Loans and Allowance for Loan Losses | 5. Loans and Allowance for Loan Losses Loans consisted of the following: December 31, December 31, 2015 2014 (Dollars in thousands) Real estate: Residential $ 849,722 $ 827,005 Commercial 887,431 765,066 Construction 30,895 57,371 Installment 2,970 3,356 Commercial 409,550 309,708 Collateral 1,668 1,733 Home equity line of credit 174,701 169,768 Revolving credit 91 99 Resort 784 929 Total loans 2,357,812 2,135,035 Net deferred loan costs 3,984 3,842 Loans 2,361,796 2,138,877 Allowance for loan losses (20,198 ) (18,960 ) Loans, net $ 2,341,598 $ 2,119,917 Changes in the allowance for loan losses by segments are as follows: For the Year Ended December 31, 2015 Balance at Charge-offs Recoveries Provision for Balance at (Dollars in thousands) Real estate: Residential $ 4,382 $ (295 ) $ 112 $ (115 ) $ 4,084 Commercial 8,949 (213 ) - 1,519 10,255 Construction 478 - - (247 ) 231 Installment 41 (39 ) - 37 39 Commercial 3,250 (318 ) 6 1,181 4,119 Collateral - - - - - Home equity line of credit 1,859 (238 ) - (151 ) 1,470 Revolving credit - (246 ) 29 217 - Resort 1 - - (1 ) - $ 18,960 $ (1,349 ) $ 147 $ 2,440 $ 20,198 For the Year Ended December 31, 2014 Balance at Charge-offs Recoveries Provision for Balance at (Dollars in thousands) Real estate: Residential $ 3,647 $ (701 ) $ 58 $ 1,378 $ 4,382 Commercial 8,253 (93 ) 1 788 8,949 Construction 1,152 - - (674 ) 478 Installment 48 (4 ) - (3 ) 41 Commercial 3,746 (1,066 ) 84 486 3,250 Collateral - - - - - Home equity line of credit 1,465 (106 ) - 500 1,859 Revolving credit - (133 ) 18 115 - Resort 3 - - (2 ) 1 $ 18,314 $ (2,103 ) $ 161 $ 2,588 $ 18,960 For the Year Ended December 31, 2013 Balance at Charge-offs Recoveries Provision for Balance at (Dollars in thousands) Real estate: Residential $ 3,778 $ (430 ) $ 6 $ 293 $ 3,647 Commercial 8,105 - - 148 8,253 Construction 760 - - 392 1,152 Installment 77 - - (29 ) 48 Commercial 2,654 (31 ) 52 1,071 3,746 Collateral - - - - - Home equity line of credit 1,377 - - 88 1,465 Revolving credit - (62 ) 20 42 - Resort 456 - - (453 ) 3 Unallocated 22 - - (22 ) - $ 17,229 $ (523 ) $ 78 $ 1,530 $ 18,314 The following table lists the allocation of the allowance by impairment methodology and by loan segment at December 31, 2015 and 2014: December 31, 2015 December 31, 2014 Reserve Reserve (Dollars in thousands) Total Allocation Total Allocation Loans individually evaluated for impairment: Real estate: Residential $ 12,377 $ 139 $ 11,791 $ 285 Commercial 16,152 26 19,051 233 Construction 4,719 - 4,719 - Installment 259 8 251 8 Commercial 6,023 361 5,680 225 Collateral - - - - Home equity line of credit 703 - 1,031 - Revolving credit - - - - Resort 784 - 929 1 41,017 534 43,452 752 Loans collectively evaluated for impairment: Real estate: Residential $ 841,921 $ 3,945 $ 819,630 $ 4,097 Commercial 870,757 10,229 745,501 8,716 Construction 26,176 231 52,652 478 Installment 2,695 31 3,093 33 Commercial 403,473 3,758 303,980 3,025 Collateral 1,668 - 1,733 - Home equity line of credit 173,998 1,470 168,737 1,859 Revolving credit 91 - 99 - Resort - - - - 2,320,779 19,664 2,095,425 18,208 Total $ 2,361,796 $ 20,198 $ 2,138,877 $ 18,960 The following is a summary of loan delinquencies at recorded investment values at December 31, 2015 and 2014: December 31, 2015 30-59 Days 60-89 Days > 90 Days Past Due 90 (Dollars in thousands) Past Due Past Due Past Due Total and Still Number Amount Number Amount Number Amount Number Amount Accruing Real estate: Residential 18 $ 3,379 5 $ 863 15 $ 6,304 38 $ 10,546 $ - Commercial 2 318 - - 1 994 3 1,312 - Construction - - - - 1 187 1 187 - Installment 3 38 - - - - 3 38 - Commercial 4 153 - - 2 1,752 6 1,905 - Collateral 7 68 - - 1 10 8 78 - Home equity line of credit 3 280 2 360 2 210 7 850 - Demand 1 29 - - - - 1 29 - Revolving credit - - - - - - - - - Resort - - - - - - - - - Total 38 $ 4,265 7 $ 1,223 22 $ 9,457 67 $ 14,945 $ - December 31, 2014 30-59 Days 60-89 Days > 90 Days Past Due 90 (Dollars in thousands) Past Due Past Due Past Due Total and Still Number Amount Number Amount Number Amount Number Amount Accruing Real estate: Residential 16 $ 3,599 6 $ 1,263 16 $ 6,819 38 $ 11,681 $ - Commercial 2 348 - - 3 1,979 5 2,327 - Construction - - - - 1 187 1 187 - Installment 3 69 2 82 2 33 7 184 - Commercial 1 40 1 4 7 550 9 594 - Collateral 9 99 - - - - 9 99 - Home equity line of credit 3 202 1 349 5 389 9 940 - Demand 1 67 - - - - 1 67 - Revolving credit - - - - - - - - - Resort - - - - - - - - - Total 35 $ 4,424 10 $ 1,698 34 $ 9,957 79 $ 16,079 $ - 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: December 31, December 31, (Dollars in thousands) 2015 2014 Nonaccrual loans: Real estate: Residential $ 9,773 $ 9,706 Commercial 1,106 2,112 Construction 187 187 Installment 32 155 Commercial 3,232 2,268 Collateral 10 - Home equity line of credit 573 1,040 Revolving credit - - Resort - - Total nonaccruing loans 14,913 15,468 Loans 90 days past due and still accruing - - Other real estate owned 279 400 Total nonperforming assets $ 15,192 $ 15,868 The following is a summary of information pertaining to impaired loans at December 31, 2015 and 2014: December 31, 2015 December 31, 2014 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 $ 11,530 $ 12,878 $ - $ 5,862 $ 6,286 $ - Commercial 13,233 13,303 - 13,804 13,828 - Construction 4,719 4,965 - 4,719 4,965 - Installment 202 202 - 220 232 - Commercial 3,921 4,066 - 3,527 3,584 - Collateral - - - - - - Home equity line of credit 703 719 - 1,031 1,264 - Revolving credit - - - - - - Resort 784 784 - - - - Total 35,092 36,917 - 29,163 30,159 - Impaired loans with a valuation allowance: Real estate: Residential 847 881 139 5,929 6,848 285 Commercial 2,919 2,919 26 5,247 5,523 233 Construction - - - - - - Installment 57 72 8 31 31 8 Commercial 2,102 2,457 361 2,153 2,266 225 Collateral - - - - - - Home equity line of credit - - - - - - Revolving credit - - - - - - Resort - - - 929 929 1 Total 5,925 6,329 534 14,289 15,597 752 Total impaired loans $ 41,017 $ 43,246 $ 534 $ 43,452 $ 45,756 $ 752 The following table summarizes average recorded investment and interest income recognized on impaired loans: For the Year Ended December 31, 2015 2014 2013 Average Interest Average Interest Average Interest Recorded Income Recorded Income Recorded Income (Dollars in thousands) Investment Recognized Investment Recognized Investment Recognized Impaired loans without a valuation allowance: Real estate: Residential $ 10,621 $ 112 $ 6,727 $ 88 $ 5,683 $ 28 Commercial 13,674 575 15,159 705 10,695 814 Construction 4,719 138 1,320 138 237 - Installment 238 14 198 13 52 13 Commercial 4,182 110 3,791 140 3,059 28 Collateral - - - - - - Home equity line of credit 928 4 684 2 491 - Demand - - - - - - Revolving credit - - - - - - Resort 827 26 - - - - Total 35,189 979 27,879 1,086 20,217 883 Impaired loans with a valuation allowance: Real estate: Residential 1,037 35 5,592 41 5,872 52 Commercial 3,504 158 4,765 137 8,594 147 Construction - - - - 198 - Installment 35 1 29 1 27 1 Commercial 1,682 15 2,378 74 3,854 66 Collateral - - - - - - Home equity line of credit - - - - - - Demand - - - - - - Revolving credit - - - - - - Resort - - 1,035 35 995 47 Total 6,258 209 13,799 288 19,540 313 Total impaired loans $ 41,447 $ 1,188 $ 41,678 $ 1,374 $ 39,757 $ 1,196 There was no interest income recognized on a cash basis method of accounting for the years ended December 31, 2015, 2014 and 2013. The following tables present information on loans whose terms had been modified in a troubled debt restructuring at December 31, 2015 and 2014: December 31, 2015 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 14 $ 2,242 11 $ 5,557 25 $ 7,799 Commercial 4 6,664 - - 4 6,664 Construction 1 4,532 1 187 2 4,719 Installment 4 227 2 32 6 259 Commercial 6 2,350 8 1,482 14 3,832 Collateral - - - - - - Home equity line of credit 3 153 - - 3 153 Revolving credit - - - - - - Resort 1 784 - - 1 784 Total 33 $ 16,952 22 $ 7,258 55 $ 24,210 December 31, 2014 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 11 $ 1,849 10 $ 5,608 21 $ 7,457 Commercial 7 8,359 - - 7 8,359 Construction 1 4,532 1 187 2 4,719 Installment 4 212 1 39 5 251 Commercial 8 2,783 5 1,621 13 4,404 Collateral - - - - - - Home equity line of credit - - 2 126 2 126 Revolving credit - - - - - - Resort 1 929 - - 1 929 Total 32 $ 18,664 19 $ 7,581 51 $ 26,245 The recorded investment balance of TDRs approximated $24.2 million and $26.2 million at December 31, 2015 and 2014, respectively. At December 31, 2015 and 2014, the majority of the Company’s TDRs are on accrual status. TDRs on accrual status were $17.0 million and $18.7 million while TDRs on nonaccrual status were $7.3 million and $7.6 million at December 31, 2015 and 2014, respectively. At December 31, 2015, 100% of the accruing TDRs have been performing in accordance with the restructured terms. At December 31, 2015 and 2014, the allowance for loan losses included specific reserves of $340,000 and $592,000 related to TDRs, respectively. For the years ended December 31, 2015 and 2014, the Bank had charge-offs totaling $296,000 and $1.3 million, 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 $272,000 and $206,000 at December 31, 2015 and 2014, 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 years ended December 31, 2015, 2014 and 2013: For the Year Ended December 31, 2015 (Dollars in thousands) Number of Recorded Recorded Troubled debt restructurings: Real estate Residential 8 $ 1,549 $ 1,520 Commercial 1 493 483 Installment 1 44 40 Commercial 3 133 128 Home equity line of credit 3 153 153 Total 16 $ 2,372 $ 2,324 For the Year Ended December 31, 2014 (Dollars in thousands) Number of Recorded Recorded Troubled debt restructurings: Real estate: Residential 10 $ 1,814 $ 1,744 Construction 1 4,532 4,532 Installment 2 56 55 Commercial 4 3,763 3,130 Total 17 $ 10,165 $ 9,461 For the Year Ended December 31, 2013 (Dollars in thousands) Number of Recorded Recorded Troubled debt restructurings: Real estate: Residential 7 $ 1,640 $ 1,617 Commercial 4 2,242 2,231 Construction 1 187 187 Installment 3 216 215 Commercial 6 2,076 2,101 Home equity line of credit 3 353 307 Total 24 $ 6,714 $ 6,658 (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 years ended December 31, 2015, 2014 and 2013: For the Year Ended December 31, 2015 (Dollars in thousands) Number of Extended Adjusted Combination Other Total Real estate: Residential 8 $ - $ - $ - $ 1,520 $ 1,520 Commercial 1 - - - 483 483 Installment 1 - - - 40 40 Commercial 3 - - 33 95 128 Home equity line of credit 3 - - - 153 153 Total 16 $ - $ - $ 33 $ 2,291 $ 2,324 For the Year Ended December 31, 2014 (Dollars in thousands) Number of Extended Adjusted Combination Other Total Real estate: Residential 10 $ - $ - $ 224 $ 1,520 $ 1,744 Construction 1 4,532 - - - 4,532 Installment 2 39 - - 16 55 Commercial 4 2,009 - - 1,121 3,130 Total 17 $ 6,580 $ - $ 224 $ 2,657 $ 9,461 For the Year Ended December 31, 2013 (Dollars in thousands) Number of Extended Adjusted Combination Other Total Real estate: Residential 7 $ - $ - $ 225 $ 1,392 $ 1,617 Commercial 4 2,095 - - 136 2,231 Construction 1 - - - 187 187 Installment 3 - - 34 181 215 Commercial 6 1,951 - - 150 2,101 Home equity line of credit 3 - - 14 293 307 Total 24 $ 4,046 $ - $ 273 $ 2,339 $ 6,658 A TDR is considered to be in re-default once it is more than 30 days past due following a modification. The following loans defaulted and had been modified as a TDR during the twelve month period preceding the default date during the years ended December 31, 2015, 2014 and 2013. For the Year Ended December 31, 2015 2014 2013 (Dollars in thousands) Number of Recorded Number of Recorded Number of Recorded Real estate: Residential 1 $ 314 2 $ 662 - $ - Commercial - - - - 2 1,758 Installment 1 31 - - - - Commercial - - 2 69 2 100 Home equity line of credit - - - - 1 183 Total 2 $ 345 4 $ 731 5 $ 2,041 (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. 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 December 31, 2015 and 2014: December 31, 2015 (Dollars in thousands) Pass Special Mention Substandard Doubtful Total Real estate: Residential $ 838,314 $ 1,154 $ 10,254 $ - $ 849,722 Commercial 867,531 10,861 9,039 - 887,431 Construction 26,176 - 4,719 - 30,895 Installment 2,886 52 32 - 2,970 Commercial 390,719 10,354 8,311 166 409,550 Collateral 1,647 - 21 - 1,668 Home equity line of credit 173,879 229 593 - 174,701 Revolving credit 91 - - - 91 Resort 784 - - - 784 Total Loans $ 2,302,027 $ 22,650 $ 32,969 $ 166 $ 2,357,812 December 31, 2014 (Dollars in thousands) Pass Special Mention Substandard Doubtful Total Real estate: Residential $ 815,209 $ 488 $ 11,308 $ - $ 827,005 Commercial 741,278 12,550 11,238 - 765,066 Construction 51,947 705 4,719 - 57,371 Installment 3,113 41 202 - 3,356 Commercial 285,185 14,754 9,557 212 309,708 Collateral 1,733 - - - 1,733 Home equity line of credit 168,238 302 1,228 - 169,768 Revolving credit 99 - - - 99 Resort 929 - - - 929 Total Loans $ 2,067,731 $ 28,840 $ 38,252 $ 212 $ 2,135,035 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, commercial business and resort 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. |