| Loans and Allowance | NOTE 3: Loans and Allowance The Company’s loan and allowance policies are as follows: Loans Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan. For all loan classes, the accrual of interest is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. For all loan classes, the entire balance of the loan is considered past due if the minimum payment contractually required to be paid is not received by the contractual due date. For all loan classes, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. Consistent with regulatory guidance, charge-offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. The Company’s policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined. For all loan portfolio segments except residential and consumer loans, the Company promptly charges-off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral. The Company charges-off residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge-down of 1-4 family first and junior lien mortgages to the net realizable value less costs to sell when the loan is 180 days past due, charge-off of unsecured open-end loans when the loan is 180 days past due, and charge down to the net realizable value when other secured loans are 120 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection will occur regardless of delinquency status, need not be charged off. For all for classes, all interest accrued but not collected for loans that are placed on nonaccrual or charged off are reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Company requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status. When cash payments are received on impaired loans in each loan class, the Company records the payment as interest income unless collection of the remaining recorded principal amount is doubtful, at which time payments are used to reduce the principal balance of the loan. Troubled debt restructured loans recognize interest income on an accrual basis at the renegotiated rate if the loan is in compliance with the modified terms. Allowance for Loan Losses The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectability 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 allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those 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 that loan. The general component covers non-impaired loans and is based on historical charge-off experience by segment. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the prior three years. Management believes the three year historical loss experience methodology is appropriate in the current economic environment. A loan is considered impaired when, based on current information and events, 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 based on the loan’s current payment status and the borrower’s financial condition including available sources of cash flows. Loans that experience insignificant payment 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 non-homogenous type loans such as commercial, non-owner residential and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. For impaired loans where the Company utilizes the discounted cash flows to determine the level of impairment, the Company includes the entire change in the present value of cash flows as bad debt expense. The fair values of collateral dependent impaired loans are based on independent appraisals of the collateral. In general, the Company acquires an updated appraisal upon identification of impairment and annually thereafter for commercial, commercial real estate and multi-family loans. If the most recent appraisal is over a year old, and a new appraisal is not performed, due to lack of comparable values or other reasons, the existing appraisal is utilized and discounted 25% - 35% based on the age of the appraisal, condition of the subject property, and overall economic conditions. After determining the collateral value as described, the fair value is calculated based on the determined collateral value less selling expenses. The potential for outdated appraisal values is considered in our determination of the allowance for loan losses through our analysis of various trends and conditions including the local economy, trends in charge-offs and delinquencies, etc. and the related qualitative adjustments assigned by the Company. Segments of loans with similar risk characteristics are collectively evaluated for impairment based on the segment’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower. Categories of loans include:
(Unaudited)
March 31, December 31,
2018 2017
(In Thousands)
Commercial $ 12,441 $ 11,572
Real estate loans
Residential 62,039 61,885
Commercial and multi-family 57,689 57,485
Construction 2,740 2,093
Second mortgages and equity lines of credit 6,318 6,594
Consumer loans
Indirect 86,291 86,109
Other 18,241 17,978
245,759 243,176
Less
Net deferred loan fees, premiums and discounts 108 112
Allowance for loan losses 2,972 2,745
Total loans $ 242,679 $ 240,859 The risk characteristics of each loan portfolio segment are as follows: Commercial Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Commercial and Multi-Family Real Estate These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial and multi-family real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial and multi-family real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial and multi-family real estate portfolio are diverse in terms of type and geographic location. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. Construction Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews and financial analysis of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing. Residential, Second mortgages and equity lines of credit and Consumer With respect to residential loans that are secured by 1-4 family residences, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Second mortgages and equity lines of credit loans are typically secured by a subordinate interest in 1-4 family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers. The following presents by portfolio segment, the activity in the allowance for loan losses for the three months ended March 31, 2018 (unaudited) and 2017 (unaudited).
(Unaudited)
Real Estate
Commercial Residential Commercial Construction Seconds Consumer Total
(In Thousands)
Three Months Ended March 31, 2018:
Balance, beginning of year $ 303 $ 191 $ 886 $ 2 $ 10 $ 1,353 $ 2,745
Provision for losses 253 19 (10 ) 1 (1 ) 293 555
Recoveries on loans — 15 — — — 32 47
Loans charged off — (27 ) (1 ) — — (347 ) (375 )
Balance, end of period $ 556 $ 198 $ 875 $ 3 $ 9 $ 1,331 $ 2,972
Three Months Ended March 31, 2017:
Balance, beginning of year $ 247 $ 329 $ 670 $ — $ — $ 1,031 $ 2,277
Provision for losses 4 10 47 1 2 294 358
Recoveries on loans — 1 — — — 60 61
Loans charged off — (42 ) (32 ) — — (300 ) (374 )
Balance, end of period $ 251 $ 298 $ 685 $ 1 $ 2 $ 1,085 $ 2,322 The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of March 31, 2018 (unaudited) and December 31, 2017:
March 31, 2018
Real Estate
Commercial Residential Commercial Construction Seconds and Consumer Total
(In Thousands)
Allowance:
Balance, end of period $ 556 $ 198 $ 875 $ 3 $ 9 $ 1,331 $ 2,972
Individually evaluated for impairment 461 - 556 - - - 1,017
Collectivity evaluated for impairment 95 198 319 3 9 1,331 1,955
Loans:
Ending balance $ 12,441 $ 62,039 $ 57,689 $ 2,740 $ 6,318 $ 104,532 $ 245,759
Individually evaluated for impairment 810 - 1,598 - - - 2,408
Collectivity evaluated for impairment 11,631 62,039 56,091 2,740 6,318 104,532 243,351
December 31, 2017
Real Estate
Commercial Residential Commercial Construction Seconds and Consumer Total
(In Thousands)
Allowance:
Balance, end of year $ 303 $ 191 $ 886 $ 2 $ 10 $ 1,353 $ 2,745
Individually evaluated for impairment 214 - 556 - - - 770
Collectivity evaluated for impairment 89 191 330 2 10 1,353 1,975
Loans:
Ending balance $ 11,572 $ 61,885 $ 57,485 $ 2,093 $ 6,594 $ 104,087 $ 243,716
Individually evaluated for impairment 814 - 1,605 - - - 2,419
Collectivity evaluated for impairment 10,758 61,885 55,880 2,093 6,594 104,087 241,297 The following tables present the credit risk profile of the Bank’s loan portfolio based on rating category and payment activity as of March 31, 2018 (unaudited) and December 31, 2017:
(Unaudited)
Real Estate
Commercial Residential Commercial Construction Seconds Consumer Total
(In Thousands)
Pass $ 11,483 $ 61,716 $ 53,096 $ 2,740 $ 6,318 $ 104,532 $ 239,885
Watch 148 — 990 — — — 1,138
Special Mention — 323 2,005 — — — 2,328
Substandard 810 –– 1,598 — — — 2,408
Doubtful — — — — — — —
Loss — — — — — — —
Total $ 12,441 $ 62,039 $ 57,689 $ 2,740 $ 6,318 $ 104,532 $ 245,759
December 31, 2017
Real Estate
Commercial Residential Commercial Construction Seconds Consumer Total
(In Thousands)
Pass $ 10,601 $ 61,561 $ 52,873 $ 2,093 $ 6,594 $ 104,087 $ 237,809
Watch 157 –– 992 — — — 1,149
Special Mention –– 324 2,015 — –– — 2,339
Substandard 814 –– 1,605 — — –– 2,419
Doubtful –– — — — — — ––
Loss — — — — –– — ––
Total $ 11,572 $ 61,885 $ 57,485 $ 2,093 $ 6,594 $ 104,087 $ 243,716 The Company generally categorizes all classes of loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Generally, smaller dollar consumer loans are excluded from this grading process and are reflected in the Pass category. The delinquency trends of these consumer loans are monitored on homogeneous basis and the related delinquent amounts are reflected in the aging analysis table below. The Company uses the following definitions for risk ratings: The Pass asset quality rating encompasses assets that have generally performed as expected. With the exception of some smaller consumer and residential loans, these assets generally do not have delinquency. Loans assigned this rating include loans to borrowers possessing solid credit quality with acceptable risk. Borrowers in these grades are differentiated from higher grades on the basis of size (capital and/or revenue), leverage, asset quality, stability of the industry or specific market area and quality/coverage of collateral. These borrowers generally have a history of consistent earnings and reasonable leverage. The Watch asset quality rating encompasses assets that have been brought to the attention of management and may, if not corrected, warrant a more serious quality rating by management. These assets are usually in the first phase of a deficiency situation and may possess similar criteria as Special Mention assets. This grade includes “pass grade” loans to borrowers which require special monitoring because of deteriorating financial results, declining credit ratings, decreasing cash flow, increasing leverage, marginal collateral coverage or industry stress that has resulted or may result in a changing overall risk profile. The Special Mention asset quality rating encompasses assets that have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. This grade is intended to include loans to borrowers whose credit quality has clearly deteriorated and where risk of further decline is possible unless active measures are taken to correct the situation. Weaknesses are considered potential at this state and are not yet fully defined. The Substandard asset quality rating encompasses assets that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any; assets having a well-defined weakness(es) based upon objective evidence; assets characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected; or the possibility that liquidation will not be timely. Loans categorized in this grade possess a well-defined credit weakness and the likelihood of repayment from the primary source is uncertain. Significant financial deterioration has occurred and very close attention is warranted to ensure the full repayment without loss. Collateral coverage may be marginal and the accrual of interest has been suspended. The Doubtful asset quality rating encompasses assets that have all of the weaknesses of those classified as Substandard. In addition, these weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The Loss asset quality rating encompasses assets that are considered uncollectible and of such little value that their continuance as assets of the bank is not warranted. A loss classification does not mean that an asset has no recovery or salvage value; instead, it means that it is not practical or desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be realized in the future. The Company evaluates the loan grading system definitions and allowance for loan loss methodology on an ongoing basis. No significant changes were made to either during 2018. The following table presents the Bank’s loan portfolio aging analysis as of March 31, 2018 (unaudited) and December 31, 2017:
March 31, 2018
Real Estate
Commercial Residential Commercial Construction Seconds Consumer Total
(In Thousands)
30-59 days past due $ 11 $ 374 $ 39 $ - $ 2 $ 1,272 $ 1,698
60-89 days past due - 70 - - 20 630 720
Greater than 90 days past due 3 275 - - - 531 809
Total past due 14 719 39 - 22 2,433 3,227
Current 12,427 61,320 57,650 2,740 6,296 102,099 242,532
Total loans $ 12,441 $ 62,039 $ 57,689 $ 2,740 $ 6,318 $ 104,532 $ 245,759
Nonaccrual loans $ - $ 114 $ - $ - $ - $ - $ 114
Past due 90 days and accruing 3 161 - - - 531 695
Total $ 3 $ 275 $ - $ - $ - $ 531 $ 809
December 31, 2017
Real Estate
Commercial Residential Commercial Construction Seconds Consumer Total
30-59 days past due $ 10 $ 378 $ - $ - $ 57 $ 1,536 $ 1,981
60-89 days past due - 18 39 - 472 529
Greater than 90 days and accruing - 149 8 - 666 823
Total past due 10 545 47 - 57 2,674 3,333
Current 11,562 61,340 57,438 2,093 6,537 101,413 240,383
Total loans $ 11,572 $ 61,885 $ 57,485 $ 2,093 $ 6,594 $ 104,087 $ 243,716
Nonaccrual loans $ - $ 115 $ 8 $ - $ - $ - $ 123
Past due 90 days and accruing - 34 - - - 666 700
Total $ - $ 149 $ 8 $ - $ - $ 666 $ 823 A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings 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, forgiveness of principal, forbearance or other actions intended to maximize collection. The following table presents impaired loans and specific valuation allowance based on class level at March 31, 2018 (unaudited) and for the year ended December 31, 2017:
March 31, 2018
Real Estate
Commercial Residential Commercial and Construction Seconds and Consumer Total
(In Thousands)
Impaired loans without a specific allowance:
Recorded investment $ 72 $ - $ 810 $ - $ - $ - $ 882
Unpaid principal balance 72 - 810 - - - 882
Impaired loans with a specific allowance:
Recorded investment 738 - 788 - - - 1,526
Unpaid principal balance 738 - 788 - - - 1,526
Specific allowance 461 - 556 - - - 1,017
Total impaired loans:
Recorded investment 810 - 1,598 - - - 2,408
Unpaid principal balance 810 - 1,598 - - - 2,408
Specific allowance 461 - 556 - - - 1,017
December 31, 2017
Real Estate
Commercial Residential Commercial and Construction Seconds and Consumer Total
(In Thousands)
Impaired loans without a specific allowance:
Recorded investment $ 76 $ - $ 812 $ - $ - $ - $ 888
Unpaid principal balance 76 - 812 - - - 888
Impaired loans with a specific allowance:
Recorded investment 738 - 793 - - - 1,531
Unpaid principal balance 738 - 793 - - - 1,531
Specific allowance 214 - 556 - - - 770
Total impaired loans:
Recorded investment 814 - 1,605 - - - 2,419
Unpaid principal balance 814 - 1,605 - - - 2,419
Specific allowance 214 - 556 - - - 770 The following presents by portfolio segment, information related to the average recorded investment and interest income recognized on impaired loans for the three months ended March 31, 2018 (unaudited) and 2017 (unaudited):
(Unaudited)
Real Estate
Commercial Residential Commercial Construction Seconds Consumer Total
(In Thousands)
Three Months Ended March 31, 2018:
Total impaired loan:
Average recorded investment $ 812 $ — $ 1,601 $ –– $ –– $ –– $ 2,413
Interest income recognized 12 — 22 –– –– –– 34
Interest income recognized on a cash basis — — –– –– –– –– ––
(Unaudited)
Real Estate
Commercial Residential Commercial Construction Seconds Consumer Total
(In Thousands)
Three Months Ended March 31, 2017:
Total impaired loan:
Average recorded investment $ 2,287 $ –– $ 1,787 $ –– $ –– $ –– $ 4,074
Interest income recognized 52 — 20 –– –– –– 72
Interest income recognized on a cash basis — — –– –– –– –– –– Troubled Debt Restructurings In the course of working with borrowers, the Company may choose to restructure the contractual terms of certain loans. In restructuring the loan, the Company attempts to work out an alternative payment schedule with the borrower in order to optimize collectability of the loan. Any loans that are modified, whether through a new agreement replacing the old or via changes to an existing loan agreement, are reviewed by the Company to identify if a troubled debt restructuring (“TDR”) has occurred. A troubled debt restructuring occurs when, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status, and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two. If such efforts by the Company do not result in a satisfactory arrangement, the loan is referred to legal counsel, at which time foreclosure proceedings are initiated. At any time prior to a sale of the property at foreclosure, the Company may terminate foreclosure proceedings if the borrower is able to work out a satisfactory payment plan. Nonaccrual loans, including TDRs that have not met the six month minimum performance criterion, are reported in this report as non-performing loans. For all loan classes, it is the Company’s policy to have any restructured loans which are on nonaccrual status prior to being restructured remain on nonaccrual status until six months of satisfactory borrower performance, at which time management would consider its return to accrual status. A loan is generally classified as nonaccrual when the Company believes that receipt of principal and interest is questionable under the terms of the loan agreement. Most generally, this is at 90 or more days past due. If the restructured loan is on accrual status prior to being restructured, it is reviewed to determine if the restructured loan should remain on accrual status. Loans that are considered TDR are classified as performing, unless they are on nonaccrual status or greater than 90 days past due, as of the end of the most recent quarter. With regard to determination of the amount of the allowance for credit losses, all accruing restructured loans are considered to be impaired. As a result, the determination of the amount of impaired loans for each portfolio segment within troubled debt restructurings is the same as detailed previously above. During the three months ended March 31, 2018 (unaudited) and 2017 (unaudited), there were no new restructurings classified as TDRs. No loans restructured during the last twelve months defaulted during the three months ended March 31, 2018 and 2017. At March 31, 2018 and December 31, 2017, there were $230,000 and $126,000 respectively of residential real estate loans in process of foreclosure. |
