LOANS AND ALLOWANCE FOR LOAN LOSSES

The following table summarizes the Company's loans by type.



	June 30, 2015			December 31, 2014
Commercial:
Commercial real estate	$	1,430,343		$	1,355,536
Commercial and industrial	503,200			468,848
Construction and development	321,282			370,807
Consumer:
Residential real estate	357,616			360,249
Construction and development	32,309			30,061
Home equity	276,687			276,662
Other consumer	35,225			36,874
Gross loans	2,956,662			2,899,037
Less:
Deferred loan fees	(891		)	(771		)
Allowance for loan losses	(8,358		)	(7,817		)
Net loans	$	2,947,413		$	2,890,449

As of June 30, 2015 and December 31, 2014, loans with a recorded investment of $917,199 and $828,365, respectively, were pledged to secure borrowings or available lines of credit with correspondent banks.

Purchased Credit-Impaired Loans

Loans for which it is probable at acquisition that all contractually required payments will not be collected are considered purchased credit-impaired ("PCI") loans. The following table relates to acquired Yadkin PCI loans and summarizes the contractually required payments, which includes principal and interest, expected cash flows to be collected, and the fair value of acquired PCI loans at the merger date.



	Yadkin Merger July 4, 2014

Contractually required payments	$	110,365
Nonaccretable difference	(21,102		)
Cash flows expected to be collected at acquisition	89,263
Accretable yield	(8,604		)
Fair value of PCI loans at acquisition	$	80,659

The following table summarizes changes in accretable yield, or income expected to be collected, related to all of the Company's PCI loans for the periods presented.



	Three months ended June 30,						Six months ended June 30,
	2015			2014			2015			2014

Balance, beginning of period	$	26,364		$	23,415		$	25,181		$	25,349
Accretion of income	(3,290		)	(2,971		)	(6,918		)	(6,048		)
Reclassifications from nonaccretable difference	2,501			324			4,055			2,474
Other, net	(1,475		)	(559		)	1,782			(1,566		)
Balance, end of period	$	24,100		$	20,209		$	24,100		$	20,209

The outstanding balance of PCI loans consists of the undiscounted sum of all amounts, including amounts deemed principal, interest, fees, penalties, and other under the loan, owed by the borrower at the reporting date, whether or not currently due and whether or not any such amounts have been written or charged off. The unpaid principal balance of PCI loans was $190,517 and $228,956 as of June 30, 2015 and December 31, 2014, respectively.

Purchased Non-impaired Loans

Purchased non-impaired loans are also recorded at fair value at acquisition, and the related fair value discount or premium is recognized as an adjustment to yield over the remaining life of each loan. The following table relates to acquired Yadkin purchased non-impaired loans and provides the contractually required payments, fair value, and estimate of contractual cash flows not expected to be collected at the merger date.



	Yadkin Merger July 4, 2014

Contractually required payments	$	1,502,793
Fair value of acquired loans at acquisition	1,292,020
Contractual cash flows not expected to be collected	36,219

Allowance for Loan Losses

The following tables summarize the activity in the allowance for loan losses for the periods presented.



	Commercial Real Estate			Commercial and Industrial			Commercial Construction			Residential Real Estate			Consumer Construction			Home Equity			Other Consumer			Total
Three months ended June 30, 2015
Beginning balance	$	2,954		$	1,336		$	1,732		$	1,251		$	213		$	706		$	92		$	8,284
Charge-offs	(157		)	(602		)	(51		)	(120		)	—			(183		)	(112		)	(1,225		)
Recoveries	7			114			5			28			—			113			38			305
Provision for loan losses	333			1,112			(1,021		)	168			56			139			207			994
Ending balance	$	3,137		$	1,960		$	665		$	1,327		$	269		$	775		$	225		$	8,358

Six months ended June 30, 2015
Beginning balance	$	2,796		$	1,274		$	1,691		$	1,237		$	194		$	546		$	79		$	7,817
Charge-offs	(256		)	(971		)	(67		)	(130		)	—			(318		)	(248		)	(1,990		)
Recoveries	12			250			10			52			27			154			71			576
Provision for loan losses	585			1,407			(969		)	168			48			393			323			1,955
Ending balance	$	3,137		$	1,960		$	665		$	1,327		$	269		$	775		$	225		$	8,358

Three months ended June 30, 2014
Beginning balance	$	2,280		$	782		$	1,610		$	1,726		$	214		$	503		$	98		$	7,213
Charge-offs	—			(205		)	—			(11		)	—			(83		)	(36		)	(335		)
Recoveries	1			23			2			13			—			64			6			109
Provision for loan losses	272			278			(219		)	58			(33		)	77			31			464
Ending balance	$	2,553		$	878		$	1,393		$	1,786		$	181		$	561		$	99		$	7,451

Six months ended June 30, 2014
Beginning balance	$	2,419		$	805		$	1,400		$	1,673		$	187		$	476		$	83		$	7,043
Charge-offs	(242		)	(446		)	(196		)	(207		)	—			(271		)	(132		)	(1,494		)
Recoveries	5			28			2			24			—			76			13			148
Provision for loan losses	371			491			187			296			(6		)	280			135			1,754
Ending balance	$	2,553		$	878		$	1,393		$	1,786		$	181		$	561		$	99		$	7,451

The following tables summarize the ending allowance for loans losses and the recorded investment in loans by portfolio segment and impairment method.



	June 30, 2015
	Commercial Real Estate		Commercial and Industrial		Commercial Construction		Residential Real Estate		Consumer Construction		Home Equity		Other Consumer		Total
Allowance for loan losses:
Ending balance:
Individually evaluated for impairment	$	183	$	160	$	—	$	207	$	—	$	—	$	—	$	550
Collectively evaluated for impairment	2,565		1,776		644		345		269		685		166		6,450
Purchased credit-impaired	389		24		21		775		—		90		59		1,358
Total	$	3,137	$	1,960	$	665	$	1,327	$	269	$	775	$	225	$	8,358

Loans:
Ending balance:
Individually evaluated for impairment	$	11,760	$	3,105	$	179	$	3,112	$	—	$	20	$	—	$	18,176
Collectively evaluated for impairment	1,319,303		484,647		300,586		326,298		30,884		272,610		34,727		2,769,055
Purchased credit-impaired	99,280		15,448		20,517		28,206		1,425		4,057		498		169,431
Total	$	1,430,343	$	503,200	$	321,282	$	357,616	$	32,309	$	276,687	$	35,225	$	2,956,662



	December 31, 2014
	Commercial Real Estate		Commercial and Industrial		Commercial Construction		Residential Real Estate		Consumer Construction		Home Equity		Other Consumer		Total
Allowance for loan losses:
Ending balance:
Individually evaluated for impairment	$	158	$	229	$	—	$	—	$	—	$	3	$	—	$	390
Collectively evaluated for impairment	2,177		952		1,590		681		194		456		79		6,129
Purchased credit-impaired	461		93		101		556		—		87		—		1,298
Total	$	2,796	$	1,274	$	1,691	$	1,237	$	194	$	546	$	79	$	7,817

Loans:
Ending balance:
Individually evaluated for impairment	$	5,398	$	2,343	$	910	$	928	$	—	$	406	$	—	$	9,985
Collectively evaluated for impairment	1,227,597		452,487		337,540		328,693		28,436		271,928		36,244		2,682,925
Purchased credit-impaired	122,541		14,018		32,357		30,628		1,625		4,328		630		206,127
Total	$	1,355,536	$	468,848	$	370,807	$	360,249	$	30,061	$	276,662	$	36,874	$	2,899,037

For non-PCI loans, the evaluation of the adequacy of the ALLL includes both loans evaluated collectively for impairment and loans evaluated individually for impairment. For loans evaluated collectively for impairment, loans are grouped based on common risk characteristics which include loan type and risk grade. Historical loss rates are calculated based on the historical probability of default ("PD") and loss given default ("LGD") for each loan grouping. PDs represent the likelihood that a loan will default within a one year period of time, and LGDs represent the estimated magnitude of loss the Company will incur if a loan defaults. A loan is considered to be in default if it becomes 90 days or more past due, meets the criteria for nonaccrual status, or incurs a charge-off. Historical loss rates are developed with four years of trailing default and loss data. These historical loss rates are then combined with certain qualitative factors to determine the ALLL reserve rates for each loan grouping. Qualitative factors include consideration of certain internal and external factors, such as loan delinquency levels and trends, loan growth, loan portfolio composition and concentrations, local and national economic conditions, the loan review function, and other factors management deems relevant to the ALLL calculation.

In the second quarter of 2015, the Company enhanced its ALLL methodology by transitioning to the PD/LGD approach to calculating historical loss rates by loan grouping, as previously described. In prior periods, the Company calculated historical loss rates by loan type and then weighted these loss rates across its risk grade scale. Both methods use historical loss rates to calculate reserves on loans evaluated collectively for impairment, but the Company believes the enhanced PD/LGD approach provides a more precise and consistent estimate of loan losses across the risk grade scale based on actual default data. The enhanced ALLL calculation did not have a material impact on the total ALLL as of June 30, 2015 or on the provision for loan losses in the second quarter of 2015, however, the enhanced ALLL methodology did change the allocation of ALLL across certain loan classes, particularly commercial and industrial and construction loans. The Company held other significant inputs into the ALLL model consistent, such as the "lookback" period used to develop historical loss rates, the loan groupings for collective evaluation, and the application of qualitative factors. There were also no changes to the Company's evaluation of individually impaired loans.

The Company categorizes 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, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans according to credit risk. The Company uses the following general definitions for risk ratings:


•	Pass. These loans range from superior quality with minimal credit risk to loans requiring heightened management attention but that are still an acceptable risk and continue to perform as contracted.

•

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 institution's credit position at some future date. Loans where adverse economic conditions have developed that do not jeopardize liquidation of the debt, but substantially increase the level of risk may also warrant this rating.

•

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor 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 institution 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.

The following tables summarize the risk category of loans by class of loans.



	Pass		Special Mention		Substandard		Doubtful		Total
June 30, 2015
Non-PCI Loans
Commercial:
Real estate	$	1,279,909	$	30,909	$	20,245	$	—	$	1,331,063
Commercial and industrial	469,174		12,437		6,141		—		487,752
Construction and development	295,711		3,687		1,311		56		300,765
Consumer:
Residential real estate	315,775		5,410		8,225		—		329,410
Construction and development	29,689		738		457		—		30,884
Home equity	264,090		4,968		3,572		—		272,630
Other consumer	34,121		264		287		55		34,727
Total	$	2,688,469	$	58,413	$	40,238	$	111	$	2,787,231

PCI Loans
Commercial:
Real estate	$	47,966	$	35,091	$	16,223	$	—	$	99,280
Commercial and industrial	1,782		11,863		1,803		—		15,448
Construction and development	7,405		6,704		6,408		—		20,517
Consumer:
Residential real estate	10,915		9,288		8,003		—		28,206
Construction and development	376		357		692		—		1,425
Home equity	2,216		171		1,670		—		4,057
Other consumer	434		3		61		—		498
Total	$	71,094	$	63,477	$	34,860	$	—	$	169,431



	Pass		Special Mention		Substandard		Doubtful		Total
December 31, 2014
Non-PCI Loans
Commercial:
Real estate	$	1,187,938	$	32,142	$	12,915	$	—	$	1,232,995
Commercial and industrial	433,093		15,148		6,510		79		454,830
Construction and development	334,213		2,128		2,109		—		338,450
Consumer:
Residential real estate	316,743		4,527		8,351		—		329,621
Construction and development	27,447		735		254		—		28,436
Home equity	264,953		4,238		3,143		—		272,334
Other consumer	35,736		237		269		2		36,244
Total	$	2,600,123	$	59,155	$	33,551	$	81	$	2,692,910

PCI Loans
Commercial:
Real estate	$	57,095	$	45,711	$	19,735	$	—	$	122,541
Commercial and industrial	7,408		2,936		3,674		—		14,018
Construction and development	6,857		16,374		9,126		—		32,357
Consumer:
Residential real estate	12,703		8,206		9,719		—		30,628
Construction and development	189		723		713		—		1,625
Home equity	143		2,827		1,358		—		4,328
Other consumer	2		488		140		—		630
Total	$	84,397	$	77,265	$	44,465	$	—	$	206,127

The following tables summarize the past due status of non-PCI loans based on contractual terms.



	30-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Total
June 30, 2015
Non-PCI Loans
Commercial:
Real estate	$	9,280	$	5,161	$	14,441	$	1,316,622	$	1,331,063
Commercial and industrial	3,578		2,248		5,826		481,926		487,752
Construction and development	637		725		1,362		299,403		300,765
Consumer:
Residential real estate	5,064		3,320		8,384		321,026		329,410
Construction and development	219		232		451		30,433		30,884
Home equity	6,415		1,116		7,531		265,099		272,630
Other consumer	555		122		677		34,050		34,727
Total	$	25,748	$	12,924	$	38,672	$	2,748,559	$	2,787,231



	30-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Total
December 31, 2014
Non-PCI Loans
Commercial:
Real estate	$	7,971	$	2,383	$	10,354	$	1,222,641	$	1,232,995
Commercial and industrial	5,612		1,707		7,319		447,511		454,830
Construction and development	1,162		369		1,531		336,919		338,450
Consumer:
Residential real estate	4,872		2,210		7,082		322,539		329,621
Construction and development	569		12		581		27,855		28,436
Home equity	3,985		395		4,380		267,954		272,334
Other Consumer	797		70		867		35,377		36,244
Total	$	24,968	$	7,146	$	32,114	$	2,660,796	$	2,692,910

The following table summarizes the recorded investment of non-PCI loans on nonaccrual status and loans greater than 90 days past due and accruing by class.



	June 30, 2015				December 31, 2014
	Nonaccrual		Loans greater than 90 days past due and accruing		Nonaccrual		Loans greater than 90 days past due and accruing
Non-PCI Loans
Commercial:
Commercial real estate	$	12,567	$	—	$	5,685	$	—
Commercial and industrial	4,789		7		4,594		2
Construction and development	964		—		1,692		—
Consumer:
Residential real estate	4,522		—		3,755		—
Construction and development	413		—		254		—
Home equity	2,130		—		1,721		—
Other consumer	307		—		248		—
Total	$	25,692	$	7	$	17,949	$	2

The following table provides information on impaired loans. This table excludes PCI loans and loans evaluated collectively as a homogeneous group.



	Recorded Investment With a Recorded Allowance		Recorded Investment With no Recorded Allowance		Total		Related Allowance		Unpaid Principal Balance
June 30, 2015
Non-PCI Loans
Commercial:
Commercial real estate	$	948	$	10,812	$	11,760	$	183	$	11,796
Commercial and industrial	725		2,380		3,105		160		3,105
Construction and development	—		179		179		—		182
Consumer:
Residential real estate	1,884		1,228		3,112		207		3,128
Home equity	—		20		20		—		20
Total	$	3,557	$	14,619	$	18,176	$	550	$	18,231

December 31, 2014
Non-PCI Loans
Commercial:
Commercial real estate	$	885	$	4,513	$	5,398	$	158	$	5,330
Commercial and industrial	525		1,818		2,343		229		2,718
Construction and development	—		910		910		—		1,971
Consumer:
Residential real estate	—		928		928		—		3,863
Home equity	62		344		406		3		1,920
Other consumer	—		—		—		—		—
Total	$	1,472	$	8,513	$	9,985	$	390	$	15,802



	Three months ended June 30,								Six months ended June 30,
	2015				2014				2015				2014
	Average Balance		Interest Income		Average Balance		Interest Income		Average Balance		Interest Income		Average Balance		Interest Income
Non-PCI Loans
Commercial:
Commercial real estate	$	11,253	$	5	$	5,865	$	38	$	8,579	$	25	$	5,440	$	44
Commercial and industrial	2,994		1		918		—		2,724		2		726		—
Construction and development	523		—		1,863		—		545		—		2,111		—
Consumer:
Residential real estate	2,224		22		1,423		3		2,020		44		1,180		3
Construction and development	—		—		—		—		—		—		81		—
Home equity	197		—		418		—		213		—		420		—
Other consumer	—		—		—		—		—		—		4		—
Total	$	17,191	$	28	$	10,487	$	41	$	14,081	$	71	$	9,962	$	47

The Company may modify certain loans under terms that are below market in order to maximize the amount collected from a borrower that is experiencing financial difficulties. These modifications are considered to be troubled debt restructurings ("TDRs"). TDRs are evaluated individually for impairment based on the collateral value, if the loan is determined to be collateral dependent, or discounted expected cash flows, if the loan is not determined to be collateral dependent. The Company has no commitments to lend additional funds to any borrowers that have had a loan modified in a TDR. The following table provides the number and recorded investment of TDRs outstanding.



	June 30, 2015			December 31, 2014
	Recorded Investment		Number	Recorded Investment		Number
TDRs:
Commercial real estate	$	4,250	6	$	4,215	7
Commercial and industrial	92		2	172		4
Commercial construction	179		3	131		2
Residential real estate	1,715		5	1,770		6
Home equity	20		1	83		2
Total	$	6,256	17	$	6,371	21

The following tables provide the number and recorded investment of TDRs modified during the three and six months ended June 30, 2015 and 2014.



	TDRs Modified
	Three months ended June 30, 2015			Three months ended June 30, 2014
	Recorded Investment		Number	Recorded Investment		Number
TDRs:
Below market interest rate modifications:
Commercial real estate	$	647	2	$	3,167	2
Total	$	647	2	$	3,167	$	2



	TDRs Modified
	Six months ended June 30, 2015			Six months ended June 30, 2014
	Recorded Investment		Number	Recorded Investment		Number
TDRs:
Below market interest rate modifications:
Commercial real estate	$	647	2	$	4,044	5
Commercial and industrial	—		—	75		2
Residential real estate	398		1	442		3
Home equity	—		—	39		1
Total	$	1,045	3	$	4,600	$	11

No TDRs that were modified in the twelve months ended June 30, 2015 subsequently defaulted during the six months ended June 30, 2015. No TDRs that were modified in the twelve months ended June 30, 2014 subsequently defaulted during the six months ended June 30, 2014. The Company does not generally forgive principal or unpaid interest as part of when restructuring loans. Therefore, the recorded investment in TDRs during 2015 and 2014 did not change following the modifications.