Loans and Allowance for Loan Losses | NOTE 4 – Loans and Allowance for Loan Losses The following table summarizes the composition of our loan portfolio. Total gross loans are recorded net of deferred loan fees and costs, which totaled $2.7 million as of June 30, 2018 and $2.3 million as of December 31, 2017. June 30, 2018 December 31, 2017 (dollars in thousands) Amount % of Total Amount % of Total Commercial Owner occupied RE $ 358,169 23.4% $ 316,818 22.8% Non-owner occupied RE 355,309 23.2% 312,798 22.6% Construction 73,655 4.8% 51,179 3.7% Business 238,402 15.5% 226,158 16.3% Total commercial loans 1,025,535 66.9% 906,953 65.4% Consumer Real estate 290,433 18.9% 273,050 19.7% Home equity 156,630 10.2% 156,141 11.3% Construction 38,400 2.5% 28,351 2.0% Other 22,449 1.5% 22,575 1.6% Total consumer loans 507,912 33.1% 480,117 34.6% Total gross loans, net of deferred fees 1,533,447 100.0% 1,387,070 100.0% Less—allowance for loan losses (16,100 ) (15,523 ) Total loans, net $ 1,517,347 $ 1,371,547 Maturities and Sensitivity of Loans to Changes in Interest Rates The information in the following tables summarizes the loan maturity distribution by type and related interest rate characteristics based on the contractual maturities of individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon maturity. Actual repayments of loans may differ from the maturities reflected below, because borrowers have the right to prepay obligations with or without prepayment penalties. June 30, 2018 After one One year but within After five (dollars in thousands) or less five years years Total Commercial Owner occupied RE $ 27,294 163,994 166,881 358,169 Non-owner occupied RE 37,270 182,889 135,150 355,309 Construction 17,024 21,813 34,818 73,655 Business 66,961 123,166 48,275 238,402 Total commercial loans 148,549 491,862 385,124 1,025,535 Consumer Real estate 32,872 62,050 195,511 290,433 Home equity 9,518 28,079 119,033 156,630 Construction 21,089 882 16,429 38,400 Other 7,584 10,169 4,696 22,449 Total consumer loans 71,063 101,180 335,669 507,912 Total gross loans, net of deferred fees $ 219,612 593,042 720,793 1,533,447 Loans maturing after one year with: Fixed interest rates $ 999,311 Floating interest rates 314,524 December 31, 2017 After one One year but within After five (dollars in thousands) or less five years years Total Commercial Owner occupied RE $ 24,171 167,425 125,222 316,818 Non-owner occupied RE 39,519 165,764 107,515 312,798 Construction 13,086 12,796 25,297 51,179 Business 73,588 107,584 44,986 226,158 Total commercial loans 150,364 453,569 303,020 906,953 Consumer Real estate 30,172 61,809 181,069 273,050 Home equity 13,331 25,807 117,003 156,141 Construction 14,943 1,737 11,671 28,351 Other 7,203 11,371 4,001 22,575 Total consumer 65,649 100,724 313,744 480,117 Total gross loan, net of deferred fees $ 216,013 554,293 616,764 1,387,070 Loans maturing after one year with : Fixed interest rates $ 875,991 Floating interest rates 295,066 Portfolio Segment Methodology Commercial Commercial loans are assessed for estimated losses by grading each loan using various risk factors identified through periodic reviews. The Company applies historic grade-specific loss factors to each loan class. In the development of statistically derived loan grade loss factors, the Company observes historical losses over 20 quarters for each loan grade. These loss estimates are adjusted as appropriate based on additional analysis of external loss data or other risks identified from current economic conditions and credit quality trends. The allowance also includes an amount for the estimated impairment on nonaccrual commercial loans and commercial loans modified in a troubled debt restructuring (“TDR”), whether on accrual or nonaccrual status. Consumer For consumer loans, the Company determines the allowance on a collective basis utilizing historical losses over 20 quarters to represent its best estimate of inherent loss. The Company pools loans, generally by loan class with similar risk characteristics. The allowance also includes an amount for the estimated impairment on nonaccrual consumer loans and consumer loans modified in a TDR, whether on accrual or nonaccrual status. Credit Quality Indicators Commercial We manage a consistent process for assessing commercial loan credit quality by monitoring its loan grading trends and past due statistics. All loans are subject to individual risk assessment. Our risk categories include Pass, Special Mention, Substandard, and Doubtful, each of which is defined by our banking regulatory agencies. Delinquency statistics are also an important indicator of credit quality in the establishment of our allowance for credit losses. We categorize our loans into risk categories based on relevant information about the ability of the borrower to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. A description of the general characteristics of the risk grades is as follows: ● Pass—These loans range from minimal credit risk to average however still acceptable credit risk. ● Special mention—A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the institution’s credit position at some future date. ● Substandard—A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness, or weaknesses, that may jeopardize the liquidation of the debt. A substandard loan is characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. ● Doubtful—A doubtful loan has all of the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of the currently existing facts, conditions and values, highly questionable and improbable. The tables below provide a breakdown of outstanding commercial loans by risk category. June 30, 2018 Owner Non-owner (dollars in thousands) occupied RE occupied RE Construction Business Total Pass $ 354,276 349,819 73,655 231,214 1,008,964 Special mention 1,644 1,523 - 3,579 6,746 Substandard 2,249 3,967 - 3,609 9,825 Doubtful - - - - - $ 358,169 355,309 73,655 238,402 1,025,535 December 31, 2017 Owner Non-owner occupied RE occupied RE Construction Business Total Pass $ 312,628 306,965 51,179 215,729 886,501 Special mention 1,770 2,082 - 5,540 9,392 Substandard 2,420 3,751 - 4,889 11,060 Doubtful - - - - - $ 316,818 312,798 51,179 226,158 906,953 The following tables provide past due information for outstanding commercial loans and include loans on nonaccrual status as well as accruing TDRs. June 30, 2018 Owner Non-owner (dollars in thousands) occupied RE occupied RE Construction Business Total Current $ 357,261 354,718 73,655 237,790 1,023,424 30-59 days past due 908 398 - 519 1,825 60-89 days past due - - - - - Greater than 90 Days - 193 - 93 286 $ 358,169 355,309 73,655 238,402 1,025,535 December 31, 2017 Owner Non-owner occupied RE occupied RE Construction Business Total Current $ 316,818 312,477 51,179 224,861 905,335 30-59 days past due - 129 - 416 545 60-89 days past due - - - - - Greater than 90 Days - 192 - 881 1,073 $ 316,818 312,798 51,179 226,158 906,953 As of June 30, 2018 and December 31, 2017, loans 30 days or more past due represented 0.24% and 0.34% of the Company’s total loan portfolio, respectively. Commercial loans 30 days or more past due were 0.14% and 0.11% of the Company’s total loan portfolio as of June 30, 2018 and December 31, 2017, respectively. Consumer The Company manages a consistent process for assessing consumer loan credit quality by monitoring its loan grading trends and past due statistics. All loans are subject to individual risk assessment. The Company’s categories include Pass, Special Mention, Substandard, and Doubtful, which are defined above. Delinquency statistics are also an important indicator of credit quality in the establishment of the allowance for loan losses. The tables below provide a breakdown of outstanding consumer loans by risk category. June 30, 2018 (dollars in thousands) Real estate Home equity Construction Other Total Pass $ 286,006 152,806 38,400 22,189 499,401 Special mention 1,558 510 - 197 2,265 Substandard 2,869 3,314 - 63 6,246 Doubtful - - - - - $ 290,433 156,630 38,400 22,449 507,912 December 31, 2017 Real estate Home equity Construction Other Total Pass $ 269,422 152,545 28,351 22,367 472,685 Special mention 715 1,025 - 88 1,828 Substandard 2,913 2,571 - 120 5,604 Doubtful - - - - - $ 273,050 156,141 28,351 22,575 480,117 The following tables provide past due information for outstanding consumer loans and include loans on nonaccrual status as well as accruing TDRs. June 30, 2018 (dollars in thousands) Real estate Home equity Construction Other Total Current $ 289,769 155,704 38,400 22,442 506,315 30-59 days past due 664 - - 2 666 60-89 days past due - 90 - 5 95 Greater than 90 Days - 836 - - 836 $ 290,433 156,630 38,400 22,449 507,912 December 31, 2017 Real estate Home equity Construction Other Total Current $ 271,284 154,821 28,351 22,506 476,962 30-59 days past due 681 325 - 69 1,075 60-89 days past due 131 995 - - 1,126 Greater than 90 Days 954 - - - 954 $ 273,050 156,141 28,351 22,575 480,117 As of June 30, 2018 and December 31, 2017, consumer loans 30 days or more past due were 0.10% and 0.23% of total loans, respectively. Nonperforming assets The following table shows the nonperforming assets and the related percentage of nonperforming assets to total assets and gross loans. Generally, a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when the Company believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the contractual principal or interest on the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction in principal when received. Following is a summary of our nonperforming assets, including nonaccruing TDRs. (dollars in thousands) June 30, 2018 December 31, 2017 Commercial Owner occupied RE $ - - Non-owner occupied RE 1,689 1,581 Construction - - Business 94 910 Consumer Real estate 1,174 992 Home equity 1,598 1,144 Construction - - Other - 1 Nonaccruing troubled debt restructurings 3,166 2,673 Total nonaccrual loans, including nonaccruing TDRs 7,721 7,301 Other real estate owned 117 242 Total nonperforming assets $ 7,838 7,543 Nonperforming assets as a percentage of: Total assets 0.44% 0.46% Gross loans 0.51% 0.54% Total loans over 90 days past due 1,122 2,027 Loans over 90 days past due and still accruing - - Accruing troubled debt restructurings $ 7,397 5,145 Impaired Loans The table below summarizes key information for impaired loans. The Company’s impaired loans include loans on nonaccrual status and loans modified in a TDR, whether on accrual or nonaccrual status. These impaired loans may have estimated impairment which is included in the allowance for loan losses. The Company’s commercial and consumer impaired loans are evaluated individually to determine the related allowance for loan losses. June 30, 2018 Recorded investment Impaired loans Unpaid with related Related Principal Impaired allowance for allowance for (dollars in thousands) Balance loans loan losses loan losses Commercial Owner occupied RE $ 2,858 2,793 454 74 Non-owner occupied RE 7,304 3,829 2,269 659 Construction - - - - Business 4,076 3,348 2,994 1,397 Total commercial 14,238 9,970 5,717 2,130 Consumer Real estate 2,946 2,867 2,203 1,226 Home equity 2,750 2,117 220 94 Construction - - - - Other 164 164 164 20 Total consumer 5,860 5,148 2,587 1,340 Total $ 20,098 15,118 8,304 3,470 December 31, 2017 Reco rded investment Impaired loans Unpaid with related Related Principal Impaired allowance for allowance for (dollars in thousands) Balance loans loan losses loan losses Commercial Owner occupied RE $ 2,281 2,235 464 179 Non-owner occupied RE 6,827 3,665 2,646 750 Construction - - - - Business 3,735 2,764 1,993 1,061 Total commercial 12,843 8,664 5,103 1,990 Consumer Real estate 2,062 2,037 2,037 1,379 Home equity 2,010 1,575 680 286 Construction - - - - Other 171 170 170 22 Total consumer 4,243 3,782 2,887 1,687 Total $ 17,086 12,446 7,990 3,677 The following table provides the average recorded investment in impaired loans and the amount of interest income recognized on impaired loans after impairment by portfolio segment and class. Three months ended Three months ended June 30, 2018 June 30, 2017 Average Recognized Average Recognized recorded interest recorded interest (dollars in thousands) investment income investment income Commercial Owner occupied RE $ 2,800 45 2,195 26 Non-owner occupied RE 3,878 77 3,620 48 Construction - - - - Business 3,361 57 3,623 54 Total commercial 10,039 179 9,438 128 Consumer Real estate 2,892 40 1,635 16 Home equity 2,135 24 197 1 Construction - - - - Other 165 1 180 1 Total consumer 5,192 65 2,012 18 Total $ 15,231 244 11,450 146 Six months ended Six months ended Year ended June 30, 2018 June 30, 2017 December 31, 2017 Average Recognized Average Recognized Average Recognized recorded interest recorded interest recorded interest (dollars in thousands) investment income investment income investment income Commercial Owner occupied RE $ 2,804 62 2,204 53 2,255 104 Non-owner occupied RE 3,920 126 3,721 76 4,144 199 Construction - - - - - - Business 3,380 79 3,635 98 2,823 162 Total commercial 10,104 267 9,560 227 9,222 465 Consumer Real estate 2,911 81 1,642 33 2,047 69 Home equity 2,172 51 198 2 1,576 97 Construction - - - - - - Other 167 3 181 2 174 6 Total consumer 5,250 135 2,021 37 3,797 172 Total $ 15,354 402 11,581 264 13,019 637 Allowance for Loan Losses The allowance for loan loss is management’s estimate of credit losses inherent in the loan portfolio. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The Company has an established process to determine the adequacy of the allowance for loan losses that assesses the losses inherent in the portfolio. While the Company attributes portions of the allowance to specific portfolio segments, the entire allowance is available to absorb credit losses inherent in the total loan portfolio. The Company’s process involves procedures to appropriately consider the unique risk characteristics of the commercial and consumer loan portfolio segments. For each portfolio segment, impairment is measured individually for each impaired loan. The Company’s allowance levels are influenced by loan volume, loan grade or delinquency status, historic loss experience and other economic conditions. The following table summarizes the activity related to the allowance for loan losses by commercial and consumer portfolio segments: Three months ended June 30, 2018 Commercial Consumer Owner Non-owner occupied occupied Real Home (dollars in thousands) RE RE Construction Business Estate equity Construction Other Total Balance, beginning of period $ 2,680 3,366 415 3,553 3,391 1,911 256 280 15,852 Provision for loan losses 19 342 129 280 54 (438 ) 26 (12 ) 400 Loan charge-offs - (234 ) - - - (77 ) - - (311 ) Loan recoveries - 107 - 16 1 35 - - 159 Net loan charge-offs - (127 ) - 16 1 (42 ) - - (152 ) Balance, end of period $ 2,699 3,581 544 3,849 3,446 1,431 282 268 16,100 Net charge-offs to average loans (annualized) 0.04% Allowance for loan losses to gross loans 1.05% Allowance for loan losses to nonperforming loans 208.52% Three months ended June 30, 2017 Commercial Consumer Owner Non-owner occupied occupied Real Home (dollars in thousands) RE RE Construction Business Estate equity Construction Other Total Balance, beginning of period $ 3,052 2,967 334 3,823 2,830 1,619 289 373 15,287 Provision for loan losses (88 ) 255 16 139 240 (23 ) 39 (78 ) 500 Loan charge-offs - (253 ) - (120 ) - - - - (373 ) Loan recoveries - 12 - 15 (9 ) 12 - - 30 Net loan charge-offs - (241 ) - (105 ) (9 ) 12 - - (343 ) Balance, end of period $ 2,964 2,981 350 3,857 3,061 1,608 328 295 15,444 Net charge-offs to average loans (annualized) 0.11 % Allowance for loan losses to gross loans 1.19 % Allowance for loan losses to nonperforming loans 293.75 % Six months ended June 30, 2018 Commercial Consumer Owner Non-owner occupied occupied Real Home (dollars in thousands) RE RE Construction Business Estate equity Construction Other Total Balance, beginning of period $ 2,534 3,230 325 3,848 3,495 1,600 210 281 15,523 Provision for loan losses 165 478 219 (14 ) 25 (64 ) 72 19 900 Loan charge-offs - (234 ) - (119 ) (77 ) (140 ) - (34 ) (604 ) Loan recoveries - 107 - 134 3 35 - 2 281 Net loan charge-offs - (127 ) - 15 (74 ) (105 ) - (32 ) (323 ) Balance, end of period $ 2,699 3,581 544 3,849 3,446 1,431 282 268 16,100 Net charge-offs to average loans (annualized) 0.04 % Six months ended June 30, 2017 Commercial Consumer Owner Non-owner occupied occupied Real Home RE RE Construction Business Estate equity Construction Other Total Balance, beginning of period $ 2,843 2,778 295 4,123 2,780 1,475 252 309 14,855 Provision for loan losses 121 623 55 (182 ) 200 121 76 (14 ) 1,000 Loan charge-offs - (433 ) - (130 ) - - - - (563 ) Loan recoveries - 13 - 46 81 12 - - 152 Net loan charge-offs - (420 ) - (84 ) 81 12 - - (411 ) Balance, end of period $ 2,964 2,981 350 3,857 3,061 1,608 328 295 15,444 Net charge-offs to average loans (annualized) 0.03 % The following table disaggregates the allowance for loan losses and recorded investment in loans by impairment methodology. June 30, 2018 Allowance for loan losses Recorded investment in loans (dollars in thousands) Commercial Consumer Total Commercial Consumer Total Individually evaluated $ 2,130 1,340 3,470 9,970 5,148 15,118 Collectively evaluated 8,543 4,087 12,630 1,015,565 502,764 1,518,329 Total $ 10,673 5,427 16,100 1,025,535 507,912 1,533,447 December 31, 2017 Allowance for loan losses Recorded investment in loans Commercial Consumer Total Commercial Consumer Total Individually evaluated $ 1,990 1,687 3,677 8,664 3,782 12,446 Collectively evaluated 7,947 3,899 11,846 898,289 476,335 1,374,624 Total $ 9,937 5,586 15,523 906,953 480,117 1,387,070 |