Loans and Allowance for Loan Losses | 5. Loans and Allowance for Loan Losses Loans consisted of the following: September 30, December 31, (Dollars in thousands) 2017 2016 Real estate: Residential $ 969,679 $ 907,946 Commercial 1,028,930 979,370 Construction 86,713 49,679 Commercial 436,172 430,539 Home equity line of credit 166,791 170,786 Other 5,733 5,348 Total loans 2,694,018 2,543,668 Net deferred loan costs 4,595 3,844 Loans 2,698,613 2,547,512 Allowance for loan losses (22,202 ) (21,529 ) Loans, net $ 2,676,411 $ 2,525,983 Changes in the allowance for loan losses by segments are as follows: For the Three Months Ended September 30, 2017 (Dollars in thousands) Balance at Charge-offs Recoveries Provision for Balance at Real estate: Residential $ 4,254 $ (46 ) $ 14 $ (202 ) $ 4,020 Commercial 11,633 - - 79 11,712 Construction 651 - - 109 760 Commercial 4,077 (24 ) 45 175 4,273 Home equity line of credit 1,379 - - 13 1,392 Other 43 (48 ) 7 43 45 $ 22,037 $ (118 ) $ 66 $ 217 $ 22,202 For the Three Months Ended September 30, 2016 (Dollars in thousands) Balance at Charge-offs Recoveries Provision for Balance at Real estate Residential $ 3,744 $ (57 ) $ - $ 157 $ 3,844 Commercial 10,489 - - 151 10,640 Construction 327 - - 102 429 Commercial 4,630 (28 ) - 177 4,779 Home equity line of credit 1,491 (13 ) - 55 1,533 Other 39 (64 ) 7 56 38 $ 20,720 $ (162 ) $ 7 $ 698 $ 21,263 For the Nine Months Ended September 30, 2017 (Dollars in thousands) Balance at Charge-offs Recoveries Provision for Balance at Real estate: Residential $ 4,134 $ (79 ) $ 15 $ (50 ) $ 4,020 Commercial 11,131 (111 ) 2 690 11,712 Construction 425 - - 335 760 Commercial 4,400 (346 ) 45 174 4,273 Home equity line of credit 1,398 - - (6 ) 1,392 Other 41 (128 ) 23 109 45 $ 21,529 $ (664 ) $ 85 $ 1,252 $ 22,202 For the Nine Months Ended September 30, 2016 (Dollars in thousands) Balance at Charge-offs Recoveries Provision for Balance at Real estate: Residential $ 4,084 $ (81 ) $ 1 $ (160 ) $ 3,844 Commercial 10,255 - - 385 10,640 Construction 231 - - 198 429 Commercial 4,119 (370 ) 10 1,020 4,779 Home equity line of credit 1,470 (13 ) - 76 1,533 Other 39 (222 ) 24 197 38 $ 20,198 $ (686 ) $ 35 $ 1,716 $ 21,263 The following table lists the allocation of the allowance by impairment methodology and by loan segment at September 30, 2017 and December 31, 2016: September 30, 2017 December 31, 2016 (Dollars in thousands) Total Reserve Total Reserve Loans individually evaluated for impairment: Real estate: Residential $ 12,715 $ 122 $ 12,778 $ 145 Commercial 8,587 - 12,363 14 Construction 4,532 - 4,532 - Commercial 1,569 59 2,029 112 Home equity line of credit 1,983 - 1,864 - Other 538 6 707 7 29,924 187 34,273 278 Loans collectively evaluated for impairment: Real estate: Residential $ 962,805 $ 3,898 $ 900,352 $ 3,989 Commercial 1,019,141 11,712 965,718 11,117 Construction 82,181 760 45,147 425 Commercial 434,559 4,214 428,466 4,288 Home equity line of credit 164,808 1,392 168,922 1,398 Other 5,195 39 4,634 34 2,668,689 22,015 2,513,239 21,251 Total $ 2,698,613 $ 22,202 $ 2,547,512 $ 21,529 Nonperforming assets consist of non-accruing loans including non-accruing loans identified as troubled debt restructurings, loans past due more than 90 days and still accruing interest and other real estate owned. The following table lists nonperforming assets at: September 30, December 31, (Dollars in thousands) 2017 2016 Nonaccrual loans: Real estate: Residential $ 9,022 $ 9,846 Commercial 73 976 Construction 4,532 4,532 Commercial 868 1,301 Home equity line of credit 754 862 Other 56 44 Total nonaccruing loans 15,305 17,561 Loans 90 days past due and still accruing - - Other real estate owned - - Total nonperforming assets $ 15,305 $ 17,561 The following is a summary of loan delinquencies at recorded investment values at September 30, 2017 and December 31, 2016: September 30, 2017 30-59 Days 60-89 Days > 90 Days Past Due 90 Past Due Past Due Past Due Total and Still (Dollars in thousands) Number Amount Number Amount Number Amount Number Amount Accruing Real estate: Residential 15 $ 2,948 13 $ 2,091 19 $ 7,254 47 $ 12,293 $ - Commercial - - - - - - - - - Construction - - - - 1 4,532 1 4,532 - Commercial - - - - 1 25 1 25 - Home equity line of credit 2 372 - - 3 362 5 734 - Other 9 192 2 15 2 17 13 224 - Total 26 $ 3,512 15 $ 2,106 26 $ 12,190 67 $ 17,808 $ - December 31, 2016 30-59 Days 60-89 Days > 90 Days Past Due 90 Past Due Past Due Past Due Total and Still (Dollars in thousands) Number Amount Number Amount Number Amount Number Amount Accruing Real estate: Residential 10 $ 1,226 6 $ 1,529 23 $ 7,979 39 $ 10,734 $ - Commercial 1 193 - - 1 888 2 1,081 - Construction - - - - 1 4,532 1 4,532 - Commercial 1 54 - - 3 319 4 373 - Home equity line of credit - - 2 85 3 377 5 462 - Other 7 66 1 23 - - 8 89 - Total 19 $ 1,539 9 $ 1,637 31 $ 14,095 59 $ 17,271 $ - The following is a summary of information pertaining to impaired loans at September 30, 2017 and December 31, 2016: September 30, 2017 December 31, 2016 Unpaid Unpaid Recorded Principal Related Recorded Principal Related (Dollars in thousands) Investment Balance Allowance Investment Balance Allowance Impaired loans without a valuation allowance: Real estate: Residential $ 11,748 $ 13,645 $ - $ 11,046 $ 12,833 $ - Commercial 8,587 8,621 - 9,496 9,636 - Construction 4,532 4,532 - 4,532 4,532 - Commercial 1,501 1,791 - 1,784 2,027 - Home equity line of credit 1,983 2,037 - 1,864 1,909 - Other 514 533 - 682 700 - Total 28,865 31,159 - 29,404 31,637 - Impaired loans with a valuation allowance: Real estate: Residential 967 985 122 1,732 1,796 145 Commercial - - - 2,867 2,867 14 Construction - - - - - - Commercial 68 859 59 245 894 112 Home equity line of credit - - - - - - Other 24 24 6 25 25 7 Total 1,059 1,868 187 4,869 5,582 278 Total impaired loans $ 29,924 $ 33,027 $ 187 $ 34,273 $ 37,219 $ 278 The following table summarizes average recorded investment and interest income recognized on impaired loans: Three Months Nine Months Three Months Nine Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, September 30, September 30, 2017 2017 2017 2016 2016 2016 Average Interest Interest Average Interest Interest Recorded Income Income Recorded Income Income (Dollars in thousands) Investment Recognized Recognized Investment Recognized Recognized Impaired loans without a valuation allowance: Real estate: Residential $ 11,599 $ 33 $ 91 $ 11,394 $ 22 $ 71 Commercial 8,772 101 293 12,850 125 396 Construction 4,532 - - 4,719 - 69 Commercial 1,458 7 16 2,552 8 27 Home equity line of credit 1,956 13 32 1,417 9 18 Other 597 6 21 859 8 26 Total 28,914 160 453 33,791 172 607 Impaired loans with a valuation allowance: Real estate: Residential 1,182 13 27 876 8 33 Commercial 1,430 - 51 2,900 35 105 Construction - - - - - - Commercial 102 - - 1,256 1 3 Home equity line of credit - - - - - - Other 25 - - 33 - 1 Total 2,739 13 78 5,065 44 142 Total impaired loans $ 31,653 $ 173 $ 531 $ 38,856 $ 216 $ 749 There was no interest income recognized on a cash basis method of accounting for the three and nine months ended September 30, 2017 and 2016. The following tables present information on loans whose terms had been modified in a troubled debt restructuring at September 30, 2017 and December 31, 2016: September 30, 2017 TDRs on Accrual Status TDRs on Nonaccrual Status Total TDRs (Dollars in thousands) Number of Recorded Number of Recorded Number of Recorded Real estate: Residential 19 $ 3,207 11 $ 4,212 30 $ 7,419 Commercial 2 626 - - 2 626 Construction - - 1 4,532 1 4,532 Commercial 2 305 4 791 6 1,096 Home equity line of credit 14 1,345 1 314 15 1,659 Other 5 523 1 15 6 538 Total 42 $ 6,006 18 $ 9,864 60 $ 15,870 December 31, 2016 TDRs on Accrual Status TDRs on Nonaccrual Status Total TDRs (Dollars in thousands) Number of Recorded Number of Recorded Number of Recorded Real estate: Residential 15 $ 2,581 9 $ 4,433 24 $ 7,014 Commercial 2 3,333 - - 2 3,333 Construction - - 1 4,532 1 4,532 Commercial 3 485 6 1,047 9 1,532 Home equity line of credit 8 1,075 1 58 9 1,133 Other 5 686 1 20 6 706 Total 33 $ 8,160 18 $ 10,090 51 $ 18,250 The recorded investment balances of TDRs were $15.9 million and $18.3 million at September 30, 2017 and December 31, 2016, respectively. TDRs on accrual status were $6.0 million and $8.2 million while TDRs on nonaccrual status were $9.9 million and $10.1 million at September 30, 2017 and December 31, 2016, respectively. At September 30, 2017, 100% of the accruing TDRs have been performing in accordance with the restructured terms. At September 30, 2017 and December 31, 2016, the allowance for loan losses included specific reserves of $128,000 and $160,000 related to TDRs, respectively. For the nine months ended September 30, 2017 and 2016, the Bank had charge-offs totaling $81,000 and $28,000, respectively, related to portions of TDRs deemed to be uncollectible. The Bank may provide additional funds to borrowers in TDR status. The amount of additional funds available to borrowers in TDR status was $18,000 and $369,000 at September 30, 2017 and December 31, 2016, respectively. The following tables include the recorded investment and number of modifications for modified loans. The Company reports the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured for the three and nine months ended September 30, 2017 and 2016: For the Three Months Ended September 30, 2017 For the Nine Months Ended September 30, 2017 (Dollars in thousands) Number of Recorded Recorded Investment After Modification (1) Number of Recorded Recorded Investment After Modification (1) Troubled Debt Restructurings: Real estate: Residential 1 $ 140 $ 140 7 $ 1,093 $ 1,089 Commercial 1 171 171 1 171 171 Home equity line of credit 3 349 349 6 533 532 Total 5 $ 660 $ 660 $ 14 $ 1,797 $ 1,792 For the Three Months Ended September 30, 2016 For the Nine Months Ended September 30, 2016 (Dollars in thousands) Number of Recorded Recorded Investment After Modification (1) Number of Recorded Recorded Investment After Modification (1) Troubled Debt Restructurings: Real estate Residential 1 $ 231 $ 231 1 $ 231 $ 231 Commercial 1 117 117 1 117 117 Home equity line of credit - - - 6 985 982 Total 2 $ 348 $ 348 $ 8 $ 1,333 $ 1,330 (1) The period end balances are inclusive of all partial paydowns and charge-offs since the modification date. TDRs fully paid off, charged-off or foreclosed upon by period end are not included. The following tables provide TDR loans that were modified by means of extended maturity, below market adjusted interest rates, a combination of rate and maturity, or by other means including covenant modifications, forbearance and/or the concessions and borrowers discharged in bankruptcy for the three and nine months ended September 30, 2017 and 2016: For the Three Months Ended September 30, 2017 (Dollars in thousands) Number of Extended Maturity (1) Adjusted Interest Rates (1) Combination of Rate and Maturity (1) Other (1) Total Real estate: Residential 1 $ - $ - $ - $ 140 $ 140 Commercial 1 - - - 171 171 Home equity line of credit 3 - - - 349 349 Total 5 $ - $ - $ - $ 660 $ 660 For the Nine Months Ended September 30, 2017 (Dollars in thousands) Number of Extended Maturity (1) Adjusted Interest Rates (1) Combination of Rate and Maturity (1) Other (1) Total Real estate: Residential 7 $ 90 $ - $ 336 $ 663 $ 1,089 Commercial 1 - - - 171 171 Home equity line of credit 6 88 - - 444 532 Total 14 $ 178 $ - $ 336 $ 1,278 $ 1,792 For the Three Months Ended September 30, 2016 (Dollars in thousands) Number of Extended Maturity (1) Adjusted Interest Rates (1) Combination of Rate and Maturity (1) Other (1) Total Real estate Residential 1 $ - $ - $ - $ 231 $ 231 Commercial 1 117 - - - 117 Total 2 $ 117 $ - $ - $ 231 $ 348 For the Nine Months Ended September 30, 2016 (Dollars in thousands) Number of Extended Maturity (1) Adjusted Interest Rates (1) Combination of Rate and Maturity (1) Other (1) Total Real estate Residential 1 $ - $ - $ - $ 231 $ 231 Commercial 1 117 - - - 117 Home equity line of credit 6 - - - 982 982 Total 8 $ 117 $ - $ - $ 1,213 $ 1,330 (1) The period end balances are inclusive of all partial paydowns and charge-offs since the modification date. TDRs fully paid off, charged-off or foreclosed upon by period end are not included. A TDR is considered to be in re-default once it is more than 30 days past due following a modification. There was one construction loan totaling $4.5 million that defaulted and had been modified as a TDR during the twelve month period preceding the default date during the nine months ended September 30, 2017. There were no loans that defaulted and had been modified as a TDR during the twelve month period preceding the default date for the three months ended September 30, 2017 and 2016 and for the nine months ended September 30, 2016. Credit Quality Information At the time of loan origination, a risk rating based on a nine point grading system is assigned to each commercial-related loan based on the loan officer’s and management’s assessment of the risk associated with each particular loan. This risk assessment is based on an in depth analysis of a variety of factors. More complex loans and larger commitments require the Company’s internal credit risk management department further evaluate the risk rating of the individual loan or relationship, with credit risk management having final determination of the appropriate risk rating. These more complex loans and relationships receive ongoing periodic review to assess the appropriate risk rating on a post-closing basis with changes made to the risk rating as the borrower’s and economic conditions warrant. The Company’s risk rating system is designed to be a dynamic system and we grade loans on a “real time” basis. The Company places considerable emphasis on risk rating accuracy, risk rating justification, and risk rating triggers. The Company’s risk rating process has been enhanced with its implementation of industry-based risk rating “cards.” The cards are used by the loan officers and promote risk rating accuracy and consistency on an institution-wide basis. Most loans are reviewed annually as part of a comprehensive portfolio review conducted by management and/or by an independent loan review firm. More frequent reviews of loans rated low pass, special mention, substandard and doubtful are conducted by the credit risk management department. The Company utilizes an independent loan review consulting firm to review its rating accuracy and the overall credit quality of its loan portfolio. The review is designed to provide an evaluation of the portfolio with respect to risk rating profile as well as with regard to the soundness of individual loan files. The individual loan reviews include an analysis of the creditworthiness of obligors, via appropriate key ratios and cash flow analysis and an assessment of collateral protection. The consulting firm conducts two loan reviews per year aiming at a 65.0% or higher commercial and industrial loans and commercial real estate portfolio penetration. Summary findings of all loan reviews performed by the outside consulting firm are reported to the board of directors and senior management of the Company upon completion. The Company utilizes a point risk rating scale as follows: Risk Rating Definitions Residential and consumer loans are not rated unless they are 45 days or more delinquent, in which case, depending on past-due days, they will be rated 6, 7 or 8. Loans rated 1 – 5, 55 Commercial loans in these categories are considered “pass” rated loans with low to average risk. Loans rated 6 Residential, Consumer and Commercial loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management. Loans rated 7: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected. Loans rated 8: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable. Loans rated 9: Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted. The following table presents the Company’s loans by risk rating at September 30, 2017 and December 31, 2016: September 30, 2017 (Dollars in thousands) Pass Special Mention Substandard Doubtful Total Real estate: Residential $ 958,934 $ 1,049 $ 9,696 $ - $ 969,679 Commercial 1,015,826 5,009 8,095 - 1,028,930 Construction 82,181 - 4,532 - 86,713 Commercial 398,228 24,805 13,139 - 436,172 Home equity line of credit 165,963 74 754 - 166,791 Other 5,657 21 55 - 5,733 Total Loans $ 2,626,789 $ 30,958 $ 36,271 $ - $ 2,694,018 December 31, 2016 (Dollars in thousands) Pass Special Mention Substandard Doubtful Total Real estate: Residential $ 896,861 $ 852 $ 10,233 $ - $ 907,946 Commercial 968,109 1,991 9,270 - 979,370 Construction 45,147 - 4,532 - 49,679 Commercial 413,900 3,914 12,725 - 430,539 Home equity line of credit 169,834 83 869 - 170,786 Other 5,257 24 67 - 5,348 Total Loans $ 2,499,108 $ 6,864 $ 37,696 $ - $ 2,543,668 The Company places considerable emphasis on the early identification of problem assets, problem-resolution and minimizing loss exposure. Delinquency notices are mailed monthly to all delinquent borrowers, advising them of the amount of their delinquency. Residential and consumer lending borrowers are typically given 30 days to pay the delinquent payments or to contact us to make arrangements to bring the loan current over a longer period of time. Generally, if a residential or consumer lending borrower fails to bring the loan current within 90 days from the original due date or to make arrangements to cure the delinquency over a longer period of time, the matter is referred to legal counsel and foreclosure or other collection proceedings are initiated. The Company may consider forbearance or a loan restructuring in certain circumstances where a temporary loss of income is the primary cause of the delinquency, and if a reasonable plan is presented by the borrower to cure the delinquency in a reasonable period of time after his or her income resumes. Problem or delinquent borrowers in our commercial real estate and commercial business portfolios are handled on a case-by-case basis, typically by our Special Assets Department. Appropriate problem-resolution and workout strategies are formulated based on the specific facts and circumstances. |