3. LOANS AND ALLOWANCE FOR LOAN LOSSES

Loan Origination/Risk Management

The Company has certain lending policies and procedures in place that are designed to minimize the level of risk within the loan portfolio. Diversification of the loan portfolio manages the risk associated with fluctuations in economic conditions. The Company maintains an independent loan review department that reviews and validates the credit risk program on a continual basis. Management regularly evaluates the results of the loan reviews. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Commercial loans are made based on the identified cash flows of the borrower and on the underlying collateral provided by the borrower. The cash flows of the borrower, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts from its customers. Commercial credit cards are generally unsecured and are underwritten with criteria similar to commercial loans including an analysis of the borrower’s cash flow, available business capital, and overall credit-worthiness of the borrower.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans is largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. The Company requires an appraisal of the collateral be made at origination and on an as-needed basis, in conformity with current market conditions and regulatory requirements. The underwriting standards address both owner and non-owner occupied real estate.

Construction loans are underwritten using feasibility studies, independent appraisal reviews, sensitivity analysis or absorption and lease rates and financial analysis of the developers and property owners. Construction loans are based upon estimates of costs and value associated with the complete project. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their repayment being sensitive to interest rate changes, governmental regulation of real property, economic conditions, and the availability of long-term financing.

Underwriting standards for residential real estate and home equity loans are based on the borrower’s loan-to-value percentage, collection remedies, and overall credit history.

Consumer loans are underwritten based on the borrower’s repayment ability. The Company monitors delinquencies on all of its consumer loans and leases and periodically reviews the distribution of FICO scores relative to historical periods to monitor credit risk on its credit card loans. The underwriting and review practices combined with the relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Consumer loans and leases that are 90 days past due or more are considered non-performing.

This table provides a summary of loan classes and an aging of past due loans as of December 31, 2014 (in thousands):


	As Of December 31, 2014
	30-89 Days Past Due and Accruing		Greater than 90 Days Past Due and Accruing		Non-Accrual Loans		Total Past Due		Current		Total Loans
Commercial:
Commercial	$	2,509	$	363	$	13,114	$	15,986	$	3,798,023	$	3,814,009
Commercial—credit card		267		147		37		451		115,258		115,709
Real estate:
Real estate—construction		1,244		—		983		2,227		253,779		256,006
Real estate—commercial		1,727		61		12,037		13,825		1,852,476		1,866,301
Real estate—residential		828		113		562		1,503		318,324		319,827
Real estate—HELOC		1,371		—		19		1,390		642,196		643,586
Consumer:
Consumer—credit card		2,268		2,303		560		5,131		305,165		310,296
Consumer—other		1,743		843		70		2,656		98,314		100,970
Leases		—		—		—		—		39,090		39,090

Total loans	$	11,957	$	3,830	$	27,382	$	43,169	$	7,422,625	$	7,465,794

This table provides a summary of loan classes and an aging of past due loans as of December 31, 2013 (in thousands):


	As Of December 31, 2013
	30-89 Days Past Due and Accruing		Greater than 90 Days Past Due and Accruing		Non-Accrual Loans		Total Past Due		Current		Total Loans
Commercial:
Commercial	$	2,107	$	135	$	8,042	$	10,284	$	3,291,219	$	3,301,503
Commercial—credit card		362		82		38		482		102,788		103,270
Real estate:
Real estate—construction		186		—		934		1,120		151,755		152,875
Real estate—commercial		3,611		344		19,213		23,168		1,678,983		1,702,151
Real estate—residential		1,257		13		868		2,138		287,218		289,356
Real estate—HELOC		880		6		210		1,096		565,032		566,128
Consumer:
Consumer—credit card		3,230		2,448		1,031		6,709		311,627		318,336
Consumer—other		1,727		190		370		2,287		60,625		62,912
Leases		—		—		—		—		23,981		23,981

Total loans	$	13,360	$	3,218	$	30,706	$	47,284	$	6,473,228	$	6,520,512

The Company sold $73.5 million, $121.8 million, and $246.3 million of residential real estate and student loans without recourse during the periods ended December 31, 2014, 2013, and 2012 respectively.

The Company has ceased the recognition of interest on loans with a carrying value of $27.4 million and $30.7 million at December 31, 2014 and 2013, respectively. Restructured loans totaled $9.3 million and $12.1 million at December 31, 2014 and 2013, respectively. Loans 90 days past due and still accruing interest amounted to $3.8 million and $3.2 million at December 31, 2014 and 2013, respectively. There was an insignificant amount of interest recognized on impaired loans during 2014, 2013, and 2012.

Credit Quality Indicators

As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to the risk grading of specified classes of loans, net charge-offs, non-performing loans, and general economic conditions.

The Company utilizes a risk grading matrix to assign a rating to each of its commercial, commercial real estate, and construction real estate loans. The loan rankings are summarized into the following categories: Non-watch list, Watch, Special Mention, and Substandard. Any loan not classified in one of the categories described below is considered to be a Non-watch list loan. A description of the general characteristics of the loan ranking categories is as follows:

•

Watch—This rating represents credit exposure that presents higher than average risk and warrants greater than routine attention by Company personnel due to conditions affecting the borrower, the Borrower’s industry or the economic environment. These conditions have resulted in some degree of uncertainty that results in higher than average credit risk.

•

Special Mention—This rating reflects 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 asset or the institution’s credit position at some future date. The rating is not adversely classified and does not expose an institution to sufficient risk to warrant adverse classification.

•

Substandard—This rating represents an asset inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans in this category are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard. This category may include loans where the collection of full principal is doubtful or remote.

All other classes of loans are generally evaluated and monitored based on payment activity. Non-performing loans include restructured loans on non-accrual and all other non-accrual loans.

This table provides an analysis of the credit risk profile of each loan class as of December 31, 2014 (in thousands):

Credit Exposure

Credit Risk Profile by Risk Rating


	Commercial		Real estate- construction		Real estate- commercial
	2014		2014		2014
Non-watch list	$	3,532,611	$	253,895	$	1,780,323
Watch		72,283		181		31,984
Special Mention		98,750		756		8,691
Substandard		110,365		1,174		45,303

Total	$	3,814,009	$	256,006	$	1,866,301

Credit Exposure

Credit Risk Profile Based on Payment Activity


	Commercial- credit card		Real estate- residential		Real estate- HELOC
	2014		2014		2014
Performing	$	115,672	$	319,265	$	643,567
Non-performing		37		562		19

Total	$	115,709	$	319,827	$	643,586


	Consumer- credit card		Consumer- other		Leases
	2014		2014		2014
Performing	$	309,736	$	100,900	$	39,090
Non-performing		560		70		—

Total	$	310,296	$	100,970	$	39,090

This table provides an analysis of the credit risk profile of each loan class as of December 31, 2013 (in thousands):

Credit Exposure

Credit Risk Profile by Risk Rating


	Commercial		Real estate- construction		Real estate- commercial
	2013		2013		2013
Non-watch list	$	3,041,224	$	151,359	$	1,565,894
Watch		110,932		210		76,647
Special Mention		78,064		—		19,876
Substandard		71,283		1,306		39,734

Total	$	3,301,503	$	152,875	$	1,702,151

Credit Exposure

Credit Risk Profile Based on Payment Activity


	Commercial- credit card		Real estate- residential		Real estate- HELOC
	2013		2013		2013
Performing	$	103,232	$	288,488	$	565,918
Non-performing		38		868		210

Total	$	103,270	$	289,356	$	566,128


	Consumer- credit card		Consumer- other		Leases
	2013		2013		2013
Performing	$	317,305	$	62,542	$	23,981
Non-performing		1,031		370		—

Total	$	318,336	$	62,912	$	23,981

Allowance for Loan Losses

The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s judgment of inherent probable losses within the Company’s loan portfolio as of the balance sheet date. The allowance is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. Accordingly, the methodology is based on historical loss trends. The Company’s process for determining the appropriate level of the allowance for loan losses is designed to account for credit deterioration as it occurs. The provision for probable loan losses reflects loan quality trends, including the levels of and trends related to non-accrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors.

The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific loans; however, the entire allowance is available for any loan that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including, among other things, the performance of the Company’s loan portfolio, the economy, changes in interest rates and changes in the regulatory environment.

The Company’s allowance for loan losses consists of specific valuation allowances and general valuation allowances based on historical loan loss experience for similar loans with similar characteristics and trends, general economic conditions and other qualitative risk factors both internal and external to the Company.

The allowances established for probable losses on specific loans are based on a regular analysis and evaluation of impaired loans. Loans are classified based on an internal risk grading process that evaluates the obligor’s ability to repay, the underlying collateral, if any, and the economic environment and industry in which the borrower operates. When a loan is considered impaired, the loan is analyzed to determine the need, if any, to specifically allocate a portion of the allowance for loan losses to the loan. Specific valuation allowances are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk ranking of the loan and economic conditions affecting the borrower’s industry.

General valuation allowances are calculated based on the historical loss experience of specific types of loans including an evaluation of the time span and volume of the actual charge-off. The Company calculates historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool. The historical loss ratios are updated based on actual charge-off experience. A valuation allowance is established for each pool of similar loans based upon the product of the historical loss ratio, time span to charge-off, and the total dollar amount of the loans in the pool. The Company’s pools of similar loans include similarly risk-graded groups of commercial loans, commercial real estate loans, commercial credit card, home equity loans, consumer real estate loans and consumer and other loans. The Company also considers a loan migration analysis for criticized loans. This analysis includes an assessment of the probability that a loan will move to a loss position based on its risk rating. The consumer credit card pool is evaluated based on delinquencies and credit scores. In addition, a portion of the allowance is determined by a review of qualitative factors by Management.

Generally, the unsecured portion of a commercial or commercial real estate loan is charged-off when, after analyzing the borrower’s financial condition, it is determined that the borrower is incapable of servicing the debt, little or no prospect for near term improvement exists, and no realistic and significant strengthening action is pending. For collateral dependent commercial or commercial real estate loans, an analysis is completed regarding the Company’s collateral position to determine if the amounts due from the borrower are in excess of the calculated current fair value of the collateral. Specific allocations of the allowance for loan losses are made for any collateral deficiency. If a collateral deficiency is ultimately deemed to be uncollectible, the amount is charged-off. Revolving commercial loans (such as commercial credit cards) which are past due 90 cumulative days are classified as a loss and charged off.

Generally, a consumer loan, or a portion thereof, is charged-off in accordance with regulatory guidelines which provide that such loans be charged-off when the Company becomes aware of the loss, such as from a triggering event that may include but is not limited to new information about a borrower’s intent and ability to repay the loan, bankruptcy, fraud, or death. However, the charge-off timeframe should not exceed the specified delinquency time frames, which state that closed-end retail loans (such as real estate mortgages, home equity loans and consumer installment loans) that become past due 120 cumulative days and open-end retail loans (such as home equity lines of credit and consumer credit cards) that become past due 180 cumulative days are classified as a loss and charged-off.

ALLOWANCE FOR LOAN LOSSES AND RECORDED INVESTMENT IN LOANS

This table provides a rollforward of the allowance for loan losses by portfolio segment for the year ended December 31, 2014 (in thousands):


	Year Ended December 31, 2014
	Commercial			Real estate			Consumer			Leases		Total
Allowance for loan losses:
Beginning balance	$	48,886		$	15,342		$	10,447		$	76	$	74,751
Charge-offs		(7,307	)		(259	)		(11,427	)		—		(18,993	)
Recoveries		848			44			2,490			—		3,382
Provision		12,922			(4,402	)		8,411			69		17,000

Ending Balance	$	55,349		$	10,725		$	9,921		$	145	$	76,140

Ending Balance: individually evaluated for impairment	$	972		$	935		$	—		$	—	$	1,907
Ending Balance: collectively evaluated for impairment		54,377			9,790			9,921			145		74,233
Loans:
Ending Balance: loans	$	3,929,718		$	3,085,720		$	411,266		$	39,090	$	7,465,794
Ending Balance: individually evaluated for impairment		17,060			10,243			1			—		27,304
Ending Balance: collectively evaluated for impairment		3,912,658			3,075,477			411,265			39,090		7,438,490

This table provides a rollforward of the allowance for loan losses by portfolio segment for the year ended December 31, 2013 (in thousands):


	Year Ended December 31, 2013
	Commercial			Real estate			Consumer			Leases		Total
Allowance for loan losses:
Beginning balance	$	43,390		$	15,506		$	12,470		$	60	$	71,426
Charge-offs		(4,748	)		(775	)		(12,131	)		—		(17,654	)
Recoveries		867			77			2,535			—		3,479
Provision		9,377			534			7,573			16		17,500

Ending Balance	$	48,886		$	15,342		$	10,447		$	76	$	74,751

Ending Balance: individually evaluated for impairment	$	2,882		$	1,370		$	—		$	—	$	4,252
Ending Balance: collectively evaluated for impairment		46,004			13,972			10,447			76		70,499
Loans:
Ending Balance: loans	$	3,404,773		$	2,710,510		$	381,248		$	23,981	$	6,520,512
Ending Balance: individually evaluated for impairment		14,635			15,543			11			—		30,189
Ending Balance: collectively evaluated for impairment		3,390,138			2,694,967			381,237			23,981		6,490,323

This table provides a rollforward of the allowance for loan losses by portfolio segment for the year ended December 31, 2012 (in thousands):


	Year Ended December 31, 2012
	Commercial			Real estate			Consumer			Leases		Total
Allowance for loan losses:
Beginning balance	$	37,927		$	20,486		$	13,593		$	11	$	72,017
Charge-offs		(8,446	)		(932	)		(12,678	)		—		(22,056	)
Recoveries		1,136			28			2,801			—		3,965
Provision		12,773			(4,076	)		8,754			49		17,500

Ending Balance	$	43,390		$	15,506		$	12,470		$	60	$	71,426

Ending Balance: individually evaluated for impairment	$	1,393		$	781		$	—		$	—	$	2,174
Ending Balance: collectively evaluated for impairment		41,977			14,725			12,470			60		69,252
Loans:
Ending Balance: loans	$	2,978,014		$	2,300,583		$	389,068		$	19,084	$	5,686,749
Ending Balance: individually evaluated for impairment		15,057			11,203			49			—		26,309
Ending Balance: collectively evaluated for impairment		2,962,957			2,289,380			389,019			19,084		5,660,440

Impaired Loans

This table provides an analysis of impaired loans by class for the year ended December 31, 2014 (in thousands):


	As Of December 31, 2014
	Unpaid Principal Balance		Recorded Investment with No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Commercial:
Commercial	$	21,758	$	13,928	$	3,132	$	17,060	$	972	$	16,022
Commercial—credit card		—		—		—		—		—		—
Real estate:
Real estate—construction		1,540		983		—		983		—		939
Real estate—commercial		9,546		4,454		3,897		8,351		935		11,298
Real estate—residential		1,083		909		—		909		—		1,006
Real estate—HELOC		—		—		—		—		—		—
Consumer:
Consumer—credit card		—		—		—		—		—		—
Consumer—other		1		1		—		1		—		12
Leases		—		—		—		—		—		—

Total	$	33,928	$	20,275	$	7,029	$	27,304	$	1,907	$	29,277

This table provides an analysis of impaired loans by class for the year ended December 31, 2013 (in thousands):


	As Of December 31, 2013
	Unpaid Principal Balance		Recorded Investment with No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Commercial:
Commercial	$	17,227	$	3,228	$	11,407	$	14,635	$	2,882	$	14,791
Commercial—credit card		—		—		—		—		—		—
Real estate:
Real estate—construction		1,408		810		123		933		—		1,186
Real estate—commercial		14,686		5,305		8,218		13,523		94		10,506
Real estate—residential		1,317		1,087		—		1,087		1,276		1,122
Real estate—HELOC		—		—		—		—		—		—
Consumer:
Consumer—credit card		—		—		—		—		—		—
Consumer—other		12		11		—		11		—		34
Leases		—		—		—		—		—		—

Total	$	34,650	$	10,441	$	19,748	$	30,189	$	4,252	$	27,639

This table provides an analysis of impaired loans by class for the year ended December 31, 2012 (in thousands):


	As Of December 31, 2012
	Unpaid Principal Balance		Recorded Investment with No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Commercial:
Commercial	$	22,453	$	12,119	$	2,938	$	15,057	$	1,393	$	13,287
Commercial—credit card		—		—		—		—		—		—
Real estate:
Real estate—construction		276		276		—		276		—		118
Real estate—commercial		9,334		6,777		2,213		8,990		733		9,925
Real estate—residential		2,357		1,714		223		1,937		48		2,622
Real estate—HELOC		—		—		—		—		—		—
Consumer:
Consumer—credit card		—		—		—		—		—		—
Consumer—other		51		49		—		49		—		43
Leases		—		—		—		—		—		—

Total	$	34,471	$	20,935	$	5,374	$	26,309	$	2,174	$	25,995

Troubled Debt Restructurings

A loan modification is considered a troubled debt restructuring (TDR) when a concession had been granted to a debtor experiencing financial difficulties. The Company’s modifications generally include interest rate adjustments, principal reductions, and amortization and maturity date extensions. These modifications allow the debtor short-term cash relief to allow them to improve their financial condition. The Company’s restructured loans are individually evaluated for impairment and evaluated as part of the allowance for loan loss as described above in the Allowance for Loan Losses section of this note.

The Company had $477 thousand and $347 thousand in commitments to lend to borrowers with loan modifications classified as TDR’s as of December 31, 2014 and December 31, 2013, respectively. The Company made no TDR’s in the last 12 months that had payment defaults for the year ended December 31, 2014.

This table provides a summary of loans restructured by class during the years ended December 31, 2014 and 2013 (in thousands):


	Year Ended December 31, 2014						Year Ended December 31, 2013
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Commercial:
Commercial		1	$	469	$	469		2	$	1,128	$	1,066
Commercial—credit card		—		—		—		—		—		—
Real estate:
Real estate—construction		—		—		—		—		—		—
Real estate—commercial		1		178		178		1		937		937
Real estate—residential		4		277		301		—		—		—
Real estate—HELOC		—		—		—		—		—		—
Consumer:
Consumer—credit card		—		—		—		—		—		—
Consumer—other		—		—		—		—		—		—
Leases		—		—		—		—		—		—

Total		6	$	924	$	948		3	$	2,065	$	2,003