Loans Receivable And Allowance For Loan Losses | LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES Loans receivable, which management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Company is generally amortizing these amounts over the contractual life of the loan. Generally, loans held for sale are designated at time of origination, generally consist of newly originated fixed rate residential mortgage loans and are recorded at the lower of aggregate cost or estimated fair value in the aggregate. During the three months ended September 30, 2017 , the Company did not transfer any loans from held for investment to held for sale, while during the nine months ended September 30, 2017 , the Company transferred $8.2 million from held for investment to held for sale. During the three and nine months ended September 30, 2016 , the Company did not transfer any loans from held for investment to held for sale. Gains are recognized on a settlement-date basis and are determined by the difference between the net sales proceeds and the carrying value of the loans, including any net deferred fees or costs. The loans receivable portfolio is segmented into five categories, those being a) Commercial and industrial, b) Real estate-construction (consisting of both residential and commercial construction), c) Real estate-commercial, d) Real estate-residential, and e) Consumer. For all classes of loans receivable, the accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest previously accrued on these loans is reversed from income. Interest received on nonaccrual loans, including impaired loans, generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments. The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and is recorded in other liabilities on the consolidated balance sheet, which at September 30, 2017 and December 31, 2016 , the Company had no such reserves. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectable are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a monthly evaluation of the adequacy of the allowance. The allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available. The allowance consists of specific, general and unallocated components. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of the loan. The specific component relates to loans that are classified as impaired. When a loan is impaired, there are three acceptable methods under ASC 310-10-35 for measuring the impairment: 1. The loan’s observable market price; 2. The fair value of the underlying collateral; or 3. The present value (PV) of expected future cash flows. Loans that are considered “collateral-dependent” should be evaluated under the “Fair market value of collateral.” Loans that are still expected to be supported by repayment from the borrower should be evaluated under the “Present value of future cash flows.” For the most part, the Company measures impairment under the “Fair market value of collateral” for any loan that would rely on the value of collateral for recovery in the event of default. The individual impairment analysis for each loan is clearly documented as to the chosen valuation method. The general component covers pools of loans by loan class including commercial and industrial, real estate-construction and real estate-commercial not considered impaired as well as smaller balance homogeneous loans such as real estate-residential and consumer. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors. These qualitative risk factors include: 1. Changes in lending policy and procedures, including changes in underwriting standards and collection practices not previously considered in estimating credit losses. 2. Changes in relevant economic and business conditions. 3. Changes in nature and volume of the loan portfolio and in the terms of loans. 4. Changes in experience, ability and depth of lending management and staff. 5. Changes in the volume and severity of past due loans, the volume of non-accrual loans and the volume and severity of adversely classified loans. 6. Changes in the quality of the loan review system. 7. Changes in the value of underlying collateral for collateral-dependent loans. 8. The existence and effect of any concentration of credit and changes in the level of such concentrations. 9. The effect of other external forces such as competition, legal and regulatory requirements on the level of estimated credit losses in the existing portfolio. Each factor is assigned a risk value to reflect low, moderate or high risk assessments based on management’s best judgment using current market, macro and other relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation in each factor and accompany the allowance for loan loss calculation. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. A loan is considered impaired when it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and industrial, real estate-commercial, real estate-construction, real estate-residential and consumer loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of substantially all of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral. For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property. For commercial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets. The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for commercial and consumer loans. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans classified special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristics that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectable and are charged to the allowance for loan losses. Loans not classified are rated pass. In addition, federal and state regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate. The components of the loan portfolio held for investment at September 30, 2017 and December 31, 2016 are as follows: September 30, December 31, 2017 2016 (In Thousands) Commercial and industrial $ 99,601 $ 93,697 Real estate – construction 118,553 111,914 Real estate – commercial 507,507 460,685 Real estate – residential 62,416 59,065 Consumer 28,773 28,279 816,850 753,640 Allowance for loan losses (10,223 ) (9,565 ) Unearned fees (772 ) (548 ) Net Loans $ 805,855 $ 743,527 The performance and credit quality of the loan portfolio is monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the past due status as of September 30, 2017 and December 31, 2016 : 30-59 Days Past Due 60-89 Days Past Due 90 Days & Greater Total Past Due Current Total Loans Receivable Loans Receivable >90 Days and Accruing September 30, 2017: (In Thousands) Commercial and industrial $ — $ — $ 756 $ 756 $ 98,845 $ 99,601 $ — Real estate – construction — — 150 150 118,403 118,553 — Real estate – commercial — 152 252 404 507,103 507,507 — Real estate – residential — — 717 717 61,699 62,416 — Consumer 49 — 300 349 28,424 28,773 — Total $ 49 $ 152 $ 2,175 $ 2,376 $ 814,474 $ 816,850 $ — 30-59 Days Past Due 60-89 Days Past Due 90 Days & Greater Total Past Due Current Total Loans Receivable Loans Receivable >90 Days and Accruing December 31, 2016: (In Thousands) Commercial and industrial $ — $ — $ 119 $ 119 $ 93,578 $ 93,697 $ — Real estate – construction — — — — 111,914 111,914 — Real estate – commercial 154 — 666 820 459,865 460,685 — Real estate – residential — — 533 533 58,532 59,065 — Consumer — — — — 28,279 28,279 — Total $ 154 $ — $ 1,318 $ 1,472 $ 752,168 $ 753,640 $ — The following table presents non-accrual loans by classes of the loan portfolio at September 30, 2017 and December 31, 2016 : September 30, December 31, 2017 2016 (In Thousands) Commercial and industrial $ 926 $ 119 Real estate – construction 150 — Real estate – commercial 252 666 Real estate – residential 717 763 Consumer 300 — Total $ 2,345 $ 1,548 There was one new commercial and industrial troubled debt restructured loan ("TDR's), which had a pre- and post-modification outstanding recorded investment in the amount of $170,000 that occurred during the three months ended September 30, 2017 . There were no new TDR's that occurred during the three months ended September 30, 2016 . The following table presents new TDR's that occurred during the nine months ended September 30, 2017 and 2016: Nine months ended September 30, 2017 Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment (Dollars in Thousands) Troubled debt restructuring: Commercial and industrial 2 $ 320 $ 320 Real estate – construction 1 150 150 3 $ 470 $ 470 Nine months ended September 30, 2016 Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment (Dollars in Thousands) Troubled debt restructuring: Commercial and industrial 1 $ 257 $ 257 Loans whose terms are modified are classified as TDRs if the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a TDR generally involve a temporary reduction in interest rate or a modification of a loan’s amortization schedule. Non-accrual TDRs are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after the modification is in place. Loans classified as TDRs, including those restored to accrual status, are designated as impaired. The Company’s TDR modifications are made on terms typically up to 12 months in order to aggressively monitor and track performance of the credit. The short-term modifications are monitored for continued performance for an additional period of time after the expiration of the concession. Balance reductions and annualized loss rates are also important metrics that are monitored. The main objective of the modification program is to reduce the payment burden for the borrower and improve the net present value of the Company’s expected cash flows. Impaired loans are individually assessed to determine that the loan’s carrying value is not in excess of the estimated fair value of the collateral (less cost to sell), if the loan is collateral dependent, or the present value of the expected future cash flows, if the loan is not collateral dependent. Management performs a detailed evaluation of each impaired loan and generally obtains updated appraisals as part of the evaluation. In addition, management adjusts estimated fair value down to appropriately consider recent market conditions, our willingness to accept a lower sales price to effect a quick sale, and costs to dispose of any supporting collateral. At September 30, 2017 , TDRs totaled $8.1 million , including $7.0 million that were current and eight non-accrual loans totaling $1.1 million. As of December 31, 2016 , TDRs totaled $8.2 million , including $8.1 million that were current and two non-accrual loans totaling $157,000 . At September 30, 2017 , the Company had no specific reserve against any loan relationship classified as TDR, while at December 31, 2016 , a specific reserve of $2,000 was established against one loan relationships classified as TDR. There were no loans receivable modified as TDRs and with a payment default occurring within 12 months of the restructure date, and the payment default occurring during the three and nine months ended September 30, 2017 and 2016 , respectively. It is the Company’s policy to classify a TDR that is either 90 days or greater delinquent or that has been placed on a non-accrual status as a subsequently defaulted TDR. The following tables summarize information in regards to impaired loans by loan portfolio class at September 30, 2017 and December 31, 2016 , and for the three and nine months ended September 30, 2017 and 2016 , respectively: As of September 30, 2017 For the three months ended September 30, 2017 For the nine months ended September 30, 2017 Recorded Investment, Net of Charge-offs Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized (In Thousands) With no related allowance recorded: Commercial and industrial $ 3,629 $ 3,877 $ — $ 3,663 $ 36 $ 3,862 $ 118 Real estate – construction 3,145 3,145 — 3,142 33 3,166 100 Real estate – commercial 1,108 1,108 — 1,131 10 1,165 30 Real estate – residential 1,088 1,088 — 1,094 5 1,111 14 Consumer 300 300 — 300 — 301 1 With an allowance recorded: Commercial and industrial $ — $ — $ — $ — $ — $ — $ — Real estate – construction — — — — — — — Real estate – commercial — — — — — — — Real estate – residential — — — — — — — Consumer — — — — — — — Total: Commercial and industrial $ 3,629 $ 3,877 $ — $ 3,663 $ 36 $ 3,862 $ 118 Real estate – construction 3,145 3,145 — 3,142 33 3,166 100 Real estate – commercial 1,108 1,108 — 1,131 10 1,165 30 Real estate – residential 1,088 1,088 — 1,094 5 1,111 14 Consumer 300 300 — 300 — 301 1 Total $ 9,270 $ 9,518 $ — $ 9,330 $ 84 $ 9,605 $ 263 As of December 31, 2016 For the three months ended September 30, 2016 For the nine months ended September 30, 2016 Recorded Investment, Net of Charge-offs Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized (In Thousands) With no related allowance recorded: Commercial and industrial $ 3,402 $ 3,415 $ — $ 3,531 $ 43 $ 3,615 $ 131 Real estate – construction 3,036 3,036 — 3,217 34 3,264 103 Real estate – commercial 1,548 1,577 — 1,572 10 1,637 37 Real estate – residential 1,139 1,189 — 1,162 5 1,168 14 Consumer — — — — — — — With an allowance recorded: Commercial and industrial $ 498 $ 498 $ 2 $ 505 $ 4 $ 509 $ 12 Real estate – construction — — — — — — — Real estate – commercial — — — — — — — Real estate – residential — — — — — — — Consumer — — — — — — — Total: Commercial and industrial $ 3,900 $ 3,913 $ 2 $ 4,036 $ 47 $ 4,124 $ 143 Real estate – construction 3,036 3,036 — 3,217 34 3,264 103 Real estate – commercial 1,548 1,577 — 1,572 10 1,637 37 Real estate – residential 1,139 1,189 — 1,162 5 1,168 14 Consumer — — — — — — — Total $ 9,623 $ 9,715 $ 2 $ 9,987 $ 96 $ 10,193 $ 297 The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of September 30, 2017 and December 31, 2016 : Pass Special Mention Substandard Doubtful Total (In Thousands) September 30, 2017: Commercial and industrial $ 95,092 $ 880 $ 3,380 $ 249 $ 99,601 Real estate – construction 112,816 4,261 1,476 — 118,553 Real estate – commercial 495,578 11,143 786 — 507,507 Real estate – residential 61,699 — 717 — 62,416 Consumer 28,255 34 484 — 28,773 Total $ 793,440 $ 16,318 $ 6,843 $ 249 $ 816,850 Pass Special Mention Substandard Doubtful Total (In Thousands) December 31, 2016: Commercial and industrial $ 88,776 $ 1,277 $ 3,644 $ — $ 93,697 Real estate – construction 108,728 1,894 1,292 — 111,914 Real estate – commercial 452,740 6,716 1,229 — 460,685 Real estate – residential 58,302 — 763 — 59,065 Consumer 27,856 230 193 — 28,279 Total $ 736,402 $ 10,117 $ 7,121 $ — $ 753,640 The following tables present the balance in the allowance for loan losses at September 30, 2017 and December 31, 2016 disaggregated on the basis of the Company’s impairment method by class of loans receivable along with the balance of loans receivable by class disaggregated on the basis of the Company’s impairment methodology: Allowance for Loan Losses Loans Receivable Balance Balance Related to Loans Individually Evaluated for Impairment Balance Related to Loans Collectively Evaluated for Impairment Balance Balance Individually Evaluated for Impairment Balance Collectively Evaluated for Impairment (In Thousands) September 30, 2017: Commercial and industrial $ 887 $ — $ 887 $ 99,601 $ 3,629 $ 95,972 Real estate – construction 1,367 — 1,367 118,553 3,145 115,408 Real estate – commercial 6,906 — 6,906 507,507 1,108 506,399 Real estate – residential 488 — 488 62,416 1,088 61,328 Consumer 174 — 174 28,773 300 28,473 Unallocated 401 — 401 — — — Total $ 10,223 $ — $ 10,223 $ 816,850 $ 9,270 $ 807,580 Allowance for Loan Losses Loans Receivable Balance Balance Related to Loans Individually Evaluated for Impairment Balance Related to Loans Collectively Evaluated for Impairment Balance Balance Individually Evaluated for Impairment Balance Collectively Evaluated for Impairment (In Thousands) December 31, 2016: Commercial and industrial $ 844 $ 2 $ 842 $ 93,697 $ 3,900 $ 89,797 Real estate – construction 1,276 — 1,276 111,914 3,036 108,878 Real estate – commercial 6,315 — 6,315 460,685 1,548 459,137 Real estate – residential 463 — 463 59,065 1,139 57,926 Consumer 244 — 244 28,279 — 28,279 Unallocated 423 — 423 — — — Total $ 9,565 $ 2 $ 9,563 $ 753,640 $ 9,623 $ 744,017 The following table presents the change in the allowance for loan losses by classes of loans for the three and nine months ended September 30, 2017 and 2016 : Allowance for Loan Losses Commercial and Industrial Real Estate - Construction Real Estate - Commercial Real Estate - Residential Consumer Unallocated Total (In Thousands) Beginning balance, July 1, 2017 $ 898 $ 1,284 $ 6,781 $ 466 $ 172 $ 352 $ 9,953 Charge-offs — — — — — — — Recoveries 4 4 6 — 1 — 15 Provision (15 ) 79 119 22 1 49 255 Ending balance, September 30, 2017 $ 887 $ 1,367 $ 6,906 $ 488 $ 174 $ 401 $ 10,223 Allowance for Loan Losses Commercial and Industrial Real Estate - Construction Real Estate - Commercial Real Estate - Residential Consumer Unallocated Total (In Thousands) Beginning balance, January 1, 2017 $ 844 $ 1,276 $ 6,315 $ 463 $ 244 $ 423 $ 9,565 Charge-offs (248 ) — — — — — (248 ) Recoveries 17 12 17 — 5 — 51 Provision 274 79 574 25 (75 ) (22 ) 855 Ending balance, September 30, 2017 $ 887 $ 1,367 $ 6,906 $ 488 $ 174 $ 401 $ 10,223 Allowance for Loan Losses Commercial and Industrial Real Estate - Construction Real Estate - Commercial Real Estate - Residential Consumer Unallocated Total (In Thousands) Beginning balance, July 1, 2016 $ 905 $ 1,165 $ 6,495 $ 387 $ 241 $ 225 $ 9,418 Charge-offs — — (444 ) — (5 ) — (449 ) Recoveries 3 — 3 — 7 — 13 Provision 10 1 427 36 (7 ) 3 470 Ending balance, September 30, 2016 $ 918 $ 1,166 $ 6,481 $ 423 $ 236 $ 228 $ 9,452 Allowance for Loan Losses Commercial and Industrial Real Estate - Construction Real Estate - Commercial Real Estate - Residential Consumer Unallocated Total (In Thousands) Beginning balance, January 1, 2016 $ 990 $ 1,283 $ 5,599 $ 304 $ 242 $ 295 $ 8,713 Charge-offs — — (444 ) — (5 ) — (449 ) Recoveries 9 8 249 — 62 — 328 Provision (81 ) (125 ) 1,077 119 (63 ) (67 ) 860 Ending balance, September 30, 2016 $ 918 $ 1,166 $ 6,481 $ 423 $ 236 $ 228 $ 9,452 |