6. ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses were as follows:

Allowance for Loan Losses and Recorded Investment in Financing Receivables

For the Year Ended December 31, 2014

Commercial

Home
Equity⁽¹⁾

Residential
Real Estate

Other⁽²⁾

Total

Allowance for loan losses:

Beginning balance

27,828

3,375

2,898

1,436

35,537

Charge-offs

(20,056

)

(4,568

)

(3,124

)

(3,332

)

(31,080

)

Recoveries

3,045

401

198

342

3,986

Net charge-offs

(17,011

)

(4,167

)

(2,926

)

(2,990

)

(27,094

)

Provision for loan losses

5,017

4,030

3,541

2,215

14,803

Ending balance

15,834

3,238

3,513

661

23,246

Ending balance: individually evaluated for impairment

—

Ending balance: collectively evaluated for impairment

15,834

3,238

3,513

661

23,246

Financing Receivables:

Ending balance

1,052,932

174,165

276,993

6,054

1,510,144

Ending balance: individually evaluated for impairment

3,584

1,751

4,759

135

10,229

Ending balance: collectively evaluated for impairment

1,049,348

172,414

272,234

5,919

1,499,915

⁽¹⁾	Amount includes both home equity lines of credit and term loans

⁽²⁾	Includes the unallocated portion of the allowance for loan losses.


	For the Year Ended December 31, 2013
	Commercial			Home Equity⁽¹⁾			Residential Real Estate			Other⁽²⁾			Total
Allowance for loan losses:

Beginning balance	$	33,197		$	2,734		$	3,333		$	6,609		$	45,873
Charge-offs		(21,090	)		(1,646	)		(409	)		(878	)		(24,023	)
Recoveries		11,747			488			15			290			12,540

Net charge-offs		(9,343	)		(1,158	)		(394	)		(588	)		(11,483	)
Provision for loan losses		3,974			1,799			(41	)		(4,585	)		1,147

Ending balance	$	27,828		$	3,375		$	2,898		$	1,436		$	35,537

Ending balance: individually evaluated for impairment	$	916		$	—		$	—		$	17		$	933

Ending balance: collectively evaluated for impairment	$	26,912		$	3,375		$	2,898		$	1,419		$	34,604

Financing Receivables:
Ending balance	$	1,587,567		$	213,757		$	305,552		$	30,828		$	2,137,704

Ending balance: individually evaluated for impairment	$	28,772		$	4,988		$	2,569		$	586		$	36,915

Ending balance: collectively evaluated for impairment	$	1,558,795		$	208,769		$	302,983		$	30,242		$	2,100,789

(1)	Amount includes both home equity lines of credit and term loans

(2)	Includes the unallocated portion of the allowance for loan losses.


	For the Year Ended December 31, 2012
	Commercial			Home Equity⁽¹⁾			Residential Real Estate			Other⁽²⁾			Total
Allowance for loan losses:

Beginning balance	$	34,227		$	2,566		$	903		$	3,971		$	41,667
Charge-offs		(51,265	)		(2,489	)		(249	)		(1,610	)		(55,613	)
Recoveries		1,950			450			14			190			2,604

Net charge-offs		(49,315	)		(2,039	)		(235	)		(1,420	)		(53,009	)
Provision for loan losses		48,285			2,207			2,665			4,058			57,215
Reserves transferred		0			0			0			0			0

Ending balance	$	33,197		$	2,734		$	3,333		$	6,609		$	45,873

Ending balance: individually evaluated for impairment	$	951		$	—		$	98		$	—		$	1,049

Ending balance: collectively evaluated for impairment	$	32,246		$	2,734		$	3,235		$	6,609		$	44,824

Financing Receivables:
Ending balance	$	1,725,567		$	238,562		$	273,413		$	38,618		$	2,276,160

Ending balance: individually evaluated for impairment	$	71,443		$	4,756		$	5,612		$	631		$	82,442

Ending balance: collectively evaluated for impairment	$	1,654,124		$	233,806		$	267,801		$	37,987		$	2,193,718

(1)	Amount includes both home equity lines of credit and term loans

(2)	Includes the unallocated portion of the allowance for loan losses.

Risk Characteristics

Commercial Loans. Included in this segment is commercial and industrial, commercial real estate owner occupied, commercial real estate non-owner occupied, and land and development. Many of the Company’s commercial and industrial loans have a real estate component as part of the collateral securing the loan. Commercial real estate owner occupied loans rely on the cash flow from the successful operation of the borrower’s business to make repayment. If the operating company experiences difficulties in terms of sales volume and/or profitability, the borrower’s ability to repay the loan may be impaired. Commercial real estate non-owner occupied loans rely on the payment of rent by third party tenants. The borrower’s ability to repay the loan or sell the property may be impacted by loss of tenants, lower lease rates needed to attract new tenants or the inability to sell a completed project in a timely fashion and at a profit. Commercial and industrial loans are primarily secured by assets of the business, such as accounts receivable and inventory. Due to the nature of the collateral securing these loans, the liquidation of these assets may be problematic and costly. Commercial real estate owner occupied and non-owner occupied loans are secured by the underlying properties. The local economy and real estate market affect the appraised value of these properties which may impact the ultimate repayment of these loans. Land and development loans are primarily repaid by the sale of the developed properties or by conversion to a permanent term loan. These loans are dependent upon the completion of the project on time and within budget, which may be impacted by general economic conditions. The Company requires cash collateral in an interest reserve in order to extend credit on construction projects to mitigate the credit risk.

Home Equity Loans. This segment consists of both home equity lines of credit and home equity term loans on single family residences. These loans rely on the personal income of the borrower for repayment which may be impacted by economic conditions, such as unemployment levels, interest rates and the housing market. These loans are primarily secured by second liens on properties, which serves as the secondary source of repayment. The secondary source of repayment may be impaired by the real estate market and local regulations. The Company ceased all home equity lines of credit and all home equity term loan origination activity in the second half of 2014.

Residential Real Estate Loans. Included in this segment are residential mortgages on single family residences. These loans rely on the personal income of the borrower for repayment which may be impacted by economic conditions, such as unemployment levels, interest rates and the housing market. These loans are primarily secured by liens on the underlying properties, which serves as the secondary source of repayment. The secondary source of repayment may be impaired by the real estate market and local regulations. Beginning in the third quarter of 2014, the Company ceased all origination activity for both its portfolio and for sale to the secondary market.

Other Loans. Other loans consist of personal credit lines, mobile home loans and consumer installment loans. These loans rely on the borrowers’ personal income for repayment and are either unsecured or secured by personal use assets and mobile homes. These loans may be impacted by economic conditions such as unemployment levels. The liquidation of the assets securing these loans may be difficult and costly.

The allowance for loan losses was $23.2 million, $35.5 million and $45.9 million at December 31, 2014, 2013 and 2012, respectively. The ratio of allowance for loan losses to loans held-for-investment was 1.54%, 1.66% and 2.02% at December 31, 2014, 2013 and 2012, respectively.

The provision for loan losses charged to expense is based upon historical loan loss experience, a series of qualitative factors, and an evaluation of estimated losses in the current commercial loan portfolio, including the evaluation of impaired loans under FASB ASC 310. Values assigned to the qualitative factors and those developed from historic loss experience provide a dynamic basis for the calculation of reserve factors for both pass-rated loans (general pooled allowance) and those criticized and classified loans that continue to perform.

A loan is considered to be impaired when, based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan. An insignificant delay or insignificant shortfall in amount of payments does not necessarily result in a loan being identified as impaired. For this purpose, delays less than 90 days are considered to be insignificant. Impairment losses are included in the provision for loan losses in the consolidated statements of operations. Impaired loans include accruing and non-accruing TDR loans. Loans not individually reviewed are evaluated as a group using reserve factor percentages based on historical loss and recovery experience and qualitative factors. Such loans generally include consumer loans, residential real estate loans, and small business loans. In determining the appropriate level of the general pooled allowance, management makes estimates based on internal risk ratings, which take into account such factors as debt service coverage, loan-to-value ratios, management’s abilities and external factors.

The following tables present the Company’s components of impaired loans, segregated by class of loans. Commercial and consumer loans that were collectively evaluated for impairment are not included in the data that follows:


Impaired Loans
As of December 31, 2014
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Accrued Interest Income Recognized		Cash Interest Income Recognized
With no related allowance:
Commercial:
Commercial & industrial	$	147	$	149	$	—	$	161	$	19	$	—
Commercial & industrial, held-for-sale		28		50		—		52		—		—
CRE owner occupied		3,297		4,499		—		3,875		—		—
CRE owner occupied, held-for-sale		32		74		—		136		—		—
CRE non-owner occupied		—		—		—		—		—		—
CRE non-owner occupied, held-for-sale		229		352		—		53		—		—
Land and development		140		223		—		181		—		—
Consumer:
Residential real estate		4,852		5,587		3		4,513		—		97
Residential real estate, held-for-sale		3,478		4,984		—		1,365		—		—
Home Equity Lines of Credit		405		456		—		420		—		—
Home Equity Lines of Credit, held-for-sale		619		903		—		1,282		—		—
Home Equity Term Loans		1,347		1,863		—		1,385		—		—
Home Equity Term Loans, held-for-sale		3,266		4,743		—		3,735		—		—
Other		150		348		—		138		—		—
With an allowance recorded:
Commercial:
Commercial & industrial	$	—	$	—	$	—	$	—	$	—	$	—
CRE owner occupied		—		—		—		—		—		—
Consumer:
Other		—		—		—		—		—		—

Total commercial	$	3,873	$	5,348	$	—	$	4,458	$	19	$	97
Total consumer	$	14,118	$	18,884	$	3	$	12,836	$	—	$	—


Impaired Loans As of December 31, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Accrued Interest Income Recognized		Cash Interest Income Recognized
With no related allowance:
Commercial:
Commercial & industrial	$	3,206	$	3,281	$	—	$	1,884	$	—	$	—
CRE owner occupied		18,503		27,367		—		13,528		—		—
CRE non-owner occupied		1,969		2,251		—		66		—		—
Land and development		2,512		2,549		—		2,669		—		—
Consumer:
Residential real estate		2,569		3,135		—		1,689		—		—
Home Equity Lines of Credit		3,749		5,051		—		3,132		—		—
Home Equity Term Loans		1,238		1,456		—		918		—		—
Other		560		1,567		—		481		—		—

With an allowance recorded:
Commercial:
Commercial & industrial		423		425		423		73		—		—
CRE owner occupied		2,164		2,164		494		47		—		—
Consumer:
Other		26		27		17		16		—		—
Total commercial	$	28,777	$	38,037	$	917	$	18,267	$	—	$	—
Total consumer	$	8,142	$	11,236	$	17	$	6,236	$	—	$	—


Impaired Loans As of December 31, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Accrued Interest Income Recognized		Cash Interest Income Recognized
With no related allowance:
Commercial:
Commercial & industrial	$	17,257	$	19,094	$	—	$	13,112	$	—	$	—
Commercial & industrial, held for sale		1,125		2,252				1,987
CRE owner occupied		22,586		42,558		—		18,650		—		—
CRE owner occupied, held for sale		5,596		17,091				11,217
CRE non-owner occupied		5,305		6,979		—		5,379		—		—
CRE non-owner occupied, held for sale		5,428		9,583				5,269
Land and development		20,649		31,333		—		22,321		—		—
Land and development, held for sale		589		2,124				1,255
Consumer:
Residential real estate		5,428		5,852		—		4,176		—		—
Home Equity Lines of Credit		3,582		4,610		—		2,443		—		—
Home Equity Term Loans		1,174		1,285		—		864		—		—
Other		631		1,395		—		193		—		—

With an allowance recorded:
Commercial:
CRE owner occupied		4,649		8,779		649		4,675		—		—
Land and development		997		1,013		302		287		—		—
Consumer:
Residential Real Estate		184		194		98		67		—		—
Total commercial	$	84,181	$	140,806	$	951	$	84,152	$	—	$	—
Total consumer	$	10,999	$	13,336	$	98	$	7,743	$	—	$	—

In accordance with FASB ASC 310, those impaired loans for which the collateral is sufficient to support the outstanding principal do not result in a specific allowance for loan losses. Included in impaired loans at December 31, 2014 were three TDRs for which the collateral is sufficient to support the outstanding principal, one of which was in accruing status. In addition, one of the TDRs at December 31, 2014 included a commitment to lend additional funds of $91 thousand as of December 31, 2014.

There were no new TDR agreements entered into during the twelve months ended December 31, 2014. The following table presents an analysis of the Company’s TDR agreements entered into during the twelve months ended December 31, 2013 and 2012:

Troubled Debt Restructurings for the Twelve Months Ended December 31, 2013

Number of
Contracts

Pre-Modification
Outstanding Recorded
Investment

Post-Modification
Outstanding Recorded
Investment

Commercial and industrial

1,417

1,392

CRE owner occupied

413

406

Residential real estate

199

197


Troubled Debt Restructurings for the Twelve Months Ended December 31, 2012
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
CRE owner occupied		1	$	8,955	$	8,955
CRE owner occupied		1		272		265
Residential real estate		1		371		413

The following tables present information regarding the types of concessions granted on loans that were restructured during the twelve months ended December 31, 2013 and 2012:


Troubled Debt Restructurings for the Twelve Months Ended December 31, 2013
	Number of Contracts		Concession Granted
Commercial and industrial		1	Modified principal repayment terms.
CRE owner occupied		1	Interest rate concession.
Residential real estate		1	Modified term debt to interest only for a 6 month period.

Troubled Debt Restructurings for the Twelve Months Ended December 31, 2012
	Number of Contracts		Concession Granted
CRE Owner occupied		1	Reduction in the outstanding principal balance.
CRE non-owner occupied		1	Interest rate concession.
Land and development		1	Interest rate concession.

During the twelve months ended December 31, 2014 and 2013, the Company did not have any TDR agreements that had subsequently defaulted that were entered into within the respective preceding twelve months. The residential real estate TDR as of December 31, 2013 returned to accrual status during 2014.


Troubled Debt Restructurings That Subsequently Defaulted For the Year Ended December 31, 2012
	Number of Contracts		Outstanding Recorded Investment
Land and development		1	$	748

The following tables present the Company’s distribution of risk ratings loan portfolio, segregated by class, as of December 31, 2014, 2013 and 2012:

Credit Quality Indicators

As of December 31, 2014

Credit Risk by Internally Assigned Grade

Commercial

Consumer

Commercial
& industrial

CRE
owner
occupied

CRE non-
owner
occupied

Land and
development

Home
equity
lines of
credit

Home
equity
term loans

Residential
real estate

Other

Grade:

Pass

235,985

267,018

451,921

70,018

155,084

16,819

272,044

5,902

Special Mention

6,304

6,669

—

Substandard

205

4,964

9,710

138

1,842

420

4,949

152

Doubtful

—

Total

242,494

278,651

461,631

70,156

156,926

17,239

276,993

6,054

Credit Quality Indicators

As of December 31, 2013

Commercial

Consumer

Commercial
& industrial

CRE
owner
occupied

CRE non-
owner
occupied

Land and
development

Home
equity
lines of
credit

Home
equity
term loans

Residential
real estate

Other

Grade:

Pass

415,875

407,486

550,426

61,303

181,796

24,016

299,625

29,994

Special Mention

37,064

17,741

9,464

494

—

Substandard

25,372

41,051

16,194

2,509

6,682

1,263

5,927

809

Doubtful

423

2,164

—

Total

478,734

468,442

576,084

64,306

188,478

25,279

305,552

30,829


Credit Quality Indicators As of December 31, 2012
	Commercial								Consumer
	Commercial & industrial		CRE owner occupied		CRE non- owner occupied		Land and development		Home equity lines of credit		Home equity term loans		Residential real estate		Other
Grade:
Pass	$	479,983	$	456,576	$	544,645	$	32,791	$	200,429	$	29,561	$	265,139	$	37,561
Special Mention		36,233		19,955		24,885		—		—		—		—		—
Substandard		40,750		51,294		15,327		23,128		7,291		1,281		8,274		1,057

Total	$	556,966	$	527,825	$	584,857	$	55,919	$	207,720	$	30,842	$	273,413	$	38,618

The Company’s primary tool for assessing risk when evaluating a credit in terms of its underwriting, structure, documentation and eventual collectability is a risk rating system in which the loan is assigned a numeric value. Behind each numeric category is a defined set of characteristics reflective of the particular level of risk.

The risk rating system is based on a fourteen point grade using a two-digit scale. The upper seven grades are for “pass” categories, the middle grade is for the “criticized” category, while the lower six grades represent “classified” categories which are equivalent to the guidelines utilized by the OCC.

The portfolio manager is responsible for assigning, maintaining, and documenting accurate risk ratings for all commercial loans and commercial real estate loans. The portfolio manager assigns a risk rating at the inception of the loan, reaffirms it annually, and adjusts the rating based on the performance of the loan. As part of the loan review process, a regional credit officer will review risk ratings for accuracy. The portfolio manager’s risk rating will also be reviewed periodically by the loan review department and the Bank’s regulators.

To calculate risk ratings in a consistent fashion, the Company uses a Risk Rating Methodology that assesses quantitative and qualitative components which include elements of the Company’s financial condition, abilities of management, position in the market, collateral and guarantor support and the impact of changing conditions. When combined with professional judgment, an overall risk rating is assigned.

The following tables present the Company’s analysis of past due loans, segregated by class of loans, as of December 31, 2014, 2013 and 2012:


Aging of Receivables
As of December 31, 2014
	30-59 Days Past Due		60-89 Days Past Due		90 Days Past Due		Total Past Due		Current		Total Financing Receivables		Loans 90 Days Past Due and Accruing
Commercial:
Commercial & industrial	$	4,212	$	105	$	151	$	4,468	$	238,026	$	242,494	$	—
CRE owner occupied		1,685		23		1,321		3,029		275,622		278,651		—
CRE non-owner occupied		2,786		166		—		2,952		458,679		461,631		—
Land and development		—		—		140		140		70,016		70,156		—
Consumer:
Home equity lines of credit		2,001		903		796		3,700		153,226		156,926		—
Home equity term loans		254		188		147		589		16,650		17,239		—
Residential real estate		4,183		670		3,719		8,572		268,421		276,993		—

Other		45		12		136		193		5,861		6,054		—

Total	$	15,166	$	2,069	$	6,411	$	23,643	$	1,486,501	$	1,510,144	$	—


Aging of Receivables
As of December 31, 2013
	30-59 Days Past Due		60-89 Days Past Due		90 Days Past Due		Total Past Due		Current		Total Financing Receivables		Loans 90 Days Past Due and Accruing
Commercial:
Commercial & industrial	$	9,149	$	2,726	$	3,452	$	15,327	$	463,407	$	478,734	$	—
CRE owner occupied		4,901		5,865		3,753		14,519		453,923		468,442		—
CRE non-owner occupied		899		4,661		1,070		6,630		569,454		576,084		—
Land and development		—		—		2,512		2,512		61,794		64,306		—
Consumer:
Home equity lines of credit		3,030		1,457		2,324		6,811		181,667		188,478		—
Home equity term loans		1,032		223		825		2,080		23,199		25,279		—
Residential real estate		12,776		1,927		1,086		15,789		289,763		305,552		—

Other		340		202		378		920		29,909		30,829		—

Total	$	32,127	$	17,061	$	15,400	$	64,588	$	2,073,116	$	2,137,704	$	—


Aging of Receivables
As of December 31, 2012
	30-59 Days Past Due		60-89 Days Past Due		90 Days Past Due		Total Past Due		Current		Total Financing Receivables		Loans 90 Days Past Due and Accruing
Commercial:
Commercial & industrial	$	3,192	$	797	$	2,350	$	6,339	$	550,627	$	556,966	$	—
CRE owner occupied		5,828		223		10,811		16,862		510,963		527,825		—
CRE non-owner occupied		4,037		1		2,974		7,012		577,845		584,857		—
Land and development		3,823		—		12,139		15,962		39,957		55,919		—
Consumer:
Home equity lines of credit		2,296		880		2,518		5,694		202,026		207,720		—
Home equity term loans		960		340		972		2,272		28,570		30,842		—
Residential real estate		8,387		328		5,288		14,003		259,410		273,413		—
Other		599		273		499		1,371		37,247		38,618		—

Total	$	29,122	$	2,842	$	37,551	$	69,515	$	2,206,645	$	2,276,160	$	—