LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES | NOTE 4 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES Set forth below is selected data relating to the composition of the loan portfolio at December 31 (in thousands): December 31, 2016 December 31, 2015 Real Estate: Residential $ 237,177 33.2 % $ 161,820 28.9 % Commercial 320,187 44.8 279,123 49.8 Construction 19,709 2.8 18,987 3.4 Commercial, financial and agricultural 85,508 12.0 71,090 12.7 Consumer loans to individuals 51,524 7.2 29,231 5.2 Total loans 714,105 100.0 % 560,251 100.0 % Deferred fees, net (216) (326) Total loans receivable 713,889 559,925 Allowance for loan losses (6,463) (7,298) Net loans receivable $ 707,426 $ 552,627 The following table presents the components of the purchase accounting adjustments related to the purchased credit-impaired loans acquired: (In Thousands) July 31, 2016 Contractually required principal and interest $ 2,621 Non-accretable discount (1,014) Expected cash flows 1,607 Accretable discount (239) Estimated fair value $ 1,368 Changes in the accretable yield for purchased credit-impaired loans were as follows for the twelve months ended December 31: (In thousands) 2016 2015 2014 Balance at beginning of period $ - $ 8 $ 20 Additions 239 - - Accretion (30) (1) (12) (12) Reclassification and other (1) (7) - - Balance at end of period $ 208 $ - $ 8 The following table presents additional information regarding loans acquired and accounted for in accordance with ASC 310-30 (in thousands): December 31, 2016 December 31, 2015 Outstanding Balance $ 1,821 $ 498 Carrying Amount $ 1,386 $ 498 There were no material increases or decreases in the expected cash flows of these loans since the acquisition date. There has been no allowance for loan losses recorded for acquired loans with specific evidence of deterioration in credit quality. As of December 31, 2016, for loans that were acquired prior to 2016 with or without specific evidence of deterioration in credit quality, adjustments to the allowance for loan losses have been accounted for through the allowance for loan loss adequacy calculation. For loans that were acquired in 2016 with or without specific evidence of deterioration in credit quality, there were no adjustments to the allowance for loan losses calculation. The Company maintains a loan review system, which allows for a periodic review of our loan portfolio and the early identification of potential impaired loans. The system takes into consideration, among other things, delinquency status, size of loans, type and market value of collateral and financial condition of the borrowers. Specific loan loss allowances are established for identified losses based on a review of such information. A loan evaluated for impairment is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. All loans identified as impaired are evaluated independently. The Company does not aggregate such loans for evaluation purposes. Impairment is measured on a loan-by-loan basis for commercial and construction loans by the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral-dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential mortgage loans for impairment disclosures, unless such loans are part of a larger relationship that is impaired, or are classified as a troubled debt restructuring. The following tables show the amount of loans in each category that were individually and collectively evaluated for impairment at the dates indicated: Real Estate Loans Commercial Consumer Residential Commercial Construction Loans Loans Total (In thousands) December 31, 2016 Individually evaluated for impairment $ 23 $ 2,601 $ - $ - $ - $ 2,624 Loans acquired with deteriorated credit quality 821 565 - - - 1,386 Collectively evaluated for impairment 236,333 317,021 19,709 85,508 51,524 710,095 Total Loans $ 237,177 $ 320,187 $ 19,709 $ 85,508 $ 51,524 $ 714,105 Real Estate Loans Commercial Consumer Residential Commercial Construction Loans Loans Total (In thousands) December 31, 2015 Individually evaluated for impairment $ 28 $ 8,659 $ - $ 43 $ - $ 8,730 Loans acquired with deteriorated credit quality 140 358 - - - 498 Collectively evaluated for impairment 161,652 270,106 18,987 71,047 29,231 551,023 Total Loans $ 161,820 $ 279,123 $ 18,987 $ 71,090 $ 29,231 $ 560,251 The following table includes the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable. Unpaid Recorded Principal Associated Investment Balance Allowance December 31, 2016 (In thousands) With no related allowance recorded: Real Estate Loans Residential $ 23 $ 28 $ - Commercial 2,601 3,427 - Subtotal 2,624 3,455 - Total: Real Estate Loans Residential 23 28 - Commercial 2,601 3,427 - Total Impaired Loans $ 2,624 $ 3,455 $ - Unpaid Recorded Principal Associated Investment Balance Allowance December 31, 2015 (In thousands) With no related allowance recorded: Real Estate Loans Residential $ 168 $ 173 $ - Commercial 2,644 4,610 - Commercial, financial and agricultural 43 43 Subtotal 2,855 4,826 - With an allowance recorded: Real Estate Loans Commercial 6,373 6,446 1,613 Subtotal 6,373 6,446 1,613 Total: Real Estate Loans Residential 168 173 - Commercial 9,017 11,056 1,613 Commercial, financial and agricultural 43 43 - Total Impaired Loans $ 9,228 $ 11,272 $ 1,613 The following information for impaired loans is presented for the years ended December 31, 2016, 2015 and 2014: Average Recorded Average Recorded Interest Income Investment Recognized 2016 2015 2014 2016 2015 2014 (In thousands) Total: Real Estate Loans Residential $ 25 $ 159 $ 233 $ - $ 4 $ 5 Commercial 2,671 8,847 7,492 91 526 503 Commercial Loans - 9 - - 2 - Total Loans $ 2,696 $ 9,015 $ 7,725 $ 91 $ 532 $ 508 Troubled debt restructured loans are those loans whose terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of financial difficulties experienced by the borrower, who could not obtain comparable terms from alternate financing sources. As of December 31, 2016, troubled debt restructured loans totaled $1.5 million and resulted in specific reserves of $0 . During 2016, there were no new loan relationships identified as troubled debt restructurings, while one loan with a balance of $5.0 million as of December 31, 2015 was transferred to Foreclosed Real Estate Owned during 2016 as a result of foreclosure on the property and one loan relationship with a balance of $82,000 as of December 31, 2015 was charged-off in 2016. During 2016, the Company recognized charge-offs totaling $2.6 million on loans classified as troubled debt restructurings. As of December 31, 2015, troubled debt restructured loans totaled $6.8 million and resulted in specific reserves of $1,613,000 . During 2015, there were two new loan relationships identified as troubled debt restructurings totaling $176,000 based on executed modification agreements, while one loan with a balance of $1.7 million as of December 31, 2014 was transferred to Foreclosed Real Estate Owned during 2015 as a result of foreclosure on the property. During 2015, the Company recognized charge-offs totaling $1.3 million on loans classified as troubled debt restructurings. Additionally, the Company recognized expenses of $322,000 in foreclosed real estate owned expense related to a property which was previously classified as a troubled debt restructuring. Foreclosed assets acquired in settlement of loans are carried at fair value less estimated costs to sell and are included in foreclosed real estate owned on the Consolidated Balance Sheets. As of December 31, 2016 and 2015, foreclosed real estate owned totaled $5,302,000 and $2,847,000 , respectively. As of December 31, 2016, included within foreclosed real estate owned is $297,000 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of December 31, 2016, the Company has initiated formal foreclosure proceedings on $421,000 of consumer residential mortgage loans. Management uses an eight point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first four categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are considered Substandard. Any portion of a loan that has been charged off is placed in the Loss category. To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as nonperformance, repossession, or death occurs to raise awareness of a possible credit event. The Company’s Loan Review Department is responsible for the timely and accurate risk rating of the loans on an ongoing basis. Every credit which must be approved by Loan Committee or the Board of Directors is assigned a risk rating at time of consideration. Loan Review also annually reviews relationships of $1,000,000 and over to assign or re-affirm risk ratings. Loans in the Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance. The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard, Doubtful and Loss within the internal risk rating system as of December 31, 2016 and December 31, 2015 (in thousands): Special Pass Mention Substandard Doubtful Loss Total December 31, 2016 Commercial real estate loans $ 310,432 $ 5,432 $ 4,323 $ - $ - $ 320,187 Commercial 84,600 885 23 - - 85,508 Total $ 395,032 $ 6,317 $ 4,346 $ - $ - $ 405,695 Special Pass Mention Substandard Doubtful Loss Total December 31, 2015 Commercial real estate loans $ 267,892 $ 1,837 $ 9,394 $ - $ - $ 279,123 Commercial 71,047 - 43 - - 71,090 Total $ 338,939 $ 1,837 $ 9,437 $ - $ - $ 350,213 For residential real estate loans, construction loans and consumer loans, the Company evaluates credit quality based on the performance of the individual credits. Nonperforming loans include loans that have been placed on nonaccrual status and loans remaining in accrual status on which the contractual payment of principal and interest has become 90 days past due. The following table presents the recorded investment in the loan classes based on payment activity as of December 31, 2016 and December 31, 2015 (in thousands): Performing Nonperforming Total December 31, 2016 Residential real estate loans $ 235,829 $ 1,137 $ 237,177 Construction 19,681 28 19,709 Consumer loans to individuals 51,524 - 51,524 Total $ 307,034 $ 1,165 $ 308,410 Performing Nonperforming Total December 31, 2015 Residential real estate loans $ 161,380 $ 440 $ 161,820 Construction 18,987 - 18,987 Consumer loans to individuals 29,231 - 29,231 Total $ 209,598 $ 440 $ 210,038 Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of December 31, 2016 and December 31, 2015 (in thousands): Current 31-60 Days Past Due 61-90 Days Past Due Greater than 90 Days Past Due and still accruing Non-Accrual Total Past Due and Non-Accrual Total Loans December 31, 2016 Real Estate loans Residential $ 234,790 $ 986 $ 264 $ 1 $ 1,136 $ 2,387 $ 237,177 Commercial 318,979 445 1 - 762 1,208 320,187 Construction 19,681 - - - 28 28 19,709 Commercial loans 85,355 143 10 - - 153 85,508 Consumer loans 51,456 39 29 - - 68 51,524 Total $ 710,261 $ 1,613 $ 304 $ 1 $ 1,926 $ 3,844 $ 714,105 Current 31-60 Days Past Due 61-90 Days Past Due Greater than 90 Days Past Due and still accruing Non-Accrual Total Past Due and Non-Accrual Total Loans December 31, 2015 Real Estate loans Residential $ 160,683 $ 646 $ 51 $ - $ 440 $ 1,137 $ 161,820 Commercial 272,125 310 39 - 6,649 6,998 279,123 Construction 18,959 28 - - - 28 18,987 Commercial loans 71,043 4 - - 43 47 71,090 Consumer loans 29,179 41 11 - - 52 29,231 Total $ 551,989 $ 1,029 $ 101 $ - $ 7,132 $ 8,262 $ 560,251 The following table presents the allowance for loan losses by the classes of the loan portfolio: (In thousands) Residential Real Estate Commercial Real Estate Construction Commercial Consumer Total Beginning balance, December 31, 2015 $ 1,069 $ 5,506 $ 90 $ 397 $ 236 $ 7,298 Charge Offs (123) (2,711) - (15) (102) (2,951) Recoveries 6 15 - - 45 66 Provision for loan losses 140 1,813 (12) (75) 184 2,050 Ending balance, December 31, 2016 $ 1,092 $ 4,623 $ 78 $ 307 $ 363 $ 6,463 Ending balance individually evaluated for impairment $ - $ 3 $ - $ - $ - $ 3 Ending balance collectively evaluated for impairment $ 1,092 $ 4,620 $ 78 $ 307 $ 363 $ 6,460 (In thousands) Residential Real Estate Commercial Real Estate Construction Commercial Consumer Total Beginning balance, December 31, 2014 $ 1,323 $ 3,890 $ 222 $ 256 $ 184 $ 5,875 Charge Offs (224) (2,883) - - (91) (3,198) Recoveries 20 - - - 21 41 Provision for loan losses (50) 4,499 (132) 141 122 4,580 Ending balance, December 31, 2015 $ 1,069 $ 5,506 $ 90 $ 397 $ 236 $ 7,298 Ending balance individually evaluated for impairment $ - $ 1,613 $ - $ - $ - $ 1,613 Ending balance collectively evaluated for impairment $ 1,069 $ 3,893 $ 90 $ 397 $ 236 $ 5,685 (In thousands) Residential Real Estate Commercial Real Estate Construction Commercial Consumer Total Beginning balance, December 31, 2013 $ 1,441 $ 3,025 $ 898 $ 184 $ 160 $ 5,708 Charge Offs (270) (1,196) - - (80) (1,546) Recoveries - 2 - - 31 33 Provision for loan losses 152 2,059 (676) 72 73 1,680 Ending balance, December 31, 2014 $ 1,323 $ 3,890 $ 222 $ 256 $ 184 $ 5,875 Ending balance individually evaluated for impairment $ - $ 293 $ - $ - $ - $ 293 Ending balance collectively evaluated for impairment $ 1,323 $ 3,597 $ 222 $ 256 $ 184 $ 5,582 The recorded investment in impaired loans, not requiring an allowance for loan losses was $2,624,000 (net of charge-offs against the allowance for loan losses of $831,000 ) and $2,855,000 (net of charge-offs against the allowance for loan losses of $1,971,000 ) at December 31, 2016 and 2015, respectively. The recorded investment in impaired loans requiring an allowance for loan losses was $0 and $6,373,000 (net of a charge-off against the allowance for loan losses of $73,000 ) at December 31, 2016 and 2015, respectively. The specific reserve related to impaired loans was $0 for 2016 and $1,613,000 for 2015. For the years ended December 31, 2016 and 2015, the average recorded investment in these impaired loans was $2,696,000 , and $9,015,000, respectively, and the interest income recognized on these impaired loans was $91,000 and $532,000 , respectively. During the period ended December 31, 2016, the allowance for commercial real estate loans decreased from $5,506,000 to $4,623,000 . This $883,000 decrease in the required allowance was due to a $1,610,000 decrease in the specific reserve component resulting from the transfer of an impaired loan with a specific reserve allowance of $1,596,000 at December 31, 2015 to foreclosed real estate during 2016. This reduction was partially offset by a $419,000 increase in the allowance for commercial real estate loans due to an increase in the historical loss factor from 0.70% at December 31, 2015 to 0.80% on December 31, 2016. During the period ended December 31, 2015, the allowance for residential real estate loans decreased from $1,323,000 to $1,069,000 . This $254,000 decrease in the required allowance was due primarily to a decrease in the historical loss factor from 0.30% at December 31, 2014 to 0.23% on December 31, 2015. During the same period, the required allowance for commercial real estate loans increased from $3,890,000 at December 31, 2014 to $5,506,000 on December 31, 2015. This increase can be attributed to a $1,320,000 increase in the specific reserve component. Interest income that would have been recorded on loans accounted for on a non-accrual basis under the original terms of the loans was $1 63,000 , $515,000 and $451,000 for 2016, 2015 and 2014, respectively. As of December 31, 2016 and 2015, the Company considered its concentration of credit risk to be acceptable. As of December 31, 2016, the highest concentrations are in commercial rentals and the hospitality lodging industry, with loans outstanding of $71.8 million, or 70.7% of bank capital, to commercial rentals, and $50.9 million, or 50.1% of bank capital to the hospitality and lodging industry. Charge-offs on loans within these concentrations were $31,000 , $643,000 and $422,000 for the years ended December 31, 2016, 2015 and 2014, respectively. Gross realized gains and gross realized losses on sales of residential mortgage loans were $54,000 and $0 , respectively, in 2016 compared to $113,000 and $0 , respectively, in 2015 and $150,000 and $0 , respectively, in 2014. The proceeds from the sales of residential mortgage loans totaled $1.7 million, $4.4 million and $4.4 million for the years ended December 31, 2016, 2015 and 2014, respectively. As of December 31, 2016 and 2015, the outstanding value of loans serviced for others totaled $35.5 million and $32.9 million, respectively. |