Allowance for Loan Losses

6 Months Ended

Jun. 30, 2016

Receivables [Abstract]

Allowance for Loan Losses

Note 4. Allowance for Loan Losses

The Company maintains an allowance for loan losses in an amount determined by management on the basis of the character of the loans, loan performance, financial condition of borrowers, the value of collateral securing loans and other relevant factors.

The following table summarizes the changes in the Company’s allowance for loan losses for the periods indicated.

	Three months ended June 30,						Six months ended June 30,
	2016			2015			2016			2015
	(in thousands)
Allowance for loan losses, beginning of period	$	23,544		$	22,529		$	23,075		$	22,318
Loans charged off		(111	)		(403	)		(180	)		(484	)
Recoveries on loans previously charged-off		164			119			252			211
Net recoveries (charge-offs)		53			(284	)		72			(273	)
Provision charged to expense		350			—			800			200
Reclassification to other liabilities*		(84	)		—			(84	)		—
Allowance for loan losses, end of period	$	23,863		$	22,245		$	23,863		$	22,245

* The reclassification relates to allowance for loan losses allocations on unused commitments that have been reclassified to other liabilities.

Further information pertaining to the allowance for loan losses for the three months ending June 30, 2016 follows:

	Construction and Land Development			Commercial and Industrial			Municipal		Commercial Real Estate			Residential Real Estate			Consumer			Home Equity			Unallocated		Total
	(in thousands)
Allowance for loan losses:
Balance at March 31, 2016	$	1,973		$	6,693		$	990	$	10,533		$	1,249		$	693		$	1,185		$	228	$	23,544
Charge-offs		—			—			—		—			—			(111	)		—			—		(111	)
Recoveries		—			56			—		—			2			106			—			—		164
Provision		264			(878	)		811		128			53			(77	)		9			40		350
Reclassification to other liabilities		(3	)		(29	)		—		(11	)		(2	)		(3	)		(36	)		—		(84	)
Ending balance at June 30, 2016	$	2,234		$	5,842		$	1,801	$	10,650		$	1,302		$	608		$	1,158		$	268	$	23,863
Amount of allowance for loan losses for loans deemed to be impaired	$	6		$	10		$	—	$	151		$	7		$	—		$	—		$	—	$	174
Amount of allowance for loan losses for loans not deemed to be impaired	$	2,228		$	5,832		$	1,801	$	10,499		$	1,295		$	608		$	1,158		$	268	$	23,689
Loans:
Ending balance	$	31,178		$	493,033		$	134,386	$	728,658		$	219,494		$	11,339		$	183,816		$	—	$	1,801,904
Loans deemed to be impaired	$	96		$	410		$	—	$	3,736		$	215		$	—		$	—		$	—	$	4,457
Loans not deemed to be impaired	$	31,082		$	492,623		$	134,386	$	724,922		$	219,279		$	11,339		$	183,816		$	—	$	1,797,447

Further information pertaining to the allowance for loan losses for the six months ending June 30, 2016 follows:

		Construction and Land Development			Commercial and Industrial			Municipal		Commercial Real Estate			Residential Real Estate			Consumer			Home Equity			Unallocated			Total
	(in thousands)
Allowance for loan losses:
Balance at December 31, 2015	$	2,041		$	5,899		$	994	$	10,589		$	1,320		$	644		$	1,077		$	511		$	23,075
Charge-offs		—			—			—		—			—			(180	)		—			—			(180	)
Recoveries		—			91			—		—			3			158			—			—			252
Provision		196			(119	)		807		72			(19	)		(11	)		117			(243	)		800
Reclassification to other liabilities		(3	)		(29	)		—		(11	)		(2	)		(3	)		(36	)		—			(84	)
Ending balance at June 30, 2016	$	2,234		$	5,842		$	1,801	$	10,650		$	1,302		$	608		$	1,158		$	268		$	23,863
Amount of allowance for loan losses for loans deemed to be impaired	$	6		$	10		$	—	$	151		$	7		$	—		$	—		$	—		$	174
Amount of allowance for loan losses for loans not deemed to be impaired	$	2,228		$	5,832		$	1,801	$	10,499		$	1,295		$	608		$	1,158		$	268		$	23,689
Loans:
Ending balance	$	31,178		$	493,033		$	134,386	$	728,658		$	219,494		$	11,339		$	183,816		$	—		$	1,801,904
Loans deemed to be impaired	$	96		$	410		$	—	$	3,736		$	215		$	—		$	—		$	—		$	4,457
Loans not deemed to be impaired	$	31,082		$	492,623		$	134,386	$	724,922		$	219,279		$	11,339		$	183,816		$	—		$	1,797,447

During the six months ending June 30, 2016, the Company’s provision was primarily attributable to an increase in municipal balances. During the three months ending June 30, 2016 the Company’s provision was primarily attributable to an increase in construction loan balances. There was also an increase in municipal originations, which increased the municipal allocation and commercial and industrial loan payoffs, which decreased the commercial and industrial allocations.

Further information pertaining to the allowance for loan losses for the three months ending June 30, 2015 follows:

		Construction and Land Development			Commercial and Industrial			Municipal			Commercial Real Estate			Residential Real Estate			Consumer			Home Equity		Unallocated			Total
	(in thousands)
Allowance for loan losses:
Balance at March 31, 2015	$	1,884		$	4,645		$	1,373		$	11,127		$	799		$	714		$	614	$	1,373		$	22,529
Charge-offs		—			(52	)		—			(298	)		—			(53	)		—		—			(403	)
Recoveries		—			56			—			2			2			59			—		—			119
Provision		(151	)		(221	)		(373	)		892			(79	)		(11	)		36		(93	)		—
Ending balance at June 30, 2015	$	1,733		$	4,428		$	1,000		$	11,723		$	722		$	709		$	650	$	1,280		$	22,245
Amount of allowance for loan losses for loans deemed to be impaired	$	12		$	43		$	—		$	108		$	41		$	—		$	91	$	—		$	295
Amount of allowance for loan losses for loans not deemed to be impaired	$	1,721		$	4,385		$	1,000		$	11,615		$	681		$	709		$	559	$	1,280		$	21,950
Loans:
Ending balance	$	26,521		$	291,142		$	87,241		$	713,770		$	248,103		$	10,646		$	167,271	$	—		$	1,544,694
Loans deemed to be impaired	$	101		$	595		$	—		$	1,705		$	941		$	—		$	91	$	—		$	3,433
Loans not deemed to be impaired	$	26,420		$	290,547		$	87,241		$	712,065		$	247,162		$	10,646		$	167,180	$	—		$	1,541,261

Further information pertaining to the allowance for loan losses for the six months ending June 30, 2015 follows:

		Construction and Land Development		Commercial and Industrial			Municipal			Commercial Real Estate			Residential Real Estate			Consumer			Home Equity		Unallocated		Total
	(in thousands)
Allowance for loan losses:
Balance at December 31, 2104	$	1,592	$	4,758		$	1,488		$	11,199		$	775		$	810		$	599	$	1,097	$	22,318
Charge-offs		—		(52	)		—			(298	)		—			(134	)		—		—		(484	)
Recoveries		—		71			—			4			4			132			—		—		211
Provision		141		(349	)		(488	)		818			(57	)		(99	)		51		183		200
Ending balance at June 30, 2015	$	1,733	$	4,428		$	1,000		$	11,723		$	722		$	709		$	650	$	1,280	$	22,245
Amount of allowance for loan losses for loans deemed to be impaired	$	12	$	43		$	—		$	108		$	41		$	—		$	91	$	—	$	295
Amount of allowance for loan losses for loans not deemed to be impaired	$	1,721	$	4,385		$	1,000		$	11,615		$	681		$	709		$	559	$	1,280	$	21,950
Loans:
Ending balance	$	26,521	$	291,142		$	87,241		$	713,770		$	248,103		$	10,646		$	167,271	$	—	$	1,544,694
Loans deemed to be impaired	$	101	$	595		$	—		$	1,705		$	941		$	—		$	91	$	—	$	3,433
Loans not deemed to be impaired	$	26,420	$	290,547		$	87,241		$	712,065		$	247,162		$	10,646		$	167,180	$	—	$	1,541,261

The Company utilizes a six grade internal loan rating system for commercial real estate, construction and commercial loans as follows:

Loans rated 1-3 (Pass):

Loans in this category are considered “pass” rated loans with low to average risk.

Loans rated 4 (Monitor):

These loans represent classified loans that management is closely monitoring for credit quality. These loans have had or may have minor credit quality deterioration as of June 30, 2016 and December 31, 2015.

Loans rated 5 (Substandard):

Substandard loans represent classified loans that management is closely monitoring for credit quality. These loans have had more significant credit quality deterioration as of June 30, 2016 and December 31, 2015.

Loans rated 6 (Doubtful):

Doubtful loans represent classified loans that management is closely monitoring for credit quality. These loans had more significant credit quality deterioration as of June 30, 2016 and December 31, 2015 and are doubtful for full collection.

Impaired:

Impaired loans represent classified loans that management is closely monitoring for credit quality. A loan is classified as impaired when it is probable that the Company will be unable to collect all amounts due.

The following table presents the Company’s loans by risk rating at June 30, 2016.

	Construction and Land Development		Commercial and Industrial		Municipal		Commercial Real Estate
	(in thousands)
Grade:
1-3 (Pass)	$	24,048	$	492,623	$	134,386	$	724,735
4 (Monitor)		7,034		—		—		187
5 (Substandard)		—		—		—		—
6 (Doubtful)		—		—		—		—
Impaired		96		410		—		3,736
Total	$	31,178	$	493,033	$	134,386	$	728,658

The following table presents the Company’s loans by risk rating at December 31, 2015.

	Construction and Land Development		Commercial and Industrial		Municipal		Commercial Real Estate
	(in thousands)
Grade:
1-3 (Pass)	$	20,281	$	451,774	$	85,685	$	718,911
4 (Monitor)		7,042		18		—		917
5 (Substandard)		—		—		—		—
6 (Doubtful)		—		—		—		—
Impaired		98		443		—		1,678
Total	$	27,421	$	452,235	$	85,685	$	721,506

The Company has increased its exposure to larger loans to large institutions with publically available credit ratings beginning in 2015. These ratings are tracked as a credit quality indicator for these loans. Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at June 30, 2016.

	Commercial and Industrial		Municipal		Commercial Real Estate		Total
	(in thousands)
Credit Rating:
Aaa – Aa3	$	282,048	$	68,806	$	7,074	$	357,928
A1 – A3		140,324		7,400		130,152		277,876
Baa1 – Baa3		—		53,520		166,105		219,625
Ba2		—		3,610		—		3,610
Total	$	422,372	$	133,336	$	303,331	$	859,039

Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at December 31, 2015.

	Commercial and Industrial		Municipal		Commercial Real Estate		Total
	(in thousands)
Credit Rating:
Aaa – Aa3	$	234,733	$	63,865	$	7,547	$	306,145
A1 – A3		140,419		7,400		130,872		278,691
Baa1 – Baa3		—		8,890		167,489		176,379
Ba2		—		4,480		—		4,480
Total	$	375,152	$	84,635	$	305,908	$	765,695

The Company utilized payment performance as credit quality indicators for the loan types listed below. The indicators are depicted in the table “aging of past due loans,” below.

Further information pertaining to the allowance for loan losses at June 30, 2016 follows:

	Accruing 30-89 Days Past Due		Non Accrual		Accruing Greater than 90 Days		Total Past Due		Current Loans		Total
	(in thousands)
Construction and land development	$	—	$	96	$	—	$	96	$	31,082	$	31,178
Commercial and industrial		470		52		—		522		492,511		493,033
Municipal		—		—		—		—		134,386		134,386
Commercial real estate		1,080		162		—		1,242		727,416		728,658
Residential real estate		736		844		—		1,580		217,914		219,494
Consumer and overdrafts		1		3		—		4		11,335		11,339
Home equity		359		329		—		688		183,128		183,816
Total	$	2,646	$	1,486	$	—	$	4,132	$	1,797,772	$	1,801,904

Further information pertaining to the allowance for loan losses at December 31, 2015 follows:

	Accruing 30-89 Days Past Due		Non Accrual		Accruing Greater than 90 Days		Total Past Due		Current Loans		Total
	(in thousands)
Construction and land development	$	—	$	99	$	—	$	99	$	27,322	$	27,421
Commercial and industrial		—		60		—		60		452,175		452,235
Municipal		—		—		—		—		85,685		85,685
Commercial real estate		1,462		174		—		1,636		719,870		721,506
Residential real estate		596		1,559		—		2,155		253,191		255,346
Consumer and overdrafts		6		—		—		6		11,317		11,323
Home equity		628		444		—		1,072		176,948		178,020
Total	$	2,692	$	2,336	$	—	$	5,028	$	1,726,508	$	1,731,536

A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, the Company measures impairment based on a loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. Loans are charged-off when management believes that the collectability of the loan’s principal is not probable. The specific factors that management considers in making the determination that the collectability of the loan’s principal is not probable include: the delinquency status of the loan, the fair value of the collateral, if secured, and the financial strength of the borrower and/or guarantors. For collateral dependent loans, the amount of the recorded investment in a loan that exceeds the fair value of the collateral is charged-off against the allowance for loan losses in lieu of an allocation of a specific allowance amount when such an amount has been identified definitively as uncollectible. The Company’s policy for recognizing interest income on impaired loans is contained within Note 1 of the consolidated financial statements contained in the Company’s Annual Report for the fiscal year ended December 31, 2015.

The following is information pertaining to impaired loans for June 30, 2016:

	Carrying Value		Unpaid Principal Balance		Required Reserve		Average Carrying Value for 3 Months Ending 6/30/16		Interest Income Recognized for 3 Months Ending 6/30/16		Average Carrying Value for 6 Months Ending 6/30/16		Interest Income Recognized for 6 Months Ending 6/30/16
	(in thousands)
With no required reserve recorded:
Construction and land development	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial and industrial		52		239		—		54		—		56		—
Municipal		—		—		—		—		—		—		—
Commercial real estate		596		596		—		329		16		188		22
Residential real estate		103		190		—		106		2		108		4
Consumer		—		—		—		—		—		—		—
Home equity		—		—		—		—		—		—		—
Total	$	751	$	1,025	$	—	$	489	$	18	$	352	$	26
With required reserve recorded:
Construction and land development	$	96	$	108	$	6	$	97	$	—	$	97	$	—
Commercial and industrial		358		373		10		370		5		374		9
Municipal		—		—		—		—		—		—		—
Commercial real estate		3,140		3,239		151		2,030		20		1,878		33
Residential real estate		112		112		7		283		1		505		3
Consumer		—		—		—		—		—		—		—
Home equity		—		—		—		22		—		51		—
Total	$	3,706	$	3,832	$	174	$	2,802	$	26	$	2,905	$	45
Total:
Construction and land development	$	96	$	108	$	6	$	97	$	—	$	97	$	—
Commercial and industrial		410		612		10		424		5		430		9
Municipal		—		—		—		—		—		—		—
Commercial real estate		3,736		3,835		151		2,359		36		2,066		55
Residential real estate		215		302		7		389		3		613		7
Consumer		—		—		—		—		—		—		—
Home equity		—		—		—		22		—		51		—
Total	$	4,457	$	4,857	$	174	$	3,291	$	44	$	3,257	$	71

The following is information pertaining to impaired loans for June 30, 2015:

	Carrying Value		Unpaid Principal Balance		Required Reserve		Average Carrying Value for 3 Months Ending 6/30/15		Interest Income Recognized for 3 Months Ending 6/30/15		Average Carrying Value for 6 Months Ending 6/30/15		Interest Income Recognized for 6 Months Ending 6/30/15
	(in thousands)
With no required reserve recorded:
Construction and land development	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial and industrial		32		32		—		47		—		40		—
Municipal		—		—		—		—		—		—		—
Commercial real estate		—		—		—		196		—		280		—
Residential real estate		126		210		—		129		2		131		4
Consumer		—		—		—		—		—		—		—
Home equity		—		—		—		—		—		—		—
Total	$	158	$	242	$	—	$	372	$	2	$	451	$	4
With required reserve recorded:
Construction and land development	$	101	$	108	$	12	$	102	$	—	$	102	$	—
Commercial and industrial		563		765		43		644		5		722		11
Municipal		—		—		—		—		—		—		—
Commercial real estate		1,705		1,801		108		2,809		17		3,286		33
Residential real estate		815		815		41		817		1		820		7
Consumer		—		—		—		—		—		—		—
Home equity		91		91		91		91		—		92		—
Total	$	3,275	$	3,580	$	295	$	4,463	$	23	$	5,022	$	51
Total:
Construction and land development	$	101	$	108	$	12	$	102	$	—	$	102	$	—
Commercial and industrial		595		797		43		691		5		762		11
Municipal		—		—		—		—		—		—		—
Commercial real estate		1,705		1,801		108		3,005		17		3,566		33
Residential real estate		941		1,025		41		946		3		951		11
Consumer		—		—		—		—		—		—		—
Home equity		91		91		91		91		—		92		—
Total	$	3,433	$	3,822	$	295	$	4,835	$	25	$	5,473	$	55

There was one commercial real estate troubled debt restructuring during the six month period ending June 30, 2016. The pre-modification and post-modification outstanding recorded investment was $2,091,000. The loan was modified for 2016, by reducing the interest rate as well as extending the term on the loan. The financial impact for the modification was $3,000 reduction in principal payments and $1,000 reduction in interest payments.

There was no troubled debt restructuring during the six month period ended June 30, 2015.