Activity in the Allowance for Non-Covered Loan Losses

The following table summarizes activity related to the allowance for loan losses on non-covered loans, by portfolio segment:



(dollars in thousands)	For the Year Ended December 31, 2013
	Commercial			Real estate mortgage			Real estate construction			Consumer			Total
Beginning balance	$	4,405		$	6,516		$	3,050		$	3,176		$	17,147
Provision	245			353			(372		)	1,649			1,875
Charge-offs	(562		)	(225		)	(70		)	(2,439		)	(3,296		)
Recoveries	235			183			442			507			1,367
Ending Balance	$	4,323		$	6,827		$	3,050		$	2,893		$	17,093



(dollars in thousands)	For the Year Ended December 31, 2012
	Commercial			Real estate mortgage			Real estate construction			Consumer			Total
Beginning balance	$	4,034		$	6,500		$	4,046		$	3,452		$	18,032
Provision	1,763			2,889			1,699			749			7,100
Charge-offs	(1,640		)	(3,311		)	(2,706		)	(1,526		)	(9,183		)
Recoveries	248			438			11			501			1,198
Ending Balance	$	4,405		$	6,516		$	3,050		$	3,176		$	17,147

The Company had an additional allowance for loan losses for covered loans of $14.6 million, $3.3 million and $870 thousand for the years ended December 31, 2013, 2012 and 2011, respectively. See Note (7) for discussion on covered assets.

The following tables provides a summary of the allowance for non-covered loan losses and related non-covered loans, by portfolio segment:



(dollars in thousands)	December 31, 2013
	Commercial		Real estate mortgage		Real estate construction		Consumer		Total
Allowance for non-covered loan losses:
Individually evaluated for impairment	$	1,578	$	1,558	$	1,226	$	44	$	4,406
Collectively evaluated for impairment	2,745		5,269		1,824		2,849		12,687
Total allowance for non-covered loan losses	$	4,323	$	6,827	$	3,050	$	2,893	$	17,093
Non-covered loans:
Individually evaluated for impairment	$	8,254	$	12,612	$	11,513	$	439	$	32,818
Collectively evaluated for impairment	171,660		476,536		44,735		161,234		854,165
Total non-covered loans ⁽¹⁾	$	179,914	$	489,148	$	56,248	$	161,673	$	886,983

⁽¹⁾ Total non-covered loans excludes deferred loan costs of $1.7 million.



(dollars in thousands)	December 31, 2012
	Commercial		Real estate mortgage		Real estate construction		Consumer		Total
Allowance for non-covered loan losses:
Individually evaluated for impairment	$	1,468	$	1,154	$	881	$	52	$	3,555
Collectively evaluated for impairment	2,937		5,362		2,169		3,124		13,592
Total allowance for non-covered loan losses	$	4,405	$	6,516	$	3,050	$	3,176	$	17,147
Non-covered loans:
Individually evaluated for impairment	$	9,974	$	11,357	$	19,607	$	916	$	41,854
Collectively evaluated for impairment	152,507		441,270		61,791		153,974		809,542
Total non-covered loans ⁽¹⁾	$	162,481	$	452,627	$	81,398	$	154,890	$	851,396

⁽¹⁾ Total non-covered loans excludes deferred loan costs of $1.7 million.

Credit Quality and Nonperforming Non-Covered Loans

The Company manages credit quality and controls its credit risk through lending limits, credit review, approval policies and extensive, ongoing internal monitoring. Through this monitoring process, nonperforming loans are identified. Non-covered nonperforming loans consist of non-covered nonaccrual loans. Non-covered nonperforming loans are assessed for potential loss exposure on an individual or homogeneous group basis.

A loan is considered impaired when, based upon currently known information, it is deemed probable that the Company will be unable to collect all amounts due as scheduled according to the original terms of the agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, based on the loan’s observable market price or the fair value of collateral, if the loan is collateral dependent.

Loans are placed on nonaccrual status when collection of principal or interest is considered doubtful (generally when loans are 90 days or more past due). Loans placed on nonaccrual will typically remain on nonaccrual status until all principal and interest payments are brought current, there has been a sustained period of repayment performance (generally six months) and the prospects for future payments, in accordance with the loan agreement, appear relatively certain.

Interest income previously accrued on nonaccrual loans, but not yet received, is reversed in the period the loan is placed on nonaccrual status. Payments received are generally applied to principal. However, based on management’s assessment of the ultimate collectability of an impaired or nonaccrual loan, interest income may be recognized on a cash basis. Nonaccrual loans are returned to an accrual status when management determines the circumstances have improved to the extent that there has been a sustained period of repayment performance and both principal and interest are deemed collectible.

Non-Covered Impaired Loans

At December 31, 2013 and 2012, the Company had non-covered impaired loans which consisted of nonaccrual loans and restructured loans. As of December 31, 2013, the Company had no commitments to extend additional credit on these non-covered impaired loans. Non-covered impaired loans and the related allowance for loan losses were as follows:



(dollars in thousands)	December 31, 2013				December 31, 2012
	Recorded investment		Allowance		Recorded investment		Allowance
With no related allowance recorded:
Nonaccrual loans	$	8,123	$	—	$	15,479	$	—
Restructured loans	4,118		—		8,635		—
Total with no related allowance	$	12,241	$	—	$	24,114	$	—
With an allowance recorded:
Nonaccrual loans	$	286	$	10	$	72	$	5
Restructured loans	20,291		4,396		17,668		3,550
Total with an allowance recorded	20,577		4,406		17,740		3,555
Total	$	32,818	$	4,406	$	41,854	$	3,555

The following table further summarizes impaired non-covered loans, by class:



(dollars in thousands)	December 31, 2013						December 31, 2012
	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance
With no related allowance recorded:
Commercial	$	2,558	$	3,036	$	—	$	3,737	$	4,231	$	—
Real estate mortgages:
One-to-four family residential	544		629		—		938		1,132		—
Multi-family and commercial	2,766		2,981		—		3,605		4,283		—
Total real estate mortgages	3,310		3,610		—		4,543		5,415		—
Real estate construction:
One-to-four family residential	6,255		9,773		—		15,251		23,133		—
Total real estate construction	6,255		9,773		—		15,251		23,133		—
Consumer:
Direct	118		269		—		583		1,017		—
Total consumer	118		269		—		583		1,017		—
Total with no related allowance recorded	$	12,241	$	16,688	$	—	$	24,114	$	33,796	$	—
With an allowance recorded:
Commercial	$	5,696	$	5,711	$	1,578	$	6,237	$	6,237	$	1,468
Real estate mortgages:
One-to-four family residential	728		728		81		524		524		53
Multi-family and commercial	8,574		8,960		1,477		6,290		6,657		1,101
Total real estate mortgages	9,302		9,688		1,558		6,814		7,181		1,154
Real estate construction:
One-to-four family residential	5,010		5,010		1,182		4,094		4,112		855
Multi-family and commercial	248		248		44		262		262		26
Total real estate construction	5,258		5,258		1,226		4,356		4,374		881
Consumer:
Direct	321		322		44		333		333		52
Total consumer	321		322		44		333		333		52
Total with an allowance recorded	20,577		20,979		4,406		17,740		18,125		3,555
Total impaired non-covered loans	$	32,818	$	37,667	$	4,406	$	41,854	$	51,921	$	3,555

The average recorded investment in non-covered impaired loans for the years ended December 31, 2013, 2012 and 2011 was $37.3 million, $45.2 million and $47.2 million, respectively. Interest income recognized on non-covered impaired loans was $438 thousand, $605 thousand and $375 thousand for the years ended December 31, 2013, 2012 and 2011, respectively. Additional interest income of $151 thousand, $599 thousand and $1.7 million would have been recognized had the non-covered impaired loans accrued interest, in accordance with their original terms, for the years ended December 31, 2013, 2012 and 2011, respectively.

Troubled Debt Restructurings

A troubled debt restructured loan is classified as a restructuring when the Company grants a concession(s) to a borrower experiencing financial difficulties that it would not otherwise consider. Examples of such concessions include forgiveness of principal or accrued interest, extending the maturity date(s) or providing a lower interest rate than would be normally available for a transaction of similar risk. As a result of these concessions, restructured loans are considered impaired as the Company will not collect all amounts due, both principal and interest, in accordance with the terms of the original loan agreement.

Troubled debt restructurings were as follows:



(dollars in thousands)	December 31, 2013						December 31, 2012
	Accrual status		Nonaccrual status		Total modifications		Accrual status		Nonaccrual status		Total modifications
Troubled debt restructurings:
Commercial	$	6,077	$	506	$	6,583	$	7,008	$	1,160	$	8,168
Real estate mortgages:
One-to-four family residential	765		320		1,085		573		340		913
Multi-family and commercial	10,457		843		11,300		7,993		1,823		9,816
Total real estate mortgage	11,222		1,163		12,385		8,566		2,163		10,729
Real estate construction:
One-to-four family residential	6,540		4,664		11,204		10,135		9,013		19,148
Multi-family and commercial	248		—		248		262		—		262
Total real estate construction	6,788		4,664		11,452		10,397		9,013		19,410
Consumer:
Direct	322		32		354		332		20		352
Total consumer	322		32		354		332		20		352
Total restructured loans	$	24,409	$	6,365	$	30,774	$	26,303	$	12,356	$	38,659

The Company’s policy is that loans placed on nonaccrual will typically remain on nonaccrual status until all principal and interest payments are brought current and the prospect for future payment in accordance with the loan agreement appear relatively certain. The Company’s policy generally refers to six months of payment performance as sufficient to warrant a return to accrual status.

Troubled Debt Restructurings Modification Terms

The Company offers a variety of modifications to borrowers. In restructuring a loan with a borrower, the Company normally employs several types of modifications terms. The modification terms offered by the Company are as follows:

Rate Modification: A modification in which the interest rate is changed.

Term Modification: A modification in which the maturity date, the timing of payments, or frequency of payments is changed.

Interest Only Modification: A modification in which the loan is converted to interest only payments for a period of time.

Payment Modification: A modification in which the dollar amount of the payment is changed, other than an interest only modification described above.

Combination Modification: Any other type of modification, including the use of multiple terms above.

The following tables present loans restructured for the years ended December 31, 2013 and 2012. During the periods presented, all modification terms were a combination of terms employed by the Company.



(dollars in thousands)	For the Year Ended December 31, 2013
	Number of contracts	Pre-modification recorded investment		Post-modification recorded investment
Troubled debt restructurings:
Commercial	2	$	107	$	106
Real estate mortgages:
One-to-four family residential	1	213		213
Multi-family and commercial	7	3,266		3,266
Total real estate mortgage	8	3,479		3,479
Real estate construction:
One-to-four family residential	2	175		85
Total real estate construction	2	175		85
Consumer:
Direct	1	23		20
Total consumer	1	23		20
Total restructured loans	13	$	3,784	$	3,690



(dollars in thousands)	For the Year Ended December 31, 2012
	Number of contracts	Pre-modification recorded investment		Post-modification recorded investment
Troubled debt restructurings:
Commercial	18	$	4,812	$	4,403
Real estate mortgages:
One-to-four family residential	3	565		561
Multi-family and commercial	2	701		694
Total real estate mortgage	5	1,266		1,255
Real estate construction:
One-to-four family residential	2	1,064		933
Multi-family and commercial	1	262		262
Total real estate construction	3	1,326		1,195
Total restructured loans	26	$	7,404	$	6,853

There were no loans modified as troubled debt restructurings, within the previous twelve months, for which there was a payment default for the year ended December 31, 2013. For the year ended December 31, 2012, there was a $557 thousand commercial loan and a $37 thousand real estate mortgage multi-family and commercial loan that had been restructured within the previous twelve months that subsequently defaulted.

Non-Covered Nonaccrual Loans and Loans Past Due

The following table summarizes non-covered nonaccrual loans and past due loans, by class:



(dollars in thousands)	December 31, 2013
	30 - 59 Days past due		60 - 89 Days past due		Greater than 90 days and accruing		Total past due		Nonaccrual		Current		Total non-covered loans
Commercial	$	449	$	51	$	—	$	500	$	2,176	$	177,238	$	179,914
Real estate mortgages:
One-to-four family residential	—		211		—		211		507		41,093		41,811
Multi-family and commercial	939		—		—		939		883		445,515		447,337
Total real estate mortgages	939		211		—		1,150		1,390		486,608		489,148
Real estate construction:
One-to-four family residential	59		—		—		59		4,725		29,144		33,928
Multi-family and commercial	—		—		—		—		—		22,320		22,320
Total real estate construction	59		—		—		59		4,725		51,464		56,248
Consumer:
Indirect	798		101				899		—		79,001		79,900
Direct	565		5		—		570		118		81,085		81,773
Total consumer	1,363		106		—		1,469		118		160,086		161,673
Total	$	2,810	$	368	$	—	$	3,178	$	8,409	$	875,396	886,983
Deferred loan costs, net													1,703
Total non-covered loans													$	888,686



(dollars in thousands)	December 31, 2012
	30 - 59 Days past due		60 - 89 Days past due		Greater than 90 days and accruing		Total past due		Nonaccrual		Current		Total non-covered loans
Commercial	$	232	$	373	$	—	$	605	$	2,966	$	158,910	$	162,481
Real estate mortgages:
One-to-four family residential	—		—		—		—		889		35,984		36,873
Multi-family and commercial	—		—		—		—		1,903		413,851		415,754
Total real estate mortgages	—		—		—		—		2,792		449,835		452,627
Real estate construction:
One-to-four family residential	—		63		—		63		9,210		37,199		46,472
Multi-family and commercial	—		—		—		—		—		34,926		34,926
Total real estate construction	—		63		—		63		9,210		72,125		81,398
Consumer:
Indirect	966		112		—		1,078		—		76,518		77,596
Direct	469		415		—		884		583		75,827		77,294
Total consumer	1,435		527		—		1,962		583		152,345		154,890
Total	$	1,667	$	963	$	—	$	2,630	$	15,551	$	833,215	851,396
Deferred loan costs, net													1,738
Total non-covered loans													$	853,134

Non-Covered Credit Quality Indicators

The Company’s internal risk rating methodology assigns risk ratings from 1 to 9, where a higher rating represents higher risk. The nine risk ratings can be generally described by the following groups:

Pass/Watch: Pass/watch loans, risk rated 1 through 5, range from minimal credit risk to lower than average, but still acceptable, credit risk.

Special Mention: Special mention loans, risk rated 6, are loans that present certain potential weaknesses that require management’s attention. Those weaknesses, if left uncorrected, may result in deterioration of the borrower’s repayment ability or the Company’s credit position in the future.

Substandard: Substandard loans, risk rated 7, are inadequately protected by the current worth and paying capacity of the borrower or of the collateral pledged, if any. There are well-defined weaknesses that may jeopardize the repayment of debt. Such weaknesses include deteriorated financial condition of the borrower resulting from insufficient income, excessive expenses or other factors that result in inadequate cash flows to meet all scheduled obligations.

Doubtful/Loss: Doubtful/loss loans are risk rated 8 and 9. Loans assigned as doubtful have all the weaknesses inherent with substandard loans, with the added characteristic that the weaknesses make collection in full, on the basis of currently existing facts, conditions and values, highly questionable. The possibility of loss is high, but because of certain important and reasonably specific pending factors that may work to the advantage of, and strengthen the credit, its classification as an estimated loss is deferred until a more exact status may be determined. The Company charges off loans that would otherwise be classified loss.

The following table summarizes our internal risk rating, by class:



(dollars in thousands)	December 31, 2013
	Pass/Watch		Special mention		Substandard		Doubtful/Loss		Total
Commercial	$	158,571	$	6,340	$	15,003	$	—	$	179,914
Real estate mortgages:
One-to-four family residential	37,720		30		4,061		—		41,811
Multi-family and commercial	387,392		29,540		30,405		—		447,337
Total real estate mortgages	425,112		29,570		34,466		—		489,148
Real estate construction:
One-to-four family residential	21,173		3,162		9,593		—		33,928
Multi-family and commercial	20,224		—		2,096		—		22,320
Total real estate construction	41,397		3,162		11,689		—		56,248
Consumer:
Indirect	78,661		11		1,228		—		79,900
Direct	76,501		1,509		3,763		—		81,773
Total consumer	155,162		1,520		4,991		—		161,673
Total	$	780,242	$	40,592	$	66,149	$	—	886,983
Deferred loan costs, net									1,703
									$	888,686



(dollars in thousands)	December 31, 2012
	Pass/Watch		Special mention		Substandard		Doubtful/Loss		Total
Commercial	$	140,809	$	4,412	$	17,260	$	—	$	162,481
Real estate mortgages:
One-to-four family residential	31,511		1,139		4,223		—		36,873
Multi-family and commercial	363,408		26,287		26,059		—		415,754
Total real estate mortgages	394,919		27,426		30,282		—		452,627
Real estate construction:
One-to-four family residential	25,389		776		20,307		—		46,472
Multi-family and commercial	32,166		472		2,288		—		34,926
Total real estate construction	57,555		1,248		22,595		—		81,398
Consumer:
Indirect	76,076		16		1,504		—		77,596
Direct	71,176		450		5,668		—		77,294
Total consumer	147,252		466		7,172		—		154,890
Total	$	740,535	$	33,552	$	77,309	$	—	851,396
Deferred loan costs, net									1,738
									$	853,134