Note 5. Loans Receivable, Net

Loans receivable, net at March 31, 2016 and December 31, 2015 consisted of the following (in thousands):


	March 31, 2016			December 31, 2015
Commercial:
Commercial and industrial	$	141,195		$	144,538
Commercial real estate – owner occupied		308,666			307,509
Commercial real estate - investor		536,547			510,725

Total commercial		986,408			962,772


Consumer:
Residential mortgage		792,753			791,249
Residential construction		54,259			50,757
Home equity loans and lines		190,621			192,368
Other consumer		570			792

Total consumer		1,038,203			1,035,166

Total loans		2,024,611			1,997,938
Purchased credit impaired (“PCI”) loans		376			461
Loans in process		(15,033	)		(14,206	)
Deferred origination costs, net		3,253			3,232
Allowance for loan losses		(16,214	)		(16,722	)


Total loans, net	$	1,996,993		$	1,970,703

At March 31, 2016 and December 31, 2015, loans in the amount of $16.2 million and $18.3 million, respectively, were three or more months delinquent or in the process of foreclosure and the Company was not accruing interest income on these loans. There were no loans ninety days or greater past due and still accruing interest. Non-accrual loans include both smaller balance homogenous loans that are collectively evaluated for impairment and individually classified impaired loans.

The recorded investment in mortgage and consumer loans collateralized by residential real estate which are in the process of foreclosure amounted to $2.8 million at March 31, 2016. The amount of foreclosed residential real estate property held by the Company was $2.0 million at March 31, 2016.

The Company defines an impaired loan as all non-accrual commercial real estate, multi-family, land, construction and commercial loans in excess of $250,000. Impaired loans also include all loans modified as troubled debt restructurings. At March 31, 2016, the impaired loan portfolio totaled $34.4 million for which there was a specific allocation in the allowance for loan losses of $249,000. At December 31, 2015, the impaired loan portfolio totaled $38.4 million for which there was a specific allocation in the allowance for loan losses of $1.3 million. The average balance of impaired loans for the three months ended March 31, 2016 and 2015 was $34.6 million and $36.3 million, respectively.

An analysis of the allowance for loan losses for the three months ended March 31, 2016 and 2015 is as follows (in thousands):


	Three months ended
	March 31,
	2016			2015

Balance at beginning of period	$	16,722		$	16,317
Provision charged to operations		563			375
Charge-offs		(1,172	)		(358	)
Recoveries		101			85

Balance at end of period	$	16,214		$	16,419

The following table presents an analysis of the allowance for loan losses for the three months ended March 31, 2016 and 2015 and the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2016 and December 31, 2015, excluding PCI loans (in thousands):


	Residential Real Estate			Commercial Real Estate Owner Occupied			Commercial Real Estate Investor			Consumer			Commercial and Industrial			Unallocated		Total
For the three months ended March 31, 2016
Allowance for loan losses:
Balance at beginning of period	$	6,590		$	2,292		$	4,873		$	1,095		$	1,639		$	233	$	16,722
Provision (benefit) charged to operations		(11	)		1,039			(581	)		(40	)		(144	)		300		563
Charge-offs		(78	)		(968	)		—			(3	)		(123	)		—		(1,172	)
Recoveries		54			—			10			29			8			—		101

Balance at end of period	$	6,555		$	2,363		$	4,302		$	1,081		$	1,380		$	533	$	16,214


For the three months ended March 31, 2015
Allowance for loan losses:
Balance at beginning of period	$	4,291		$	3,627		$	5,308		$	1,146		$	863		$	1,082	$	16,317
Provision (benefit) charged to operations		(52	)		202			251			72			(99	)		1		375
Charge-offs		(55	)		—			(88	)		(215	)		—			—		(358	)
Recoveries		22			—			—			60			3			—		85

Balance at end of period	$	4,206		$	3,829		$	5,471		$	1,063		$	767		$	1,083	$	16,419


March 31, 2016
Allowance for loan losses:
Ending allowance balance attributed to loans:
Individually evaluated for impairment	$	43		$	127		$	79		$	—		$	—		$	—	$	249
Collectively evaluated for impairment		6,512			2,236			4,223			1,081			1,380			533		15,965

Total ending allowance balance	$	6,555		$	2,363		$	4,302		$	1,081		$	1,380		$	533	$	16,214


Loans:
Loans individually evaluated for impairment	$	13,530		$	17,226		$	925		$	2,059		$	703		$	—	$	34,443
Loans collectively evaluated for impairment		833,482			291,440			535,622			189,132			140,492			—		1,990,168

Total ending loan balance	$	847,012		$	308,666		$	536,547		$	191,191		$	141,195		$	—	$	2,024,611


December 31, 2015
Allowance for loan losses:
Ending allowance balance attributed to loans:
Individually evaluated for impairment	$	31		$	544		$	287		$	43		$	434		$	—	$	1,339
Collectively evaluated for impairment		6,559			1,748			4,586			1,052			1,205			233		15,383

Total ending allowance balance	$	6,590		$	2,292		$	4,873		$	1,095		$	1,639		$	233	$	16,722


Loans:
Loans individually evaluated for impairment	$	13,165		$	18,964		$	2,686		$	2,307		$	1,250		$	—	$	38,372
Loans collectively evaluated for impairment		828,841			288,545			508,039			190,853			143,288			—		1,959,566

Total ending loan balance	$	842,006		$	307,509		$	510,725		$	193,160		$	144,538		$	—	$	1,997,938

A summary of impaired loans at March 31, 2016 and December 31, 2015 is as follows, excluding PCI loans (in thousands):


	March 31, 2016		December 31, 2015

Impaired loans with no allocated allowance for loan losses	$	33,086	$	35,177
Impaired loans with allocated allowance for loan losses		1,357		3,195

	$	34,443	$	38,372


Amount of the allowance for loan losses allocated	$	249	$	1,339

At March 31, 2016, impaired loans include troubled debt restructuring loans of $31.5 million of which $26.7 million were performing in accordance with their restructured terms for a minimum of six months and were accruing interest. At December 31, 2015, impaired loans include troubled debt restructuring loans of $31.3 million of which $26.3 million were performing in accordance with their restructured terms and were accruing interest.

The summary of loans individually evaluated for impairment by loan portfolio segment as of March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015 follows, excluding PCI loans (in thousands):


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
As of March 31, 2016
With no related allowance recorded:
Residential real estate	$	13,521	$	13,043	$	—
Commercial real estate - owner occupied		16,923		16,996		—
Commercial real estate - investor		317		285
Consumer		2,585		2,059		—
Commercial and industrial		703		703		—

	$	34,049	$	33,086	$	—

With an allowance recorded:
Residential real estate	$	487	$	487	$	43
Commercial real estate - owner occupied		232		230		127
Commercial real estate - investor		640		640		79
Consumer		—		—		—
Commercial and industrial		—		—		—

	$	1,359	$	1,357	$	249

As of December 31, 2015
With no related allowance recorded:
Residential real estate	$	13,431	$	13,056	$	—
Commercial real estate - owner occupied		18,742		18,688		—
Commercial real estate - investor		498		466
Consumer		2,577		2,264		—
Commercial and industrial		703		703		—

	$	35,951	$	35,177	$	—

With an allowance recorded:
Residential real estate	$	109	$	109	$	31
Commercial real estate - owner occupied		276		276		544
Commercial real estate - investor		2,171		2,220		287
Consumer		81		43		43
Commercial and industrial		547		547		434

	$	3,184	$	3,195	$	1,339


	Three months ended March 31,
	2016				2015
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential real estate	$	13,190	$	125	$	12,726	$	146
Commercial real estate - owner occupied		16,792		131		11,741		72
Commercial real estate - investor		345		2		907		—
Consumer		2,196		29		2,040		28
Commercial and industrial		703		—		274		—

	$	33,226	$	287	$	27,688	$	246

With an allowance recorded:
Residential real estate	$	489	$	4	$	111	$	1
Commercial real estate - owner occupied		228		4		7,757		24
Commercial real estate - investor		642		—		642		—
Consumer		—		—		109		1
Commercial and industrial		—		—		—		—

	$	1,359	$	8	$	8,619	$	26

The following table presents the recorded investment in non-accrual loans by loan portfolio segment as of March 31, 2016 and December 31, 2015, excluding PCI loans (in thousands):


	March 31, 2016		December 31, 2015
Residential real estate	$	8,788	$	5,779
Commercial real estate - owner occupied		4,354		7,684
Commercial real estate - investor		940		3,112
Consumer		1,202		1,576
Commercial and industrial		909		123

	$	16,193	$	18,274

The following table presents the aging of the recorded investment in past due loans as of March 31, 2016 and December 31, 2015 by loan portfolio segment, excluding PCI loans (in thousands):


	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due		Total
March 31, 2016
Residential real estate	$	4,933	$	1,226	$	5,890	$	12,049	$	834,963	$	847,012
Commercial real estate - owner occupied		235		—		4,759		4,994		303,672		308,666
Commercial real estate - investor		—		841		1,189		2,030		534,517		536,547
Consumer		880		217		1,008		2,105		189,086		191,191
Commercial and industrial		—		10		245		255		140,940		141,195

	$	6,048	$	2,294	$	13,091	$	21,433	$	2,003,178	$	2,024,611

December 31, 2015
Residential real estate	$	4,075	$	2,716	$	3,168	$	9,959	$	832,047	$	842,006
Commercial real estate - owner occupied		80		—		7,684		7,764		299,745		307,509
Commercial real estate - investor		217		1,208		2,649		4,074		506,651		510,725
Consumer		1,661		115		1,248		3,024		190,136		193,160
Commercial and industrial		8		—		360		368		144,170		144,538

	$	6,041	$	4,039	$	15,109	$	25,189	$	1,972,749	$	1,997,938

The Company categorizes all commercial and commercial real estate loans, except for small business loans, into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation and current economic trends, among other factors. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as Special Mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Bank’s credit position at some future date.

Substandard. Loans classified as Substandard are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are 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 make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

Pass. Loans not meeting the criteria above that are analyzed individually as part of the above described process.

As of March 31, 2016 and December 31, 2015, and based on the most recent analysis performed, the risk category of loans by loan portfolio segment is as follows, excluding PCI loans (in thousands):


	Pass		Special Mention		Substandard		Doubtful		Total
March 31, 2016
Commercial real estate - owner occupied	$	289,814	$	4,923		13,929	$	—	$	308,666
Commercial real estate - investor		522,234		6,720		7,593		—		536,547
Commercial and industrial		139,567		662		966		—		141,195

	$	951,615	$	12,305	$	22,488	$	—	$	986,408


December 31, 2015
Commercial real estate - owner occupied	$	288,701	$	1,803	$	17,005	$	—	$	307,509
Commercial real estate - investor		494,664		10,267		5,794		—		510,725
Commercial and industrial		142,387		787		1,364		—		144,538

	$	925,752	$	12,857	$	24,163	$	—	$	962,772

For residential and consumer loan classes, the Company evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in residential and consumer loans based on payment activity as of March 31, 2016 and December 31, 2015, excluding PCI loans (in thousands):


	Residential Real Estate
	Residential		Consumer
March 31, 2016
Performing	$	838,224	$	189,989
Non-performing		8,788		1,202

	$	847,012	$	191,191


December 31, 2015
Performing	$	836,227	$	191,584
Non-performing		5,779		1,576

	$	842,006	$	193,160

The Company classifies certain loans as troubled debt restructurings when credit terms to a borrower in financial difficulty are modified. The modifications may include a reduction in rate, an extension in term, the capitalization of past due amounts and/or the restructuring of scheduled principal payments. Included in the non-accrual loan total at March 31, 2016 and December 31, 2015 were $4.8 million and $4.9 million, respectively, of troubled debt restructurings. At March 31, 2016 and December 31, 2015, the Company has allocated $170,000 and $262,000, respectively, of specific reserves to loans that are classified as troubled debt restructurings. Non-accrual loans which become troubled debt restructurings are generally returned to accrual status after six months of performance. In addition to the troubled debt restructurings included in non-accrual loans, the Company also has loans classified as troubled debt restructurings which are accruing at March 31, 2016 and December 31, 2015, which totaled $26.7 million and $26.3 million, respectively. Troubled debt restructurings are considered in the allowance for loan losses similar to other impaired loans.

The following table presents information about troubled debt restructurings which occurred during the three months ended March 31, 2016 and 2015, and troubled debt restructurings modified within the previous year and which defaulted during the three months ended March 31, 2016 and 2015 (dollars in thousands):


	Number of Loans		Pre-modification Recorded Investment		Post-modification Recorded Investment
Three months ended March 31, 2016
Troubled Debt Restructurings:
Residential real estate		1	$	190	$	189
Commercial real estate – owner occupied		1		256		270


	Number of Loans	Recorded Investment
Troubled Debt Restructurings
Which Subsequently Defaulted:	None	None



	Number of Loans		Pre-modification Recorded Investment		Post-modification Recorded Investment
Three months ended March 31, 2015
Troubled Debt Restructurings:
Residential real estate		2	$	249	$	249
Commercial real estate - investor		2		2,093		2,005
Consumer		3		136		136



	Number of Loans	Recorded Investment
Troubled Debt Restructurings
Which Subsequently Defaulted:	None	None

As part of the Colonial acquisition PCI loans were acquired at a discount primarily due to deteriorated credit quality. PCI loans are accounted for at fair value, based upon the present value of expected future cash flows, with no related allowance for loan losses.

The following table presents information regarding the estimates of the contractually required payments, the cash flows expected to be collected and the estimated fair value of the PCI loans acquired from Colonial at July 31, 2015 (in thousands):


	July 31, 2015
Contractually required principal and interest	$	3,263
Contractual cash flows not expected to be collected (non-accretable discount)		(2,012	)

Expected cash flows to be collected at acquisition		1,251
Interest component of expected cash flows (accretable yield)		(220	)

Fair value of acquired loans	$	1,031

The following table summarizes the changes in accretable yield for PCI loans during the three months ended March 31, 2016 (in thousands):


	Three months ended March 31, 2016
Beginning balance	$	75
Accretion		(9	)
Reclassification from non-accretable difference		—

Ending balance	$	66