Edgar Filing: Stock Yards Bancorp, Inc.

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended June 30, 2015

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to .

Commission file number 1-13661

STOCK YARDS BANCORP, INC.

(Exact name of registrant as specified in its charter)

Kentucky		61-1137529
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

1040 East Main Street, Louisville, Kentucky 40206

(Address of principal executive offices including zip code)

(502) 582-2571

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer o	Accelerated filer x

Non-accelerated filer o	Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.). Yes ¨ No x

The number of shares of the registrant’s Common Stock, no par value, outstanding as of July 27, 2015, was 14,851,374.

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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

Index

Item			Page

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

The following consolidated financial statements of Stock Yards Bancorp, Inc. and Subsidiary are submitted herewith:

–	Consolidated Balance Sheets June 30, 2015 (Unaudited) and December 31, 2014		2

–	Consolidated Statements of Income (Unaudited) for the three and six months ended June 30, 2015 and 2014		3

–	Consolidated Statements of Comprehensive Income (Unaudited) for the three and six months ended June 30, 2015 and 2014		4

–	Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the six months ended June 30, 2015 and 2014		5

–	Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2015 and 2014		6

–	Notes to Consolidated Financial Statements (Unaudited)		7

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	38

Item 3.		Quantitative and Qualitative Disclosures about Market Risk	56

Item 4.		Controls and Procedures	56

PART II — OTHER INFORMATION

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	56

Item 6.		Exhibits	57

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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

June 30, 2015 and December 31, 2014

(In thousands, except share data)

	June 30,		December 31,
	2015		2014
	(Unaudited)

Assets
Cash and due from banks	$	37,775	$	42,216
Federal funds sold	20,901		32,025
Cash and cash equivalents	58,676		74,241
Mortgage loans held for sale	8,237		3,747
Securities available-for-sale (amortized cost of $410,242 and $509,276 in 2015 and 2014, respectively)	412,866		513,056
Federal Home Loan Bank stock and other securities	6,347		6,347
Loans	1,899,302		1,868,550
Less allowance for loan losses	23,308		24,920
Net loans	1,875,994		1,843,630
Premises and equipment, net	40,199		39,088
Bank owned life insurance	30,554		30,107
Accrued interest receivable	5,950		5,980
Other assets	43,864		47,672
Total assets	$	2,482,687	$	2,563,868
Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing	$	551,723	$	523,947
Interest bearing	1,520,042		1,599,680
Total deposits	2,071,765		2,123,627
Securities sold under agreements to repurchase	64,418		69,559
Federal funds purchased	13,290		47,390
Accrued interest payable	125		131
Other liabilities	21,852		26,434
Federal Home Loan Bank advances	38,855		36,832
Total liabilities	2,210,305		2,303,973
Stockholders’ equity:
Preferred stock, no par value. Authorized 1,000,000 shares; no shares issued or outstanding	—		—
Common stock, no par value. Authorized 20,000,000 shares; issued and outstanding 14,851,554 and 14,744,684 shares in 2015 and 2014, respectively	10,390		10,035
Additional paid-in capital	41,213		38,191
Retained earnings	219,466		209,584
Accumulated other comprehensive income	1,313		2,085
Total stockholders’ equity	272,382		259,895
Total liabilities and stockholders’ equity	$	2,482,687	$	2,563,868

See accompanying notes to unaudited consolidated financial statements.

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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Income (Unaudited)

For the three and six months ended June 30, 2015 and 2014

(In thousands, except per share data)

	For three months ended					For six months ended
	June 30,					June 30,
	2015		2014			2015		2014

Interest income:
Loans	$	20,612	$	19,787		$	41,027	$	39,146
Federal funds sold	51		63			119		142
Mortgage loans held for sale	74		43			113		74
Securities – taxable	1,969		1,824			4,003		3,661
Securities – tax-exempt	294		296			585		594
Total interest income	23,000		22,013			45,847		43,617
Interest expense:
Deposits	938		1,114			1,911		2,254
Federal funds purchased	5		9			12		15
Securities sold under agreements to repurchase	32		29			69		63
Federal Home Loan Bank advances	224		206			440		402
Total interest expense	1,199		1,358			2,432		2,734
Net interest income	21,801		20,655			43,415		40,883
Provision for loan losses	—		1,350			—		1,700
Net interest income after provision for loan losses	21,801		19,305			43,415		39,183
Non-interest income:
Investment management and trust services	4,651		4,755			9,203		9,323
Service charges on deposit accounts	2,199		2,223			4,279		4,326
Bankcard transaction revenue	1,246		1,209			2,368		2,284
Mortgage banking revenue	913		722			1,741		1,310
Loss on sales of securities available for sale	—		(9		)	—		(9		)
Brokerage commissions and fees	499		462			960		967
Bank owned life insurance income	226		234			448		470
Other	485		461			893		861
Total non-interest income	10,219		10,057			19,892		19,532
Non-interest expenses:
Salaries and employee benefits	11,383		10,724			22,483		21,842
Net occupancy expense	1,450		1,453			2,919		3,009
Data processing expense	1,756		1,718			3,210		3,278
Furniture and equipment expense	260		259			507		527
FDIC insurance expense	317		350			614		692
Loss (gain) on other real estate owned	145		(6		)	165		(349		)
Other	3,556		3,203			6,748		6,246
Total non-interest expenses	18,867		17,701			36,646		35,245
Income before income taxes	13,153		11,661			26,661		23,470
Income tax expense	4,151		3,627			8,404		7,259
Net income	9,002		8,034			18,257		16,211
Net income per share:
Basic	$	0.61	$	0.55		$	1.24	$	1.12
Diluted	$	0.60	$	0.55		$	1.23	$	1.10
Average common shares:
Basic	14,710		14,545			14,679		14,526
Diluted	14,936		14,704			14,902		14,714

See accompanying notes to unaudited consolidated financial statements.

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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income (Unaudited)

For the three and six months ended June 30, 2015 and 2014

(In thousands)

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

Net income	$	9,002		$	8,034		$	18,257		$	16,211
Other comprehensive income, net of tax:
Unrealized (losses) gains on securities available for sale:
Unrealized (losses) gains arising during the period (net of tax of ($1,417), $663, ($405) and $1,754, respectively)	(2,631		)	1,232			(751		)	3,258
Reclassification adjustment for securities losses realized in income (net of tax of $0, $3, $0, and $3, respectively)	—			6			—			6
Unrealized losses on hedging instruments:
Unrealized losses arising during the period (net of tax of ($1), ($18), ($11) and ($7), respectively)	(2		)	(34		)	(21		)	(13		)
Other comprehensive (loss) income , net of tax	(2,633		)	1,204			(772		)	3,251
Comprehensive income	$	6,369		$	9,238		$	17,485		$	19,462

See accompanying notes to unaudited consolidated financial statements.

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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

For the six months ended June 30, 2015 and 2014

(In thousands, except per share data)

												Accumulated
	Common stock											other
	Number of					Additional			Retained			comprehensive
	shares		Amount			paid-in capital			earnings			income (loss)			Total

Balance December 31, 2013	14,609		$	9,581		$	33,255		$	188,825		$	(2,217	)	$	229,444
Net income	—		—			—			16,211			—			16,211

Other comprehensive income, net of tax	—		—			—			—			3,251			3,251

Stock compensation expense	—		—			768			—			—			768

Stock issued for exercise of stock options, net of withholdings to satisfy employee tax obligations upon vesting of stock awards	31		104			807			(73		)	—			838

Stock issued for non-vested restricted stock	40		132			1,022			(1,154		)	—			—

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award	5		18			(111		)				—			(93		)

Cash dividends declared, $0.43 per share	—		—			—			(6,300		)	—			(6,300		)

Shares repurchased or cancelled	(20	)	(66		)	(499		)	60			—			(505		)

Balance June 30, 2014	14,665		$	9,769		$	35,242		$	197,569		$	1,034		$	243,614

Balance December 31, 2014	14,745		$	10,035		$	38,191		$	209,584		$	2,085		$	259,895
Net income	—		—			—			18,257			—			18,257

Other comprehensive loss, net of tax	—		—			—			—			(772		)	(772		)

Stock compensation expense	—		—			995			—			—			995

Stock issued for exercise of stock options, net of withholdings to satisfy employee tax obligations upon vesting of stock awards	74		245			1,917			(175		)	—			1,987

Stock issued for non-vested restricted stock	35		116			1,088			(1,204		)	—			—

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award	18		61			(397		)	(128		)	—			(464		)

Cash dividends declared, $0.47 per share	—		—			—			(6,952		)	—			(6,952		)

Shares repurchased or cancelled	(20	)	(67		)	(581		)	84			—			(564		)

Balance June 30, 2015	14,852		$	10,390		$	41,213		$	219,466		$	1,313		$	272,382

See accompanying notes to unaudited consolidated financial statements.

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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows (Unaudited)

For the six months ended June 30, 2015 and 2014

(In thousands)

	2015			2014

Operating activities:
Net income	$	18,257		$	16,211
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	—			1,700
Depreciation, amortization and accretion, net	3,374			3,226
Deferred income tax expense (benefit)	1,170			(252		)
Loss on sale of securities available for sale	—			9
Gain on sales of mortgage loans held for sale	(1,133		)	(769		)
Origination of mortgage loans held for sale	(63,461		)	(41,363		)
Proceeds from sale of mortgage loans held for sale	60,104			39,727
Bank owned life insurance income	(448		)	(470		)
Gain on the disposal of premises and equipment	(5		)	(30		)
Loss (gain) on the sale of other real estate	165			(349		)
Stock compensation expense	995			768
Excess tax benefits from share-based compensation arrangements	(293		)	(169		)
Decrease in accrued interest receivable and other assets	387			584
(Decrease) increase in accrued interest payable and other liabilities	(4,303		)	2,337
Net cash provided by operating activities	14,809			21,160
Investing activities:
Purchases of securities available for sale	(92,730		)	(124,550		)
Proceeds from sale of securities available for sale	5,934			7,732
Proceeds from maturities of securities available for sale	184,878			197,397
Net increase in loans	(32,596		)	(80,407		)
Purchases of premises and equipment	(2,615		)	(1,203		)
Proceeds from disposal of premises and equipment	—			344
Proceeds from sale of foreclosed assets	1,820			4,303
Net cash provided by investing activities	64,691			3,616
Financing activities:
Net (decrease) increase in deposits	(51,862		)	6,458
Net decrease in securities sold under agreements to repurchase and federal funds purchased	(39,241		)	(2,421		)
Proceeds from Federal Home Loan Bank advances	63,200			21,820
Repayments of Federal Home Loan Bank advances	(61,177		)	(20,082		)
Issuance of common stock for options and performance stock units	1,566			626
Excess tax benefits from share-based compensation arrangements	293			169
Common stock repurchases	(900		)	(555		)
Cash dividends paid	(6,944		)	(6,300		)
Net cash used in financing activities	(95,065		)	(285		)
Net (decrease) increase in cash and cash equivalents	(15,565		)	24,491
Cash and cash equivalents at beginning of period	74,241			70,770
Cash and cash equivalents at end of period	$	58,676		$	95,261
Supplemental cash flow information:
Income tax payments	$	6,774		$	5,094
Cash paid for interest	2,438			2,729
Supplemental non-cash activity:
Transfers from loans to other real estate owned	$	232		$	1,505

See accompanying notes to unaudited consolidated financial statements.

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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Unaudited)

(1) Summary of Significant Accounting Policies

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all information and footnotes required by U.S. generally accepted accounting principles (US GAAP) for complete financial statements. The consolidated unaudited financial statements of Stock Yards Bancorp, Inc. (“Bancorp”) and its subsidiary reflect all adjustments (consisting only of adjustments of a normal recurring nature) which are, in the opinion of management, necessary for a fair presentation of financial condition and results of operations for the interim periods.

The unaudited consolidated financial statements include the accounts of Stock Yards Bancorp, Inc. and its wholly-owned subsidiary, Stock Yards Bank & Trust Company (“Bank”). Significant intercompany transactions and accounts have been eliminated in consolidation. In preparing the unaudited consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of related revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, valuation of available-for sale securities, other real estate owned and income tax assets, and estimated liabilities and expense.

A description of other significant accounting policies is presented in the notes to Consolidated Financial Statements for the year ended December 31, 2014 included in Stock Yards Bancorp, Inc.’s Annual Report on Form 10-K. Certain reclassifications have been made in the prior year financial statements to conform to current year classifications.

Interim results for the three and six month periods ended June 30, 2015 are not necessarily indicative of the results for the entire year.

Critical Accounting Policies

Management has identified the accounting policy related to the allowance and provision for loan losses as critical to the understanding of Bancorp’s results of operations and discussed this conclusion with the Audit Committee of the Board of Directors. Since the application of this policy requires significant management assumptions and estimates, it could result in materially different amounts to be reported if conditions or underlying circumstances were to change. Assumptions include many factors such as changes in borrowers’ financial condition which can change quickly or historical loss ratios related to certain loan portfolios which may or may not be indicative of future losses. In the second quarter of 2015, Bancorp extended the historical period used to capture Bancorp’s historical loss ratios from 12 quarters to 24 quarters. Management believes the extension of the look-back period is appropriate to capture the impact of a full economic cycle and more accurately represents the current level of risk inherent in the loan portfolio. To the extent that management’s assumptions prove incorrect, the results from operations could be materially affected by a higher or lower provision for loan losses. The accounting policy related to the allowance for loan losses is applicable to the commercial banking segment of Bancorp.

The allowance for loan losses is management’s estimate of probable losses inherent in the loan portfolio as of the balance sheet date. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

Bancorp’s allowance calculation includes specific allowance allocations to loan portfolio segments at June 30, 2015 for qualitative factors including, among other factors, national and local economic and business conditions, the quality and experience of lending staff and management, changes in lending policies and procedures, changes in volume and severity of past due loans, classified loans and non-performing loans, potential impact of any concentrations of credit, changes in the nature and terms of loans such as growth

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rates and utilization rates, changes in the value of underlying collateral for collateral-dependent loans, considering Bancorp’s disposition bias, and the effect of other external factors such as the legal and regulatory environment. Bancorp may also consider other qualitative factors in future periods for additional allowance allocations, including, among other factors, changes in Bancorp’s loan review process. Bancorp utilizes the sum of all allowance amounts derived as described above as the appropriate level of allowance for loan and lease losses. Changes in the criteria used in this evaluation or the availability of new information could cause the allowance to be increased or decreased in future periods. In addition, bank regulatory agencies, as part of their examination process, may require adjustments to the allowance for loan and lease losses based on their judgments and estimates.

(2) Securities

The amortized cost, unrealized gains and losses, and fair value of securities available-for-sale follow:

(in thousands)	Amortized		Unrealized
June 30, 2015	cost		Gains		Losses		Fair value

U.S. Treasury and other U.S. Government obligations	$	10,000	$	—	$	—	$	10,000
Government sponsored enterprise obligations	175,985		1,942		559		177,368
Mortgage-backed securities - government agencies	160,359		1,477		1,510		160,326
Obligations of states and political subdivisions	63,142		1,344		157		64,329
Corporate equity securities	756		87		—		843

Total securities available for sale	$	410,242	$	4,850	$	2,226	$	412,866

December 31, 2014

U.S. Treasury and other U.S. Government obligations	$	70,000	$	—	$	—	$	70,000
Government sponsored enterprise obligations	203,531		2,017		562		204,986
Mortgage-backed securities - government agencies	173,573		2,042		1,345		174,270
Obligations of states and political subdivisions	61,416		1,560		142		62,834
Corporate equity securities	756		210		—		966

Total securities available for sale	$	509,276	$	5,829	$	2,049	$	513,056

Corporate equity securities consist of common stock in a publicly-traded business development company.

There were no securities classified as held to maturity as of June 30, 2015 or December 31, 2014.

In the first quarter of 2015, Bancorp sold securities with total fair market value of $5.9 million, generating no gain or loss. These securities consisted of agency and mortgage-backed securities with small remaining balances and agency securities. In the second quarter of 2014, Bancorp sold securities with total fair market value of $7.7 million, generating a net loss of $9 thousand. These securities consisted of mortgage-backed securities with small remaining balances, obligations of state and political subdivisions, and agency securities. These sales were made in the ordinary course of portfolio management. Management has the intent and ability to hold all remaining investment securities available-for-sale for the foreseeable future.

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A summary of the available-for-sale investment securities by contractual maturity groupings as of June 30, 2015 is shown below.

(in thousands)
Securities available-for-sale	Amortized cost		Fair value

Due within 1 year	$	26,168	$	26,253
Due after 1 but within 5 years	123,077		124,852
Due after 5 but within 10 years	18,907		19,263
Due after 10 years	80,975		81,329
Mortgage-backed securities	160,359		160,326
Corporate equity securities	756		843
Total securities available-for-sale	$	410,242	$	412,866

Actual maturities may differ from contractual maturities because some issuers have the right to call or prepay obligations. In addition to equity securities, the investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as the FHLMC, FNMA, and GNMA. These securities differ from traditional debt securities primarily in that they may have uncertain principal payment dates and are priced based on estimated prepayment rates on the underlying collateral.

Securities with a carrying value of approximately $258.4 million at June 30, 2015 and $263.1 million at December 31, 2014 were pledged to secure accounts of commercial depositors in cash management accounts, public deposits, and cash balances for certain investment management and trust accounts.

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Securities with unrealized losses at June 30, 2015 and December 31, 2014, not recognized in the statements of income are as follows:

	Less than 12 months				12 months or more				Total
(in thousands)	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
June 30, 2015	value		losses		value		losses		value		losses

Government sponsored enterprise obligations	$	25,363	$	208	$	8,793	$	351	$	34,156	$	559
Mortgage-backed securities - government agencies	36,666		394		33,165		1,116		69,831		1,510
Obligations of states and political subdivisions	18,249		124		2,221		33		20,470		157

Total temporarily impaired securities	$	80,278	$	726	$	44,179	$	1,500	$	124,457	$	2,226

December 31, 2014

Government sponsored enterprise obligations	$	36,979	$	30	$	26,848	$	532	$	63,827	$	562
Mortgage-backed securities - government agencies	4,038		77		49,325		1,268		53,363		1,345
Obligations of states and political subdivisions	12,655		67		6,297		75		18,952		142

Total temporarily impaired securities	$	53,672	$	174	$	82,470	$	1,875	$	136,142	$	2,049

Applicable dates for determining when securities are in an unrealized loss position are June 30, 2015 and December 31, 2014. As such, it is possible that a security had a market value lower than its amortized cost on other days during the past twelve months, but is not in the “Investments with an Unrealized Loss of less than 12 months” category above.

Unrealized losses on Bancorp’s investment securities portfolio have not been recognized as an expense because the securities are of high credit quality, and the decline in fair values is due to changes in the prevailing interest rate environment since the purchase date. Fair value is expected to recover as securities reach their maturity date and/or the interest rate environment returns to conditions similar to when these securities were purchased. These investments consist of 71 and 80 separate investment positions as of June 30, 2015 and December 31, 2014, respectively. Because management does not intend to sell the investments, and it is not likely that Bancorp will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, Bancorp does not consider these securities to be other-than-temporarily impaired at June 30, 2015.

FHLB stock and other securities are investments held by Bancorp which are not readily marketable and are carried at cost. This category includes holdings of Federal Home Loan Bank of Cincinnati (FHLB) stock which are required for access to FHLB borrowing, and are classified as restricted securities.

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(3) Loans

Composition of loans, net of deferred fees and costs, by primary loan portfolio class follows:

(in thousands)	June 30, 2015		December 31, 2014

Commercial and industrial	$	595,584	$	571,754
Construction and development, excluding undeveloped land	102,274		95,733
Undeveloped land	19,965		21,268

Real estate mortgage:
Commercial investment	484,130		487,822
Owner occupied commercial	342,908		340,982
1-4 family residential	216,864		211,548
Home equity - first lien	42,612		43,779
Home equity - junior lien	65,354		66,268
Subtotal: Real estate mortgage	1,151,868		1,150,399

Consumer	29,611		29,396

Total loans	$	1,899,302	$	1,868,550

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The following table presents the balance in the recorded investment in loans and allowance for loan losses by portfolio segment and based on impairment evaluation method as of June 30, 2015 and December 31, 2014.

	Type of loan
			Construction
			and development
	Commercial		excluding
(in thousands)	and		undeveloped		Undeveloped		Real estate
June 30, 2015	industrial		land		land		mortgage		Consumer		Total

Loans	$	595,584	$	102,274	$	19,965	$	1,151,868	$	29,611	$	1,899,302

Loans collectively evaluated for impairment	$	591,064	$	101,333	$	19,965	$	1,146,530	$	29,537	$	1,888,429

Loans individually evaluated for impairment	$	4,440	$	516	$	—	$	4,844	$	73	$	9,873

Loans acquired with deteriorated credit quality	$	80	$	425	$	—	$	494	$	1	$	1,000

				Construction
				and development
	Commercial			excluding
	and			undeveloped		Undeveloped			Real estate
	industrial			land		land			mortgage			Consumer			Unallocated		Total

Allowance for loan losses
At December 31, 2014	$	11,819		$	721	$	1,545		$	10,541		$	294		$	—	$	24,920
Provision (credit)	(1,250		)	655		(471		)	1,022			44			—		—
Charge-offs	(1,330		)	—		—			(358		)	(274		)	—		(1,962		)
Recoveries	14			—		—			81			255			—		350
At June 30, 2015	$	9,253		$	1,376	$	1,074		$	11,286		$	319		$	—	$	23,308

Allowance for loans collectively evaluated for impairment	$	6,807		$	1,286	$	1,074		$	10,860		$	247		$	—	$	20,274

Allowance for loans individually evaluated for impairment	$	2,446		$	90	$	—		$	426		$	72		$	—	$	3,034

Allowance for loans acquired with deteriorated credit quality	$	—		$	—	$	—		$	—		$	—		$	—	$	—

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	Type of loan
			Construction
			and development
	Commercial		excluding
(in thousands)	and		undeveloped		Undeveloped		Real estate
December 31, 2014	industrial		land		land		mortgage		Consumer		Total

Loans	$	571,754	$	95,733	$	21,268	$	1,150,399	$	29,396	$	1,868,550

Loans collectively evaluated for impairment	$	564,443	$	94,603	$	21,268	$	1,146,212	$	29,311	$	1,855,837

Loans individually evaluated for impairment	$	7,239	$	516	$	—	$	3,720	$	76	$	11,551

Loans acquired with deteriorated credit quality	$	72	$	614	$	—	$	467	$	9	$	1,162

				Construction
				and development
	Commercial			excluding
	and			undeveloped			Undeveloped			Real estate
	industrial			land			land			mortgage			Consumer			Unallocated		Total

Allowance for loan losses
At December 31, 2013	$	7,644		$	2,555		$	5,376		$	12,604		$	343		$	—	$	28,522
Provision (credit)	4,593			(1,584		)	(2,244		)	(1,190		)	25			—		(400		)
Charge-offs	(661		)	(250		)	(1,753		)	(993		)	(587		)	—		(4,244		)
Recoveries	243			—			166			120			513			—		1,042
At December 31, 2014	$	11,819		$	721		$	1,545		$	10,541		$	294		$	—	$	24,920

Allowance for loans collectively evaluated for impairment	$	10,790		$	706		$	1,545		$	10,285		$	218		$	—	$	23,544

Allowance for loans individually evaluated for impairment	$	1,029		$	15		$	—		$	256		$	76		$	—	$	1,376

Allowance for loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—		$	—		$	—	$	—

The considerations by Bancorp in computing its allowance for loan losses are determined based on the various risk characteristics of each loan segment. Relevant risk characteristics are as follows:

· Commercial and industrial loans: Loans in this category are made to businesses. Generally these loans are secured by assets of the business and repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer and/or business spending will have an effect on the credit quality in this loan category.

· Construction and development, excluding undeveloped land: Loans in this category primarily include owner-occupied and investment construction loans and commercial development projects. In most cases, construction loans require only interest to be paid during construction, and then convert to permanent financing in the real estate mortgage segment, requiring principal amortization. Repayment of development loans is derived from sale of lots or units including any pre-sold units. Credit risk is affected by construction delays, cost overruns, market conditions and availability of permanent financing, to the extent such permanent financing is not being provided by Bancorp.

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· Undeveloped land: Loans in this category are secured by land initially acquired for development by the borrower, but for which no development has yet taken place. Credit risk is affected by market conditions and time to sell lots at an adequate price. Credit risk is also affected by availability of permanent financing, to the extent such permanent financing is not being provided by Bancorp.

· Real estate mortgage: Loans in this category are made to and secured by owner-occupied residential real estate, owner-occupied real estate used for business purposes, and income-producing investment properties. Repayment is dependent on credit quality of the individual borrower. Underlying properties are generally located in Bancorp’s primary market area. Cash flows of income producing investment properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on credit quality. Overall health of the economy, including unemployment rates and housing prices, has an effect on credit quality in this loan category.

· Consumer: Loans in this category may be either secured or unsecured and repayment is dependent on credit quality of the individual borrower and, if applicable, sale of collateral securing the loan. Therefore, overall health of the economy, including unemployment rates and housing prices, will have a significant effect on credit quality in this loan category.

Bancorp has loans that were acquired in a 2013 acquisition, for which there was, at acquisition, evidence of deterioration of credit quality since origination and for which it was probable that all contractually required payments would not be collected. The carrying amount of those loans is included in the balance sheet amounts of loans at June 30, 2015 and December 31, 2014. Changes in the fair value adjustment for acquired impaired loans are shown in the following table:

(in thousands)	Accretable discount			Non- accretable discount

Balance at December 31, 2013	$	137		$	369

Accretion	(75		)	(103		)
Reclassifications from (to) non-accretable difference	—			—
Disposals	—			—
Balance at December 31, 2014	62			266

Accretion	(27		)	—
Reclassifications from (to) non-accretable difference	—			—
Disposals	—			—
Balance at June 30, 2015	$	35		$	266

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The following table presents loans individually evaluated for impairment as of June 30, 2015 and December 31, 2014.

			Unpaid				Average
(in thousands)	Recorded		principal		Related		recorded
June 30, 2015	investment		balance		allowance		investment

Loans with no related allowance recorded
Commercial and industrial	$	762	$	3,461	$	—	$	802
Construction and development, excluding undeveloped land	26		151		—		26
Undeveloped land	—		—		—		—

Real estate mortgage
Commercial investment	104		361		—		110
Owner occupied commercial	1,649		2,087		—		1,587
1-4 family residential	492		492		—		695
Home equity - first lien	80		80		—		27
Home equity - junior lien	72		72		—		72
Subtotal: Real estate mortgage	2,397		3,092		—		2,491

Consumer	1		1		—		—
Subtotal	$	3,186	$	6,705	$	—	$	3,319

Loans with an allowance recorded
Commercial and industrial	$	3,678	$	6,566	$	2,446	$	5,438
Construction and development, excluding undeveloped land	490		490		90		490
Undeveloped land	—		—		—