Credit Quality and Nonperforming Assets

6 Months Ended

Jun. 30, 2016

Credit Quality and Nonperforming Assets [Abstract]

Note 11 – Credit Quality and Nonperforming Assets

Credit Quality Classifications

The Company monitors the credit quality of loans on a continuous basis using the regulatory and accounting classifications of pass, special mention, substandard and impaired to characterize the associated credit risk. Balances classified as “loss” are immediately charged off. The Company conforms to the following definitions for risk classifications utilized:

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Pass: Larger non-homogeneous loans not meeting the risk rating definitions below, and smaller homogeneous loans that are not assessed on an individual basis.

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Special mention: Loans which have potential issues that deserve the close attention of Management. If left uncorrected, those potential weaknesses could eventually diminish the prospects for full repayment of principal and interest according to the contractual terms of the loan agreement, or could result in deterioration of the Company’s credit position at some future date.

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Substandard: Loans that have at least one clear and well-defined weakness that could jeopardize the ultimate recoverability of all principal and interest, such as a borrower displaying a highly leveraged position, unfavorable financial operating results and/or trends, uncertain repayment sources or a deteriorated financial condition.

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Impaired: A loan is considered impaired when, based on 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 agreement. Impaired loans include all nonperforming loans, restructured troubled debt (“TDRs”), and certain other loans that are still being maintained on accrual status. A TDR may be nonperforming or performing, depending on its accrual status and the demonstrated ability of the borrower to comply with restructured terms (see “Troubled Debt Restructurings” section below for additional information on TDRs).

Credit quality classifications for the Company’s loan balances were as follows, as of the dates indicated:

Credit Quality Classifications

(dollars in thousands, unaudited)

	June 30, 2016
	Pass		Special Mention		Substandard		Impaired		Total
Real Estate:
1-4 family residential construction	$	16,939	$	-	$	-	$	-	$	16,939
Other construction/land		32,065		5,356		-		969		38,390
1-4 family - closed end		127,637		774		935		6,112		135,458
Equity lines		34,599		1,700		748		3,777		40,824
Multi-family residential		31,017		-		-		417		31,434
Commercial real estate - owner occupied		201,868		3,984		3,045		3,302		212,199
Commercial real estate - non-owner occupied		164,128		5,378		167		5,103		174,776
Farmland		129,053		560		2,484		43		132,140
Total real estate		737,306		17,752		7,379		19,723		782,160

Agricultural		49,775		159		24		65		50,023
Commercial and industrial		86,649		22,143		661		2,293		111,746
Mortgage Warehouse		197,715		-		-		-		197,715
Consumer loans		11,485		148		23		1,962		13,618
Total gross loans and leases	$	1,082,930	$	40,202	$	8,087	$	24,043	$	1,155,262

	December 31, 2015
	Pass		Special Mention		Substandard		Impaired		Total
Real Estate:
1-4 family residential construction	$	13,784	$	1,157	$	-	$	-	$	14,941
Other construction/land		35,901		135		-		1,323		37,359
1-4 family - closed end		127,972		2,498		387		6,499		137,356
Equity lines		39,966		199		957		3,111		44,233
Multi-family residential		26,178		-		-		1,044		27,222
Commercial real estate - owner occupied		196,211		12,075		7,322		3,100		218,708
Commercial real estate - non-owner occupied		155,223		4,505		170		5,209		165,107
Farmland		130,285		1,563		724		610		133,182
Total real estate		725,520		22,132		9,560		20,896		778,108

Agricultural		46,197		40		-		-		46,237
Commercial and industrial		108,931		933		755		2,588		113,207
Mortgage Warehouse		180,355		-		-		-		180,355
Consumer loans		12,718		178		16		2,037		14,949
Total gross loans and leases	$	1,073,721	$	23,283	$	10,331	$	25,521	$	1,132,856

Past Due and Nonperforming Assets

Nonperforming assets are comprised of loans for which the Company is no longer accruing interest, and foreclosed assets, including mobile homes and OREO. OREO consists of real properties acquired by foreclosure or similar means, which the Company is offering or will offer for sale. Nonperforming loans and leases result when reasonable doubt surfaces with regard to the ability of the Company to collect all principal and interest. At that point, we stop accruing interest on the loan or lease in question and reverse any previously-recognized interest to the extent that it is uncollected or associated with interest-reserve loans. Any asset for which principal or interest has been in default for 90 days or more is also placed on non-accrual status even if interest is still being received, unless the asset is both well secured and in the process of collection. An aging of the Company’s loan balances is presented in the following tables, by number of days past due as of the indicated dates:

Loan Portfolio Aging

(dollars in thousands, unaudited)

	June 30, 2016
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or More Past Due⁽¹⁾		Total Past Due		Current		Total Financing Receivables		Non-Accrual Loans⁽²⁾
Real Estate:
1-4 family residential construction	$	-	$	-	$	-	$	-	$	16,939	$	16,939	$	-
Other construction/land		-		-		-		-		38,390		38,390		257
1-4 family - closed end		75		-		-		75		135,383		135,458		446
Equity lines		298		78		197		573		40,251		40,824		1,630
Multi-family residential		-		-		-		-		31,434		31,434		-
Commercial real estate - owner occupied		198		-		358		556		211,643		212,199		2,276
Commercial real estate - non-owner occupied		-		-		-		-		174,776		174,776		235
Farmland		-		43		-		43		132,097		132,140		43
Total real estate		571		121		555		1,247		780,913		782,160		4,887

Agricultural		-		-		64		64		49,959		50,023		65
Commercial and industrial		32		1		112		145		111,601		111,746		529
Mortgage warehouse lines		-		-		-		-		197,715		197,715		-
Consumer		99		13		-		112		13,506		13,618		463
Total gross loans and leases	$	702	$	135	$	731	$	1,568	$	1,153,694	$	1,155,262	$	5,944

⁽¹⁾ As of June 30, 2016 there were no loans over 90 days past due and still acrruing.

⁽²⁾ Included in total financing receivables

	December 31, 2015
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or More Past Due⁽¹⁾		Total Past Due		Current		Total Financing Receivables		Non-Accrual Loans⁽²⁾
Real Estate:
1-4 family residential construction	$	612	$	545	$	-	$	1,157	$	13,784	$	14,941	$	-
Other construction/land		18		129		63		210		37,149		37,359		457
1-4 family - closed end		1,065		917		566		2,548		134,808		137,356		2,298
Equity lines		199		247		484		930		43,303		44,233		1,770
Multi-family residential		-		630		-		630		26,592		27,222		630
Commercial real estate - owner occupied		232		129		260		621		218,087		218,708		2,325
Commercial real estate - non-owner occupied		-		-		-		-		165,107		165,107		262
Farmland		-		-		-		-		133,182		133,182		610
Total real estate		2,126		2,597		1,373		6,096		772,012		778,108		8,352

Agricultural		-		-		-		-		46,237		46,237		-
Commercial and industrial		127		153		86		366		112,841		113,207		710
Mortgage warehouse lines		-		-		-		-		180,355		180,355		-
Consumer		98		9		45		152		14,797		14,949		572
Total gross loans and leases	$	2,351	$	2,759	$	1,504	$	6,614	$	1,126,242	$	1,132,856	$	9,634

⁽¹⁾ As of December 31, 2015 there were no loans over 90 days past due and still accruing.

⁽²⁾ Included in total financing receivables

Troubled Debt Restructurings

A loan that is modified for a borrower who is experiencing financial difficulty is classified as a troubled debt restructuring if the modification constitutes a concession. At June 30, 2016, the Company had a total of $17.2 million in TDRs, including $2.5 million in TDRs that were on non-accrual status. Generally, a non-accrual loan that has been modified as a TDR remains on non-accrual status for a period of at least six months to demonstrate the borrower’s ability to comply with the modified terms. However, performance prior to the modification, or significant events that coincide with the modification, could result in a loan’s return to accrual status after a shorter performance period or even at the time of loan modification. Regardless of the period of time that has elapsed, if the borrower’s ability to meet the revised payment schedule is uncertain then the loan will be kept on non-accrual status. Moreover, a TDR is generally considered to be in default when it appears that the customer will not likely be able to repay all principal and interest pursuant to restructured terms.

The Company may agree to different types of concessions when modifying a loan or lease. The tables below summarize TDRs which were modified during the noted periods, by type of concession:

Troubled Debt Restructurings, by Type of Loan Modification

(dollars in thousands, unaudited)

	Three months ended June 30, 2016
	Rate Modification		Term Modification		Interest Only Modification		Rate & Term Modification		Total

Real estate:
Other construction/land	$	-	$	-	$	-	$	-	$	-
1-4 family - closed-end		-		-		547		259		806
Equity lines		-		1,051		-		-		1,051
Multi-family residential		-		-		-		132		132
Commercial real estate - owner occupied		-		-		-		-		-
Total real estate loans		-		1,051		547		391		1,989
Commercial and industrial		-		-		-		-		-
Consumer loans		-		-		-		10		10
	$	-	$	1,051	$	547	$	401	$	1,999

	Three months ended June 30, 2015
	Rate Modification		Term Modification		Interest Only Modification		Rate & Term Modification		Total

Real Estate:
Other construction/land	$	-	$	-	$	-	$	-	$	-
1-4 family - closed-end		-		-		-		226		226
Equity lines		-		146		-		290		436
Multi-family residential		-		418		-		-		418
Commercial real estate - owner occupied		-		-		-		-		-
Total real estate loans		-		564		-		516		1,080
Commercial and industrial		-		25		-		-		25
Consumer loans		-		-		-		-		-
	$	-	$	589	$	-	$	516	$	1,105

Troubled Debt Restructurings, by Type of Loan Modification
(dollars in thousands, unaudited)

	Six months ended June 30, 2016
	Rate Modification		Term Modification		Interest Only Modification		Rate & Term Modification		Total

Real estate:
Other construction/land	$	-	$	17	$	-	$	-	$	17
1-4 family - closed-end		-		-		547		259		806
Equity lines		-		1,280		-		-		1,280
Multi-family residential		-		-				132		132
Commercial real estate - owner occupied		-		-		-		266		266
Total real estate loans		-		1,297		547		657		2,501
Commercial and industrial		-		-		-		-		-
Consumer loans		-		20		-		60		80
	$	-	$	1,317	$	547	$	717	$	2,581

	Six months ended June 30, 2015
	Rate Modification		Term Modification		Interest Only Modification		Rate & Term Modification		Total

Real Estate:
Other construction/land	$	-	$	111	$	-	$	-	$	111
1-4 family - closed-end		-		-		-		226		226
Equity lines		-		351		-		290		641
Multi-family residential		-		418		-		-		418
Commercial real estate - owner occupied		-		-		-		-		-
Total real estate loans		-		880		-		516		1,396
Commercial and industrial		-		68		-		-		68
Consumer loans		-		-		-		-		-
	$	-	$	948	$	-	$	516	$	1,464

The following tables present, by class, additional details related to loans classified as TDRs during the referenced periods, including the recorded investment in the loan both before and after modification and balances that were modified during the period:

Troubled Debt Restructurings

(dollars in thousands, unaudited)

	Three months ended June 30, 2016
			Pre- Modification		Post- Modification
	Number of Loans		Outstanding Recorded Investment		Outstanding Recorded Investment		Reserve Difference⁽¹⁾		Reserve
Real Estate:
Other Construction/Land		0	$	-	$	-	$	-	$	-
1-4 family - closed-end		5		806		806		75		139
Equity Lines		8		1,051		1,051		1		22
Multi-family residential		1		132		132		-		7
Commercial RE- owner occupied		0		-		-		-		-
Total Real Estate Loans				1,989		1,989		76		168

Commercial and Industrial		0		-		-		-		-
Consumer loans		1		10		10		-		1
			$	1,999	$	1,999	$	76	$	169

⁽¹⁾ This represents the change in the ALLL reserve for these credits measured as the difference between the specific post-modification impairment reserve and the pre-modification reserve calculated under our general allowance for loan loss methodology.

	Three months ended June 30, 2015
			Pre- Modification		Post- Modification
	Number of Loans		Outstanding Recorded Investment		Outstanding Recorded Investment		Reserve Difference⁽¹⁾		Reserve
Real Estate:
Other Construction/Land		0	$	-	$	-	$	-	$	-
1-4 family - closed-end		2		226		226		6		7
Equity Lines		5		436		436		142		157
Multi-family residential		1		418		418		-		1
Commercial RE- owner occupied		0		-		-		-		-
Total Real Estate Loans				1,080		1,080		148		165

Commercial and Industrial		1		25		25		-		11
Consumer loans		0		-		-		-		-
			$	1,105	$	1,105	$	148	$	176

	Six months ended June 30, 2016
			Pre- Modification		Post- Modification
	Number of Loans		Outstanding Recorded Investment		Outstanding Recorded Investment		Reserve Difference⁽¹⁾		Reserve
Real Estate:
Other Construction/Land		1	$	17	$	17	$	-	$	2
1-4 family - closed-end		5		806		806		75		139
Equity Lines		10		1,280		1,280		-		30
Multi-family residential		1		132		132		-		7
Commercial RE- owner occupied		1		266		266		-		4
Total Real Estate Loans				2,501		2,501		75		182

Commercial and Industrial		0		-		-		-		-
Consumer loans		3		80		80		-		6
			$	2,581	$	2,581	$	75	$	188

	Six months ended June 30, 2015
			Pre- Modification		Post- Modification
	Number of Loans		Outstanding Recorded Investment		Outstanding Recorded Investment		Reserve Difference⁽¹⁾		Reserve
Real Estate:
Other Construction/Land		2	$	111	$	111	$	4	$	2
1-4 family - closed-end		2		226		226		6		7
Equity Lines		7		641		641		142		218
Multi-family residential		1		418		418		-		1
Commercial RE- owner occupied		0		-		-		-		-
Total Real Estate Loans				1,396		1,396		152		228

Commercial and Industrial		3		68		68		(19)		23
Consumer loans		0		-		-		-		-
			$	1,464	$	1,464	$	133	$	251

The company had no finance receivables modified as TDRs within the previous twelve months that defaulted or were charged off during the three month or six month periods ended June 30, 2016 and 2015 respectively.

Purchased Credit Impaired Loans

The Company may acquire loans which show evidence of credit deterioration since origination. These purchased credit impaired (“PCI”) loans are recorded at the amount paid, since there is no carryover of the seller’s allowance for loan losses. Potential losses on PCI loans subsequent to acquisition are recognized by an increase in the allowance for loan losses. PCI loans are accounted for individually or are aggregated into pools of loans based on common risk characteristics. The Company estimates the amount and timing of expected cash flows, and expected cash receipts in excess of the amount paid for the loan(s) are recorded as interest income over the remaining life of the loan or pool of loans (accretable yield). The excess of contractual principal and interest over expected cash flows is not recorded (nonaccretable difference). Expected cash flows are periodically re-evaluated throughout the life of the loan or pool of loans. If the present value of the expected cash flows is determined at any time to be less than the carrying amount, a reserve is recorded. If the present value of the expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.

Our acquisition of Santa Clara Valley Bank in the fourth quarter of 2014 included a portfolio of loans, some of which have shown evidence of credit deterioration since origination and for which it was probable at acquisition that all contractually required payments would not be collected. The carrying amount and unpaid principal balance of those PCI loans was as follows, as of the dates indicated (dollars in thousands):

Purchased Credit Impaired Loans:

(dollars in thousands, unaudited)

	June 30, 2016
	Unpaid Principal Balance		Carrying Value

Real estate secured	$	1,124	$	171
Commercial and industrial		19		-
Consumer		-		-
Total purchased credit impaired loans	$	1,143	$	171

	December 31, 2015
	Unpaid Principal Balance		Carrying Value

Real estate secured	$	1,158	$	188
Commercial and industrial		38		-
Consumer		1		-
Total purchased credit impaired loans	$	1,197	$	188

An allowance for loan losses totaling $117,000 was allocated for PCI loans as of June 30, 2016, as compared to $121,000 at December 31, 2015. We also recorded approximately $70,000 in discount accretion on PCI loans during the six months ended June 30, 2016.