Allowance for Loan Losses and Credit Quality Information | 6. ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY INFORMATION 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 twelve months ended December 31, 2015, net charge-offs totaled $10.1 million or 0.29% of average loans, compared to $5.4 million, or 0.18% of average loans annualized, during the twelve months ended December 31, 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 net charge-offs of $5.7 million during the twelve months ending December 31, 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 twelve months ended December 31, 2015, we increased the look-back period to 20 quarters from 16 quarters used at December 31, 2015 and prior periods. This change in the look-back period resulted in an increase of $1.3 million to the total allowance at December 31, 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 20 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 eight quarters as of December 31, 2015. Further, our residential mortgage and consumer LEP remained at four quarters as of December 31, 2015. We evaluate LEP quarterly for reasonableness and complete a detailed historical analysis of our commercial LEP at least annually. The final component of the allowance for loan losses 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 in order to capture factors not already included in other components in our allowance for loan losses methodology. We review the qualitative estimates of valuation factors quarterly and management uses its judgment to make adjustments based on current trends. 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 an analysis of the allowance for loan losses and loan balances as of and for the year ended December 31, 2015 and December 31, 2014: (In Thousands) Commercial Owner- Commercial Construction Residential Consumer Complexity (1) Total Twelve months ended December 31, 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 (6,303 ) (738 ) (1,135 ) (146 ) (548 ) (3,225 ) — (12,095 ) Recoveries 301 77 222 185 226 957 — 1,968 Provision (credit) for loan losses 4,241 665 (67 ) 852 76 2,183 (510 ) 7,440 Provision for acquired loans 80 23 201 34 4 8 — 350 Ending balance $ 11,156 $ 6,670 $ 6,487 $ 3,521 $ 2,281 $ 5,964 $ 1,010 $ 37,089 Period-end allowance allocated to: Loans individually evaluated for impairment $ 1,164 $ — $ — $ 211 $ 918 $ 199 $ — $ 2,492 Loans collectively evaluated for impairment 9,988 6,648 6,384 3,310 1,360 5,765 1,010 34,465 Acquired loans evaluated for impairment 4 22 103 — 3 — — 132 Ending balance $ 11,156 $ 6,670 $ 6,487 $ 3,521 $ 2,281 $ 5,964 $ 1,010 $ 37,089 Period-end loan balances evaluated for: Loans individually evaluated for impairment $ 5,680 $ 1,090 $ 3,411 $ 1,419 $ 15,548 $ 7,664 $ — $ 34,812 Loans collectively evaluated for impairment 930,346 820,911 869,359 213,801 166,252 335,323 — 3,335,992 Acquired nonimpaired loans 112,586 53,954 83,415 27,009 76,929 17,255 — 371,148 Acquired impaired loans 12,985 4,688 10,513 3,544 950 7 — 32,687 Ending balance $ 1,061,597 $ 880,643 $ 966,698 $ 245,773 $ 259,679 $ 360,249 $ — $ 3,774,639 (3) (In Thousands) Commercial Owner- Commercial Construction Residential Consumer Complexity (1) Total Twelve months ended December 31, 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 (3,587 ) (1,085 ) (425 ) (88 ) (811 ) (2,855 ) — (8,851 ) Recoveries 1,611 249 202 242 168 981 — 3,453 Provision (credit) for loan losses 2,062 (159 ) 557 (884 ) 88 1,421 495 3,580 Ending balance $ 12,837 $ 6,643 $ 7,266 $ 2,596 $ 2,523 $ 6,041 $ 1,520 $ 39,426 Period-end allowance allocated to: Loans individually evaluated for impairment $ 3,034 $ 609 $ 319 $ 334 $ 790 $ 231 $ — $ 5,317 Loans collectively evaluated for impairment 9,803 6,034 6,947 2,262 1,733 5,810 1,520 34,109 Ending balance $ 12,837 $ 6,643 $ 7,266 $ 2,596 $ 2,523 $ 6,041 $ 1,520 $ 39,426 Period-end loan balances evaluated for: Loans individually evaluated for impairment $ 12,381 $ 2,474 $ 8,335 $ 1,419 $ 15,666 $ 6,376 $ — $ 46,651 ( 2) Loans collectively evaluated for impairment 872,398 743,680 753,451 127,324 184,788 312,539 — 2,994,180 Acquired nonimpaired loans 32,024 40,180 37,697 9,891 17,363 8,619 145,774 Acquired impaired loans 3,269 2,264 5,976 3,863 512 9 15,893 Ending balance $ 920,072 $ 788,598 $ 805,459 $ 142,497 $ 218,329 $ 327,543 $ — $ 3,202,498 (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 which are considered to be impaired loans of $13.6 million at December 31, 2015 and $22.6 million as of December 31, 2014. (3) Ending loan balances do not include deferred costs. Nonaccrual and Past Due Loans Nonaccruing loans are those loans 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 and 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 process of collection. The following tables show our nonaccrual and past due loans at the dates indicated: At Dec. 31, 2015 30–59 Days 60–89 Days Greater Than Past Due and Total Past And Still Accruing Acquired Nonaccrual Total (In Thousands) Commercial $ 1,686 $ 270 $ 12,355 $ 14,311 $ 1,028,973 $ 12,985 $ 5,328 $ 1,061,597 Owner-occupied 713 217 4,886 5,816 869,048 4,688 1,091 880,643 Commercial mortgages 141 4 288 433 952,426 10,513 3,326 966,698 Construction — — — — 242,229 3,544 — 245,773 Residential 5,263 621 251 6,135 245,307 950 7,287 259,679 Consumer 1,222 36 252 1,510 354,599 7 4,133 360,249 Total (1) $ 9,025 $ 1,148 $ 18,032 $ 28,205 $ 3,692,582 $ 32,687 $ 21,165 $ 3,774,639 % of Total Loans 0.24 % 0.03 % 0.48 % 0.75 % 97.83 % 0.86 % 0.56 % 100.00 % (1) Balances in table above includes $371.1 million in acquired non-impaired loans. At Dec. 31, 2014 30–59 Days 60–89 Days Greater Than Past Due and Total Past And Still Accruing Acquired Nonaccrual Total Loans (In Thousands) 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 % 100.00 % (1) Balances in table above includes $145.8 million in acquired non-impaired loans. Impaired Loans Loans for which it is probable we will not collect all principal and interest due according to 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 December 31, 2015 and December 31, 2014: 2015 (In Thousands) Ending Loans with (1) Loan with Related Contractual Average Commercial $ 6,137 $ 951 $ 5,186 $ 1,168 $ 20,206 $ 9,391 Owner-occupied commercial 2,127 1,090 1,037 22 2,947 2,111 Commercial mortgages 4,652 3,410 1,242 103 11,826 7,540 Construction 1,419 — 1,419 211 1,419 1,448 Residential 15,710 9,034 6,676 920 18,655 15,264 Consumer 7,665 6,498 1,167 200 9,353 6,801 Total (2) $ 37,710 $ 20,983 $ 16,727 $ 2,624 $ 64,406 $ 42,555 2014 (In Thousands) Ending Loans with (1) Loan 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 $2.9 million in the ending loan balance and $3.5 million in the contractual principal balance. Interest income of $1.6 million and $1.8 million was recognized on impaired loans during 2015 and 2014 respectively. As of December 31, 2015, there were 32 residential loans and 3 commercial loans in the process of foreclosure. The total outstanding balance on the loans was $5.0 million and $675,000, 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 , Receivables 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 greater than 90 days past due are generally considered nonperforming and placed on nonaccrual status. The following tables provide an analysis of loans by portfolio segment based on the credit quality indicators used to determine the Allowance at December 31: Commercial Credit Exposure Total Commercial(1) Commercial Owner- Occupied Commercial Construction 2015 2014 (In Thousands) 2015 2014 2015 2014 2015 2014 2015 2014 Amount % Amount % Risk Rating: Special mention $ 5,620 $ 4,744 $ 9,535 $ 6,989 $ 12,323 $ 9,065 $ — $ — $ 27,478 $ 20,798 Substandard: Accrual 33,883 42,377 22,901 14,436 2,547 9,167 8,296 1,085 67,627 67,065 Nonaccrual 4,164 1,225 1,090 1,865 3,326 7,927 — — 8,580 11,017 Doubtful/nonaccrual 1,164 3,034 — 609 — 319 — 334 1,164 4,296 Total special mention and substandard 44,831 51,380 33,526 23,899 18,196 26,478 8,296 1,419 104,849 3 % 103,176 4 % Acquired impaired loans 12,985 3,269 4,688 2,264 10,513 5,976 3,544 3,863 31,730 1 % 15,372 1 % Pass 1,003,781 865,423 842,429 762,435 937,989 773,005 233,933 137,215 3,018,132 96 % 2,538,078 95 % Total $ 1,061,597 $ 920,072 $ 880,643 $ 788,598 $ 966,698 $ 805,459 $ 245,773 $ 142,497 $ 3,154,711 100 % $ 2,656,626 100 % (1) Table includes $ 277.0 million in acquired non-impaired loans at December 31, 2015 and $119.8 million at December 31, 2014. Consumer Credit Exposure Total Residential and Consumer(2) Residential Consumer 2015 2014 (In Thousands) 2015 2014 2015 2014 Amount Percent Amount Percent Nonperforming(1) $ 15,548 $ 15,666 $ 7,664 $ 6,376 $ 23,212 4 % $ 22,042 4 % Acquired impaired loans 950 512 7 9 957 — % 521 — % Performing 243,181 202,151 352,578 321,158 595,759 96 % 523,309 96 % Total $ 259,679 $ 218,329 $ 360,249 $ 327,543 $ 619,928 100 % $ 545,872 100 % (1) Includes $13.6 million as of December 31, 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 acquired non-impaired loans of $94.2 million at December 31, 2015 and $26.0 million at December 31, 2014. Troubled Debt Restructurings (TDR) The balance of TDRs at December 31, 2015 and December 31, 2014 was $24.6 million and $36.2 million, respectively. The balances at December 31, 2015 include approximately $11.0 million of TDRs in nonaccrual status and $13.6 million of TDRs in accrual status compared to $13.6 million of TDRs in nonaccrual status and $22.6 million of TDRs in accrual status at December 31, 2014. Approximately $2.1 million and $4.2 million in related reserves have been established for these loans at December 31, 2015 and December 31, 2014, respectively. A modification is classified as a TDR if both of the following exist: (1) the borrower is experiencing financial difficulty and (2) the Bank has granted a concession to the borrower. Many aspects of the borrower’s financial situation are assessed when determining whether they are experiencing financial difficulty. Concessions may include the reduction of an interest rate at a rate lower than current market rate for a new loan with similar risk, extension of the maturity date, reduction of accrued interest, or principal forgiveness. The assessments of whether a borrower is experiencing (or is likely to experience) financial difficulty and whether a concession has been granted is subjective in nature and management’s judgment is required when determining whether a modification is a TDR. During 2015, the terms of 33 loans were modified in TDRs. Twenty-two modifications were for consumer loans in which nine were discharged bankruptcies, seven were maturity date extensions, five were HELOC conversion, and one was a rate reduction. Ten were residential mortgages in which three were discharged bankruptcies, three were maturity date extensions, two were forbearance agreements, one was a rate reduction, and one was a credit exception for refinance. 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 by us 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 repayment is reasonably assured. The following table presents loans identified as TDRs during the twelve months ended December 31, 2015 and December 31, 2014: (In Thousands) Twelve Twelve Commercial $ — $ 9,356 Owner Occupied Commercial 577 — Commercial mortgages — 3,430 Construction — 1,419 Residential 895 2,062 Consumer 1,615 1,612 $ 3,087 $ 17,879 The TDRs set forth in the table above increased our allowance for loan losses by $18,000 through allocation of a related reserve, and resulted in charge-offs of $166,000 during the twelve months ended December 31, 2015. For the twelve months ended December 31, 2014, the TDRs set forth in the table above increased our allowance for loan losses by $2.2 million through allocation of a related reserve, and resulted in charge-offs of $54,000. |