Allowance For Loan Losses And Credit Quality Of Financing Receivables | NOTE 6 – ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY OF FINANCING RECEIVABLES The following table presents changes in the allowance for loan losses disaggregated by the class of loans receivable for the years ended December 31, 2016 and 2015 : (Dollars in thousands) Commercial and Industrial Construction Commercial Real Estate Residential Real Estate Consumer and Other Unallocated Total Year Ended: December 31, 2016 Beginning balance $ 85 $ 220 $ 3,646 $ 784 $ 87 $ 768 $ 5,590 Charge-offs (227 ) — (187 ) (67 ) (37 ) — (518 ) Recoveries 268 — 37 21 7 — 333 Provision (16 ) 139 436 161 (38 ) 609 1,291 Ending balance $ 110 $ 359 $ 3,932 $ 899 $ 19 $ 1,377 $ 6,696 December 31, 2015 Beginning balance $ 231 383 $ 3,491 $ 903 $ 19 $ 614 $ 5,641 Charge-offs (19 ) — (560 ) (165 ) (25 ) — (769 ) Recoveries 17 — 41 17 7 — 82 Provision (144 ) (163 ) 674 29 86 154 636 Ending balance $ 85 $ 220 $ 3,646 $ 784 $ 87 $ 768 $ 5,590 The following table presents the balance in the allowance of loan losses at December 31, 2016 and 2015 disaggregated on the basis of our impairment method by class of loans receivable along with the balance of loans receivable by class disaggregated on the basis of our impairment methodology: Allowance for Loan Losses Loans Receivable (Dollars in thousands) Balance Balance Related to Loans Individually Evaluated for Impairment Balance Related to Loans Collectively Evaluated for Impairment Balance Individually Evaluated for Impairment Collectively Evaluated for Impairment December 31, 2016 Commercial and industrial $ 110 $ 14 $ 96 $ 40,280 $ 33 $ 40,247 Construction 359 — $ 359 25,360 — $ 25,360 Commercial real estate 3,932 135 $ 3,797 479,227 4,597 $ 474,630 Residential real estate 899 6 $ 893 150,237 1,967 $ 148,270 Consumer and other loans 19 — $ 19 1,038 — 1,038 Unallocated 1,377 — — — — — Total $ 6,696 $ 155 $ 5,164 $ 696,142 $ 6,597 $ 689,545 December 31, 2015 Commercial and industrial $ 85 $ — $ 85 $ 20,023 $ 20 $ 20,003 Construction 220 — $ 220 13,348 — $ 13,348 Commercial real estate 3,646 112 $ 3,534 382,262 5,160 $ 377,102 Residential real estate 784 79 $ 705 127,204 1,546 $ 125,658 Consumer and other loans 87 73 $ 14 1,253 138 $ 1,115 Unallocated 768 — — — — — Total $ 5,590 $ 264 $ 4,558 $ 544,090 $ 6,864 $ 537,226 An age analysis of loans receivable which were past due as of December 31, 2016 and 2015 is as follows: (Dollars in thousands) 30-59 Days Past Due 60-89 days Past Due Greater Than 90 Days (a) Total Past Due Current Total Financing Receivables Recorded Investment > 90 Days and Accruing December 31, 2016 Commercial and industrial $ — $ — $ 137 $ 137 $ 40,143 $ 40,280 $ 104 Construction — — 309 309 25,051 $ 25,360 309 Commercial real estate 84 719 4,103 4,906 474,321 $ 479,227 55 Residential real estate 786 247 1,752 2,785 147,452 $ 150,237 — Consumer and other 4 — — 4 1,034 $ 1,038 — Total $ 874 $ 966 $ 6,301 $ 8,141 $ 688,001 $ 696,142 $ 468 December 31, 2015 Commercial and industrial $ 5 $ — $ 20 $ 25 $ 19,998 $ 20,023 $ — Construction — — — — 13,348 $ 13,348 — Commercial real estate 758 1,461 4,016 6,235 376,027 $ 382,262 — Residential real estate 335 247 1,138 1,720 125,484 $ 127,204 — Consumer and other 16 1 138 155 1,098 $ 1,253 — Total $ 1,114 $ 1,709 $ 5,312 $ 8,135 $ 535,955 $ 544,090 $ — (a) includes loans greater than 90 days past due and still accruing and non-accrual loans. Loans for which the accrual of interest has been discontinued at December 31, 2016 and 2015 were: (Dollars in thousands) December 31, 2016 December 31, 2015 Commercial and industrial $ 33 $ 20 Commercial real estate 4,048 4,016 Residential real estate 1,752 1,138 Consumer and other — 138 Total $ 5,833 $ 5,312 Loans are made to individuals as well as commercial entities. Specific loan terms vary as to interest rate, repayment, and collateral requirements based on the type of loan requested and the credit worthiness of the prospective borrower. Credit risk tends to be geographically concentrated in that a majority of the loan customers are located in the markets serviced by the Company. Loan performance may be adversely affected by factors impacting the general economy or conditions specific to the real estate market such as geographic location and/or property type. A description of the Company's different loan segments follows: Commercial Loans: Commercial credit is extended primarily to middle market and small business customers. Commercial loans are generally made in the Company's market place for the purpose of providing working capital, financing the purchase of equipment, inventory or commercial real estate and for other business purposes. Loans will generally be guaranteed in full or for a meaningful amount by the businesses' major owners. Underwriting of commercial loans is based primarily on the historical and projected cash flow of the business and secondarily on the underlying collateral provided. Residential Mortgage and Consumer Loans: The Company originates mortgage and consumer loans including principally residential real estate and home equity lines and loans. Each loan type is evaluated on debt to income, type of collateral and loan to collateral value, credit history and Company relationship with the borrower. In determining the adequacy of the allowance for loan losses, the Company estimates losses based on the identification of specific problem loans through its credit review process and also estimates losses inherent in other loans on an aggregate basis by loan type. The credit review process includes the independent evaluation of the loan officer assigned risk ratings by the Chief Credit Officer and a third party loan review company. Such risk ratings are assigned loss component factors that reflect the Company’s loss estimate for each group of loans. It is management’s and the board of directors’ responsibility to oversee the lending process to ensure that all credit risks are properly identified, monitored, and controlled, and that loan pricing, terms, and other safeguards against non-performance and default are commensurate with the level of risk undertaken and is rated as such based on a risk-rating system. Factors considered in assigning risk ratings and loss component factors include: borrower specific information related to expected future cash flows and operating results, collateral values, financial condition, payment status and other information; levels of and trends in portfolio charge-offs and recoveries; levels in portfolio delinquencies; effects of changes in loan concentrations and observed trends in the economy and other qualitative measurements. The Company’s risk-rating system as defined below is consistent with the system used by regulatory agencies and consistent with industry practices. Loan classifications of Substandard, Doubtful or Loss are consistent with the regulatory definitions of classified assets. Pass : This category represents loans performing to contractual terms and conditions and the primary source of repayment is adequate to meet the obligation. The Company has five categories within the Pass classification depending on strength of repayment sources, collateral values and financial condition of the borrower. Special Mention : This category represents loans performing to contractual terms and conditions; however the primary source of repayment or the borrower is exhibiting some deterioration or weaknesses in financial condition that could potentially threaten the borrowers’ future ability to repay our loan principal and interest or fees due. Substandard : This category represents loans that the primary source of repayment has significantly deteriorated or weakened which has or could threaten the borrowers’ ability to make scheduled payments. The weaknesses require close supervision by the Company’s management and there is a distinct possibility that the Company could sustain some loss if the deficiencies are not corrected. Such weaknesses could jeopardize the timely and ultimate collection of our loan principal and interest or fees due. Loss may not be expected or evident, however, loan repayment is inadequately supported by current financial information or pledged collateral. Doubtful : Loans so classified have all the inherent weaknesses of a substandard loan with the added provision that collection or liquidation in full is highly questionable and not reasonably assured. The probability of at least partial loss is high, but extraneous factors might strengthen the asset to prevent loss. The validity of the extraneous factors must be continuously monitored. Once these factors are questionable the loan should be considered for full or partial charge-off. Loss : Loans so classified are considered uncollectible, and of such little value that their continuance as active assets of the Company is not warranted. Such loans are fully charged off. The following tables illustrate the Company’s corporate credit risk profile by creditworthiness category as of December 31, 2016 and 2015 : (Dollars in thousands) Pass Special Mention Substandard Doubtful Total December 31, 2016 Commercial and industrial $ 40,247 $ — $ 33 $ — $ 40,280 Construction 25,360 — — — $ 25,360 Commercial real estate 463,889 7,461 7,877 — $ 479,227 Residential real estate 147,526 584 2,127 — $ 150,237 Consumer and other 1,038 — — — $ 1,038 $ 678,060 $ 8,045 $ 10,037 $ — $ 696,142 December 31, 2015 Commercial and industrial $ 19,983 $ 5 $ 35 $ — $ 20,023 Construction 13,348 — — — $ 13,348 Commercial real estate 367,305 8,957 6,000 — $ 382,262 Residential real estate 124,915 743 1,546 — $ 127,204 Consumer and other 1,115 — 138 — $ 1,253 $ 526,666 $ 9,705 $ 7,719 $ — $ 544,090 The following table reflects information regarding the Company’s impaired loans as of December 31, 2016 and 2015 and for the years then ended: (Dollars in thousands) Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized December 31, 2016 With no related allowance recorded: Commercial and industrial $ 19 $ 19 $ — $ 19 $ — Commercial real estate 2,324 2,324 — 2,244 16 Residential real estate 1,604 1,629 — 1,271 9 With an allowance recorded: Commercial and industrial 14 14 14 3 — Commercial real estate 2,273 2,364 135 2,492 32 Residential real estate 363 363 6 298 — Consumer and other — — — 55 — Total: Commercial and industrial 33 33 14 22 — Commercial real estate 4,597 4,688 135 4,736 48 Residential real estate 1,967 1,992 6 1,569 9 Consumer and other — — — 55 — $ 6,597 $ 6,713 $ 155 $ 6,382 $ 57 (Dollars in thousands) Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized December 31, 2015 With no related allowance recorded: Commercial and industrial $ 20 $ 20 $ — $ 16 $ — Commercial real estate 2,684 2,684 — 2,488 32 Residential real estate 1,123 1,152 — 1,239 6 With an allowance recorded: Commercial and industrial — — — 19 — Commercial real estate 2,476 2,476 112 2,706 33 Residential real estate 423 423 79 687 11 Consumer and other 138 138 73 — — Total: Commercial and industrial 20 20 — 35 — Commercial real estate 5,160 5,160 112 5,194 65 Residential real estate 1,546 1,575 79 1,926 17 Consumer and other 138 138 73 — — $ 6,864 $ 6,893 $ 264 $ 7,155 $ 82 The average recorded investment in impaired loans is calculated using the average of impaired loans over the past five quarter-end periods. The Company recognizes income on impaired loans by recording all payments as a reduction of principal on such loans. Impaired loans include loans modified in TDRs where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, postponement or forgiveness of principal, forbearance or other actions intended to maximize collection. The following table presents the recorded investment in troubled debt restructured loans as of December 31, 2016 and 2015 based on payment performance status: (Dollars in thousands) Commercial Real Estate Residential Real Estate Total December 31, 2016 Performing $ 550 $ 129 $ 679 Non-performing 2,258 — 2,258 Total $ 2,808 $ 129 $ 2,937 December 31, 2015 Performing $ 1,144 $ 409 $ 1,553 Non-performing 1,831 194 2,025 Total $ 2,975 $ 603 $ 3,578 Troubled debt restructured loans are considered impaired and are included in the previous impaired loans disclosures in this footnote. As of December 31, 2016 , we have not committed to lend additional amounts to customers with outstanding loans that are classified as TDRs. There were no TDRs that occurred during the years ended December 31, 2016 and 2015 . The TDRs described above did not require an allocation of the allowance for credit losses, nor were any charge-offs recorded subsequent to modification during the years ended December 31, 2016 and 2015 . There were two TDRs with an outstanding balance of $568 thousand for which there were payment defaults within twelve months following the date of the restructuring for the year ended December 31, 2016. There were no TDRs for which there was a payment default within twelve months following the date of the restructuring for the year ended December 31, 2015 . Loans are considered to be in payment default once they are greater than 30 days contractually past due under the modified terms. There were no charge-offs on defaulted TDRs during the years ended December 31, 2016 and 2015 . |