Note 5. Loans Receivable, Net

Loans receivable, net at September 30, 2016 and December 31, 2015 consisted of the following (in thousands):


	September 30, 2016			December 31, 2015
Commercial:
Commercial and industrial	$	182,767		$	144,538
Commercial real estate – owner occupied		491,118			307,509
Commercial real estate – investor		1,014,611			510,725

Total commercial		1,688,496			962,772

Consumer:
Residential mortgage		1,061,029			791,249
Residential construction		46,813			50,757
Home equity loans and lines		251,304			192,368
Other consumer		1,270			792

Total consumer		1,360,416			1,035,166

		3,048,912			1,997,938
Purchased credit impaired (“PCI”) loans		5,836			461

Total Loans		3,054,748			1,998,399
Loans in process		(13,842	)		(14,206	)
Deferred origination costs, net		3,407			3,232
Allowance for loan losses		(15,617	)		(16,722	)

Total loans, net	$	3,028,696		$	1,970,703

At September 30, 2016 and December 31, 2015, loans in the amount of $16.5 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 $3.7 million at September 30, 2016. The amount of foreclosed residential real estate property held by the Company was $1.8 million at September 30, 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 September 30, 2016, the impaired loan portfolio totaled $34.9 million for which there was a specific allocation in the allowance for loan losses of $269,000. 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 and nine months ended September 30, 2016 was $34.5 million and $34.3 million, respectively, and $46.2 million and $40.9 million, respectively, for the same prior year periods.

An analysis of the allowance for loan losses for the three and nine months ended September 30, 2016 and 2015 is as follows (in thousands):


	Three months ended						Nine months ended
	September 30,						September 30,
	2016			2015			2016			2015
Balance at beginning of period	$	16,678		$	16,534		$	16,722		$	16,317
Provision charged to operations		888			300			2,113			975
Charge-offs		(2,116	)		(211	)		(3,511	)		(900	)
Recoveries		167			15			293			246

Balance at end of period	$	15,617		$	16,638		$	15,617		$	16,638

The following table presents an analysis of the allowance for loan losses for the three and nine months ended September 30, 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 September 30, 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 September 30, 2016
Allowance for loan losses:
Balance at beginning of period	$	6,006		$	2,711		$	4,713		$	1,107		$	1,209		$	932		$	16,678
Provision (benefit) charged to operations		(376	)		(168	)		104			(130	)		1,949			(491	)		888
Charge-offs		(167	)		—			—			(80	)		(1,869	)		—			(2,116	)
Recoveries		6			—			—			—			161			—			167

Balance at end of period	$	5,469		$	2,543		$	4,817		$	897		$	1,450		$	441		$	15,617

For the three months ended September 30, 2015
Allowance for loan losses:
Balance at beginning of period	$	3,610		$	3,716		$	5,513		$	952		$	1,686		$	1,057		$	16,534
Provision (benefit) charged to operations		1,602			(421	)		(471	)		73			(101	)		(382	)		300
Charge-offs		(51	)		—			—			(101	)		(59	)		—			(211	)
Recoveries		—			—			10			3			2			—			15

Balance at end of period	$	5,161		$	3,295		$	5,052		$	927		$	1,528		$	675		$	16,638

For the nine months ended September 30, 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		(867	)		1,261			(56	)		(98	)		1,665			208			2,113
Charge-offs		(319	)		(1,010	)		—			(146	)		(2,036	)		—			(3,511	)
Recoveries		65			—			—			46			182			—			293

Balance at end of period	$	5,469		$	2,543		$	4,817		$	897		$	1,450		$	441		$	15,617

For the nine months ended September 30, 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		920			(332	)		(172	)		249			717			(407	)		975
Charge-offs		(174	)		—			(103	)		(564	)		(59	)		—			(900	)
Recoveries		124			—			19			96			7			—			246

Balance at end of period	$	5,161		$	3,295		$	5,052		$	927		$	1,528		$	675		$	16,638

September 30, 2016
Allowance for loan losses:
Ending allowance balance attributed to loans:
Individually evaluated for impairment	$	30		$	—		$	239		$	—		$	—		$	—		$	269
Collectively evaluated for impairment		5,439			2,543			4,578			897			1,450			441			15,348

Total ending allowance balance	$	5,469		$	2,543		$	4,817		$	897		$	1,450		$	441		$	15,617

Loans:
Loans individually evaluated for impairment	$	13,753		$	17,116		$	1,180		$	2,589		$	269		$	—		$	34,907
Loans collectively evaluated for impairment		1,094,089			474,002			1,013,431			249,985			182,498			—			3,014,005

Total ending loan balance	$	1,107,842		$	491,118		$	1,014,611		$	252,574		$	182,767		$	—		$	3,048,912


	Residential Real Estate		Commercial Real Estate – Owner Occupied		Commercial Real Estate – Investor		Consumer		Commercial and Industrial		Unallocated		Total
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 September 30, 2016, and December 31, 2015, is as follows, excluding PCI loans (in thousands):


	September 30,		December 31,
	2016		2015
Impaired loans with no allocated allowance for loan losses	$	33,905	$	35,177
Impaired loans with allocated allowance for loan losses		1,002		3,195

	$	34,907	$	38,372

Amount of the allowance for loan losses allocated	$	269	$	1,339

At September 30, 2016, impaired loans included troubled debt restructured (“TDR”) loans of $29.9 million, of which $26.4 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 included TDR 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 September 30, 2016, and December 31, 2015 and for the three and nine months ended September 30, 2016 and 2015, is as follows, excluding PCI loans (in thousands):


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
As of September 30, 2016
With no related allowance recorded:
Residential real estate	$	14,155	$	13,647	$	—
Commercial real estate – owner occupied		17,119		17,116		—
Commercial real estate – investor		309		284
Consumer		3,132		2,589		—
Commercial and industrial		269		269		—

	$	34,984	$	33,905	$	—

With an allowance recorded:
Residential real estate	$	107	$	106	$	30
Commercial real estate – owner occupied		—		—		—
Commercial real estate – investor		896		896		239
Consumer		—		—		—
Commercial and industrial		—		—		—

	$	1,003	$	1,002	$	269

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 September 30,
	2016				2015
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential real estate	$	13,451	$	171	$	12,580	$	141
Commercial real estate – owner occupied		17,198		119		17,472		84
Commercial real estate – investor		281		3		428		—
Consumer		2,340		44		2,266		28
Commercial and industrial		269		—		734		3

	$	33,539	$	337	$	33,480	$	256

With an allowance recorded:
Residential real estate	$	107	$	1	$	260	$	2
Commercial real estate – owner occupied		—		—		9,995		—
Commercial real estate – investor		896		—		640		—
Consumer		—		—		85		—
Commercial and industrial		—		—		547		—

	$	1,003	$	1	$	11,527	$	2


	Nine months ended September 30,
	2016				2015
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential real estate	$	13,326	$	437	$	12,634	$	434
Commercial real estate – owner occupied		17,333		406		14,230		269
Commercial real estate – investor		303		9		451		—
Consumer		2,220		105		2,222		87
Commercial and industrial		270		—		717		9

	$	33,452	$	957	$	30,254	$	799

With an allowance recorded:
Residential real estate	$	108	$	3	$	261	$	8
Commercial real estate – owner occupied		—		—		9,512		11
Commercial real estate – investor		755		—		641		—
Consumer		—		—		28		1
Commercial and industrial		—		—		304		2

	$	863	$	3	$	10,746	$	22

The following table presents the recorded investment in non-accrual loans by loan portfolio segment as of September 30, 2016 and December 31, 2015, excluding PCI loans (in thousands):


	September 30, 2016		December 31, 2015
Residential real estate	$	7,017	$	5,779
Commercial real estate – owner occupied		5,213		7,684
Commercial real estate – investor		1,675		3,112
Consumer		1,450		1,576
Commercial and industrial		1,152		123

	$	16,507	$	18,274

The following table presents the aging of the recorded investment in past due loans as of September 30, 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
September 30, 2016
Residential real estate	$	4,880	$	2,054	$	5,543	$	12,477	$	1,095,365	$	1,107,842
Commercial real estate – owner occupied		—		60		5,213		5,273		485,845		491,118
Commercial real estate – investor		—		—		1,675		1,675		1,012,936		1,014,611
Consumer		985		267		1,443		2,695		249,879		252,574
Commercial and industrial		96		1,203		1,152		2,451		180,316		182,767

	$	5,961	$	3,584	$	15,026	$	24,571	$	3,024,341	$	3,048,912

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. 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 September 30, 2016 and December 31, 2015, and based on the most recent analysis performed, the risk category of loans by loan portfolio segment follows, excluding PCI loans (in thousands). The increase in substandard and special mention loans is primarily a result of the re-grading of the Cape loan portfolio using the Bank’s risk rating scale. The classification downgrades are consistent with the Company’s due diligence findings prior to the acquisition and reflective of the credit mark at the time of acquisition.


	Pass		Special Mention		Substandard		Doubtful		Total
September 30, 2016
Commercial real estate – owner occupied	$	449,297	$	14,404	$	27,417	$	—	$	491,118
Commercial real estate – investor		992,247		7,756		14,608		—		1,014,611
Commercial and industrial		179,900		2,203		664		—		182,767

		1,621,444		24,363		42,689	$	—	$	1,688,496

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 September 30, 2016 and December 31, 2015, excluding PCI loans (in thousands):


	Residential Real Estate
	Residential		Consumer
September 30, 2016
Performing	$	1,100,825	$	251,124
Non-performing		7,017		1,450

	$	1,107,842	$	252,574

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 September 30, 2016 and December 31, 2015 were $3.5 million and $4.9 million, respectively, of troubled debt restructurings. At September 30, 2016 and December 31, 2015, the Company has allocated $30,000 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 September 30, 2016 and December 31, 2015, which totaled $26.4 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 and nine months ended September 30, 2016 and 2015, and troubled debt restructurings modified within the previous year and which defaulted during the three and nine months ended September 30, 2016 and 2015, (dollars in thousands):


	Number of Loans		Pre-modification Recorded Investment		Post-modification Recorded Investment
Three months ended September 30, 2016
Troubled Debt Restructurings:
Residential real estate		1	$	455	$	455
Consumer		1		602		602


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


	Number of Loans		Pre-modification Recorded Investment		Post-modification Recorded Investment
Nine months ended September 30, 2016
Troubled Debt Restructurings:
Residential real estate		3	$	674	$	673
Commercial real estate – investor		1		256		270
Consumer		3		665		665


	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 September 30, 2015
Troubled Debt Restructurings:
Commercial real estate – owner occupied		1	$	63	$	63
Consumer		1		207		170


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


	Number of Loans		Pre-modification Recorded Investment		Post-modification Recorded Investment
Nine months ended September 30, 2015
Troubled Debt Restructurings:
Residential real estate		4	$	509	$	472
Commercial real estate – investor		4		6,095		5,944
Consumer		9		599		547


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

As part of the Cape and Colonial American acquisitions, 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 Cape at May 2, 2016 and Colonial American at July 31, 2015 (in thousands):


	Cape May 2, 2016			Colonial American July 31, 2015
Contractually required principal and interest	$	21,345		$	3,263
Contractual cash flows not expected to be collected (non-accretable discount)		(12,387	)		(1,854	)

Expected cash flows to be collected at acquisition		8,958			1,409
Interest component of expected cash flows (accretable yield)		(576	)		(109	)

Fair value of acquired loans	$	8,382		$	1,300

The following table summarizes the changes in accretable yield for PCI loans during the three and nine months ended September 30, 2016 (in thousands):


	Three months ended September 30, 2016			Nine months ended September 30, 2016
Beginning balance	$	503		$	75
Acquisition		—			576
Accretion		(196	)		(344	)
Reclassification from non-accretable difference		—			—

Ending balance	$	307		$	307