Loans Held for Sale, Loans and Allowance for Loan Losses | 6 Months Ended |
Jun. 30, 2014 |
Loans Held for Sale, Loans and Allowance for Loan Losses | ' |
Note 5 – Loans Held for Sale, Loans and Allowance for Loan Losses |
Loans Held for Sale |
In its normal course of business, the Bank originates mortgage loans held for sale for the Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”). The Bank has elected to measure its residential mortgage loans held for sale at the lower of cost or market. Origination fees and costs are recognized in earnings at the time of origination for newly originated loans held for sale, and the loans are sold to Freddie Mac at par, so there is no gain or loss reported in earnings. |
During the six months ended June 30, 2014, the Bank has originated approximately $11.2 million and sold approximately $11.2 million. |
Loans |
Outstanding loan balances are presented net of unearned income, deferred loan fees, and unamortized discount and premium. Loans subject to FASB ASC 310-30 are presented net of the related accretable yield and nonaccretable difference. |
The loan portfolio consisted of the following at: |
|
| June 30, 2014 | | December 31, 2013 | | | | |
| Amount | | Percent | | Amount | | Percent | | | | |
| (Dollars in thousands) | | | | |
Commercial | | | | | | | | | | | | | | | | | |
Commercial & industrial | $ | 197,824 | | | 21.6 | % | | $ | 183,364 | | | 21 | % | | | | |
Commercial mortgage | | 391,877 | | | 42.7 | % | | | 380,454 | | | 43.4 | % | | | | |
Commercial construction | | 11,696 | | | 1.3 | % | | | 697 | | | 0.1 | % | | | | |
Total commercial | | 601,397 | | | 65.6 | % | | | 564,515 | | | 64.5 | % | | | | |
Consumer | | | | | | | | | | | | | | | | | |
Residential mortgage | | 147,360 | | | 16.1 | % | | | 152,757 | | | 17.5 | % | | | | |
Home equity | | 1,037 | | | 0.1 | % | | | 1,039 | | | 0.1 | % | | | | |
Automobile | | 13,412 | | | 1.5 | % | | | 7,269 | | | 0.8 | % | | | | |
Other consumer loans1 | | 153,908 | | | 16.8 | % | | | 149,593 | | | 17.1 | % | | | | |
Total consumer | | 315,717 | | | 34.4 | % | | | 310,658 | | | 35.5 | % | | | | |
Gross loans | | 917,114 | | | 100 | % | | | 875,173 | | | 100 | % | | | | |
Deferred fee (income) costs, net | | (2,472 | ) | | | | | | (2,213 | ) | | | | | | | |
Allowance for loan losses | | (12,645 | ) | | | | | | (12,077 | ) | | | | | | | |
Loans, net | $ | 901,997 | | | | | | $ | 860,883 | | | | | | | | |
|
1 | Comprised of other revolving credit, installment loans, and overdrafts. | | | | | | | | | | | | | | | | |
At June 30, 2014, total gross loans increased by $41.9 million to $917.1 million from $875.2 million at December 31, 2013. The increase in loans was largely attributed to a $36.9 million increase in commercial loans to $601.4 million at June 30, 2014, from $564.5 million at December 31, 2013. The increases in commercial loans were primarily due to new loan bookings in Guam and in the California region. The increase in commercial loans was due to a $14.5 million growth in the commercial and industrial loan portfolio, supplemented by the $11.4 million increase in commercial mortgage loans, and by the $11.0 million increase in commercial construction loans. There was a $5.1 million increase in consumer loans to $315.7 million at June 30, 2014, up from $310.7 million at December 31, 2013. The increase in consumer loans was principally due to the $6.1 million growth in automobile loans as the result of greater dealer loan activity and the $4.3 million increase in other consumer loans, partially offset by a net decrease of $5.4 million in residential mortgage loans that were paid off or paid down. |
Allowance for Loan Losses |
The allowance for loan losses is evaluated on a quarterly basis by Bank management, and is based upon management’s periodic review of the collectability of 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 or conditions change. |
The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. FASB ASC 310-10 defines an impaired loan as one for which there is uncertainty concerning collection of all principal and interest per the contractual terms of the loan. For those loans that are classified as impaired, an allowance is established when the discounted cash flow (or the collateral value or the observable market price) of the impaired loan is lower than the carrying value of the loan. The general component of the allowance covers unimpaired loans, and is estimated using a loss migration analysis based on historical charge-off experience and expected loss, given the default probability derived from the Bank’s internal risk rating process. The loss migration analysis tracks a certain number of quarters of loan loss history and industry loss factors to determine historical losses by classification category for each loan type, except certain consumer loans. These calculated loss factors are then applied to outstanding loan balances for all loans on accrual designated as “Pass,” “Special Mention,” “Substandard” or “Doubtful” (“classified loans” or “classification categories”). Additionally, a qualitative factor that is determined utilizing external economic factors and internal assessments is applied to each homogeneous loan pool. We also conduct individual loan review analyses, as part of the allowance for loan loss allocation process, applying specific monitoring policies and procedures in analyzing the existing loan portfolio. |
Credit Quality Indicators |
The Bank uses several credit quality indicators to manage credit risk, including an internal credit risk rating system that categorizes loans into pass, special mention, substandard, doubtful or loss categories. Credit risk ratings are applied individually to those classes of loans that have significant or unique credit characteristics and that benefit from a case-by-case evaluation. These are typically loans to businesses or individuals in the classes which comprise the commercial portfolio segment. Groups of loans that are underwritten and structured using standardized criteria and characteristics, such as statistical models (e.g., credit scoring or payment performance), are typically risk-rated and monitored collectively. These are typically loans to individuals in the classes which comprise the consumer portfolio segment. |
The following are the definitions of the Bank’s credit quality indicators: |
Pass (A): Exceptional: Essentially risk-free credit. These are loans of the highest quality that pose virtually no risk of loss to the Bank. This includes loans fully collateralized by means of a savings account(s) and time certificate(s) of deposit, and by at least 110% of the loan amount. Borrowers should have strong financial statements, good liquidity and excellent credit. |
Pass (B): Standard: Multiple “strong sources of repayment”. These are loans to strong borrowers with a demonstrated history of financial and managerial performance. The risk of loss is considered to be low. Loans are well-structured, with clearly identified primary and readily available secondary sources of repayment. These loans may also be secured by an equal amount of funds in a savings account or time certificate of deposit. These loans may be secured by marketable collateral whose value can be reasonably determined through outside appraisals. The borrower characteristically has a very strong cash flow and relatively low leverage. |
Pass (C): Acceptable: “Good” primary and secondary sources of repayment. These are loans to borrowers of average financial strength, stability and management expertise. The borrower should be a well-established individual or company with adequate financial resources to withstand short-term fluctuations in the marketplace. The borrower’s financial ratios and trends are favorable. The loans may be unsecured or supported by non-real estate collateral for which the value is more difficult to determine, represent a reasonable credit risk and require an average amount of account officer attention. The borrower’s ability to repay unsecured credit is to be of unquestionable strength. |
Pass (D): Monitor: “Sufficient” primary source of repayment and an acceptable secondary source of repayment. Acceptable business or individual credit, but the borrower’s operations, cash flow or financial conditions evidence average levels of risk. These loans are considered to be collectable in full, but may require a greater-than-average amount of loan officer attention. Borrowers are capable of absorbing normal setbacks without failing to meet the terms of the loan agreement. |
Special Mention: A Special Mention asset has potential weaknesses that deserve close monitoring. These potential weaknesses may result in a 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. The Special Mention classification should neither be a compromise between a pass grade and substandard, nor should it be a “catch all” grade to identify any loan that has a policy exception. |
Substandard: A substandard asset is inadequately protected by the current sound worth and payment capacity of the obligor or the collateral pledged. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Assets classified as substandard are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. |
Formula Classified: Formula classified loans are all loans and credit cards delinquent 90 days and over which have yet to be formally classified Special Mention, Substandard or Doubtful by the Bank’s Loan Committee. In most instances, the monthly formula total is comprised primarily of real estate loans, consumer loans and credit cards. Commercial loans are typically formally classified by the Loan Committee no later than their 90-day delinquency, and thus do not become part of the formula classification. Real estate loans 90-days delinquent are in the foreclosure process, which is typically completed within another 60 days, and thus are not formally classified during this period. |
Doubtful: A loan with weaknesses well enough defined that eventual repayment in full, on the basis of currently existing facts, conditions and values, is highly questionable, even though certain factors may be present which could improve the status of the loan. The probability of some loss is extremely high, but because of certain known factors that may work to the advantage of strengthening of the assets (i.e. capital injection, perfecting liens on additional collateral, refinancing plans, etc.), its classification as an estimated loss is deferred until its more exact status can be determined. |
Loss: Loans classified as “Loss” are considered uncollectible, and are either unsecured or are supported by collateral that is of little to no value. As such, their continuance as recorded assets is not warranted. While this classification does not mandate that a loan has no ultimate recovery value, losses should be taken in the period during which these loans are deemed to be uncollectible. Loans identified as loss are immediately approved for charge-off. The Bank may refer loans to outside collection agencies, attorneys, or its internal collection division to continue collection efforts. Any subsequent recoveries are credited to the Allowance for Loan Losses. |
Set forth below is a summary of the Bank’s activity in the allowance for loan losses during the three and six months ended June 30, 2014, and the year ended December 31, 2013: |
|
| Three Months Ended | | Six Months Ended | | Year Ended | | | | | | |
June 30, 2014 | June 30, 2014 | December 31, 2013 | | | | | | |
| (Dollars in thousands) | | | | | | |
Balance, beginning of period | $ | 12,458 | | | $ | 12,077 | | | $ | 12,228 | | | | | | | |
Provision for loan losses | | 900 | | | | 1,800 | | | | 2,095 | | | | | | | |
Recoveries on loans previously charged off | | 434 | | | | 885 | | | | 1,814 | | | | | | | |
Charged off loans | | (1,147 | ) | | | (2,117 | ) | | | (4,060 | ) | | | | | | |
Balance, end of period | $ | 12,645 | | | $ | 12,645 | | | $ | 12,077 | | | | | | | |
|
Set forth below is information regarding loan balances and the related allowance for loan losses, by portfolio type, for the three- and six-month periods ended June 30, 2014, and the year ended December 31, 2013, respectively. |
|
| Commercial | | Residential | | Consumer | | Total | | |
Mortgages | | |
| (Dollars in thousands) | | |
Six Months Ended June 30, 2014 | | | | | | | | | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | | | | | | | | | |
Balance at beginning of period | $ | 5,987 | | | $ | 922 | | | $ | 5,168 | | | $ | 12,077 | | | |
Charge-offs | | (266 | ) | | | (58 | ) | | | (1,793 | ) | | | (2,117 | ) | | |
Recoveries | | 167 | | | | 15 | | | | 703 | | | | 885 | | | |
Provision | | 302 | | | | 130 | | | | 1,368 | | | | 1,800 | | | |
Balance at end of period | $ | 6,190 | | | $ | 1,009 | | | $ | 5,446 | | | $ | 12,645 | | | |
| | | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2014 | | | | | | | | | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | | | | | | | | | |
Balance at beginning of quarter | $ | 6,249 | | | $ | 695 | | | $ | 5,514 | | | $ | 12,458 | | | |
Charge-offs | | (107 | ) | | | (39 | ) | | | (1,001 | ) | | | (1,147 | ) | | |
Recoveries | | 12 | | | | 12 | | | | 410 | | | | 434 | | | |
Provision | | 36 | | | | 341 | | | | 523 | | | | 900 | | | |
Balance at end of quarter | $ | 6,190 | | | $ | 1,009 | | | $ | 5,446 | | | $ | 12,645 | | | |
| | | | | | | | | | | | | | | | | |
Allowance balance at end of quarter related to: | | | | | | | | | | | | | | | | | |
Loans individually evaluated for impairment | $ | - | | | $ | - | | | $ | - | | | $ | - | | | |
Loans collectively evaluated for impairment | $ | 6,190 | | | $ | 1,009 | | | $ | 5,446 | | | $ | 12,645 | | | |
| | | | | | | | | | | | | | | | | |
Loan balances at end of quarter: | | | | | | | | | | | | | | | | | |
Loans individually evaluated for impairment | $ | 12,998 | | | $ | 8,800 | | | $ | 133 | | | $ | 21,931 | | | |
Loans collectively evaluated for impairment | | 588,399 | | | | 139,597 | | | | 167,187 | | | | 895,183 | | | |
Ending Balance | $ | 601,397 | | | $ | 148,397 | | | $ | 167,320 | | | $ | 917,114 | | | |
| | | | | | | | | | | | | | | | | |
Year Ended December 31, 2013 | | | | | | | | | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | | | | | | | | | |
Balance at beginning of year | $ | 6,251 | | | $ | 1,453 | | | $ | 4,524 | | | $ | 12,228 | | | |
Charge-offs | | (470 | ) | | | (168 | ) | | | (3,422 | ) | | | (4,060 | ) | | |
Recoveries | | 116 | | | | 143 | | | | 1,555 | | | | 1,814 | | | |
Provision | | 90 | | | | (506 | ) | | | 2,511 | | | | 2,095 | | | |
Balance at end of year | $ | 5,987 | | | $ | 922 | | | $ | 5,168 | | | $ | 12,077 | | | |
| | | | | | | | | | | | | | | | | |
Allowance balance at end of year related to: | | | | | | | | | | | | | | | | | |
Loans individually evaluated for impairment | $ | - | | | $ | - | | | $ | - | | | $ | - | | | |
Loans collectively evaluated for impairment | $ | 5,987 | | | $ | 922 | | | $ | 5,168 | | | $ | 12,077 | | | |
| | | | | | | | | | | | | | | | | |
Loan balances at end of year: | | | | | | | | | | | | | | | | | |
Loans individually evaluated for impairment | $ | 10,239 | | | $ | 6,412 | | | $ | 195 | | | $ | 16,846 | | | |
Loans collectively evaluated for impairment | | 554,276 | | | | 147,384 | | | | 156,667 | | | | 858,327 | | | |
Ending Balance | $ | 564,515 | | | $ | 153,796 | | | $ | 156,862 | | | $ | 875,173 | | | |
|
Impairment is measured on a loan-by-loan basis for commercial and real estate 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). Large groups of smaller-balance homogeneous loans are collectively evaluated for impairment. The Bank performs direct write-downs of impaired loans with a charge to the allocated component of the allowance, therefore reducing the allocated component of the allowance to zero at the end of each reporting period. 0 |
Credit Quality |
The following table provides a summary of the delinquency status of the Bank’s loans by portfolio type: |
|
| 30-59 Days | | 60-89 Days | | 90 Days and | | Total Past | | Current | | Total Loans |
Past Due | Past Due | Greater | Due | Outstanding |
| (Dollars in thousands) |
June 30, 2014 | | | | | | | | | | | | | | | | | |
Commercial | | | | | | | | | | | | | | | | | |
Commercial & industrial | $ | 3,981 | | $ | 832 | | $ | 483 | | $ | 5,296 | | $ | 192,528 | | $ | 197,824 |
Commercial mortgage | | 347 | | | 2,137 | | | 1,781 | | | 4,265 | | | 387,612 | | | 391,877 |
Commercial construction | | - | | | - | | | - | | | - | | | 11,696 | | | 11,696 |
Total commercial | | 4,328 | | | 2,969 | | | 2,264 | | | 9,561 | | | 591,836 | | | 601,397 |
| | | | | | | | | | | | | | | | | |
Consumer | | | | | | | | | | | | | | | | | |
Residential mortgage | | 4,862 | | | 9,060 | | | 4,414 | | | 18,336 | | | 129,024 | | | 147,360 |
Home equity | | - | | | 16 | | | - | | | 16 | | | 1,021 | | | 1,037 |
Automobile | | 176 | | | 8 | | | - | | | 184 | | | 13,228 | | | 13,412 |
Other consumer 1 | | 2,494 | | | 1,197 | | | 1,130 | | | 4,821 | | | 149,087 | | | 153,908 |
Total consumer | | 7,532 | | | 10,281 | | | 5,544 | | | 23,357 | | | 292,360 | | | 315,717 |
Total | $ | 11,860 | | $ | 13,250 | | $ | 7,808 | | $ | 32,918 | | $ | 884,196 | | $ | 917,114 |
| | | | | | | | | | | | | | | | | |
December 31, 2013 | | | | | | | | | | | | | | | | | |
Commercial | | | | | | | | | | | | | | | | | |
Commercial & industrial | $ | 159 | | $ | 191 | | $ | 217 | | $ | 567 | | $ | 182,797 | | $ | 183,364 |
Commercial mortgage | | 201 | | | 771 | | | 4,659 | | | 5,631 | | | 374,823 | | | 380,454 |
Commercial construction | | - | | | - | | | - | | | - | | | 697 | | | 697 |
Total commercial | | 360 | | | 962 | | | 4,876 | | | 6,198 | | | 558,317 | | | 564,515 |
| | | | | | | | | | | | | | | | | |
Consumer | | | | | | | | | | | | | | | | | |
Residential mortgage | | 10,663 | | | 4,742 | | | 3,887 | | | 19,292 | | | 133,465 | | | 152,757 |
Home equity | | - | | | - | | | - | | | - | | | 1,039 | | | 1,039 |
Automobile | | 178 | | | 13 | | | 13 | | | 204 | | | 7,065 | | | 7,269 |
Other consumer 1 | | 2,143 | | | 1,215 | | | 993 | | | 4,351 | | | 145,242 | | | 149,593 |
Total consumer | | 12,984 | | | 5,970 | | | 4,893 | | | 23,847 | | | 286,811 | | | 310,658 |
Total | $ | 13,344 | | $ | 6,932 | | $ | 9,769 | | $ | 30,045 | | $ | 845,128 | | $ | 875,173 |
|
1 | Comprised of other revolving credit, installment loans, and overdrafts. | | | | | | | | | | | | | | | | |
Generally, the accrual of interest on a loan is discontinued when principal or interest payments become more than 90 days past due, unless management believes the loan is adequately collateralized and is in the process of collection. When a loan is placed on non-accrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of cash are applied as principal reductions when received, except when the ultimate collectability of principal is probable, in which case interest payments are credited to income. Non-accrual loans may be restored to accrual status when principal and interest become current and full repayment is expected. The following table provides information as of June 30, 2014, and December 31, 2013, with respect to loans on non-accrual status, by portfolio type: |
|
| June 30, 2014 | | December 31, 2013 | | | | | | | | | | | | |
| (Dollars in thousands) | | | | | | | | | | | | |
Non-accrual loans: | | | | | | | | | | | | | | | | | |
Commercial | | | | | | | | | | | | | | | | | |
Commercial & industrial | $ | 504 | | $ | 343 | | | | | | | | | | | | |
Commercial mortgage | | 6,464 | | | 6,344 | | | | | | | | | | | | |
Total commercial | | 6,968 | | | 6,687 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Consumer | | | | | | | | | | | | | | | | | |
Residential mortgage | | 7,865 | | | 6,351 | | | | | | | | | | | | |
Home equity | | 71 | | | 62 | | | | | | | | | | | | |
Other consumer 1 | | 133 | | | 195 | | | | | | | | | | | | |
Total consumer | | 8,069 | | | 6,608 | | | | | | | | | | | | |
Total non-accrual loans | $ | 15,037 | | $ | 13,295 | | | | | | | | | | | | |
1 | Comprised of other revolving credit, installment loans, and overdrafts. | | | | | | | | | | | | | | | | |
The Bank classifies its loan portfolios using internal credit quality ratings, as discussed above under Allowance for Loan Losses. The following table provides a summary of loans by portfolio type and the Bank’s internal credit quality ratings as of June 30, 2014, and December 31, 2013. |
|
| June 30, 2014 | | December 31, 2013 | | Increase (Decrease) | | | | | | | | |
| (Dollars in thousands) | | | | | | | | |
Pass: | | | | | | | | | | | | | | | | | |
Commercial & industrial | $ | 187,598 | | $ | 170,388 | | $ | 17,210 | | | | | | | | | |
Commercial mortgage | | 362,655 | | | 349,906 | | | 12,749 | | | | | | | | | |
Commercial construction | | 11,696 | | | 697 | | | 10,999 | | | | | | | | | |
Residential mortgage | | 142,649 | | | 148,825 | | | (6,176 | ) | | | | | | | | |
Home equity | | 1,037 | | | 1,039 | | | (2 | ) | | | | | | | | |
Automobile | | 13,412 | | | 7,256 | | | 6,156 | | | | | | | | | |
Other consumer | | 152,962 | | | 148,757 | | | 4,205 | | | | | | | | | |
Total pass loans | $ | 872,009 | | $ | 826,868 | | $ | 45,141 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Special Mention: | | | | | | | | | | | | | | | | | |
Commercial & industrial | $ | 6,354 | | $ | 9,571 | | $ | (3,217 | ) | | | | | | | | |
Commercial mortgage | | 17,910 | | | 20,850 | | | (2,940 | ) | | | | | | | | |
Commercial construction | | - | | | - | | | - | | | | | | | | | |
Residential mortgage | | - | | | - | | | - | | | | | | | | | |
Home equity | | - | | | - | | | - | | | | | | | | | |
Automobile | | - | | | - | | | - | | | | | | | | | |
Other consumer | | - | | | - | | | - | | | | | | | | | |
Total special mention loans | $ | 24,264 | | $ | 30,421 | | $ | (6,157 | ) | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Substandard: | | | | | | | | | | | | | | | | | |
Commercial & industrial | $ | 3,562 | | $ | 3,360 | | $ | 202 | | | | | | | | | |
Commercial mortgage | | 11,258 | | | 9,384 | | | 1,874 | | | | | | | | | |
Commercial construction | | - | | | - | | | - | | | | | | | | | |
Residential mortgage | | 271 | | | 76 | | | 195 | | | | | | | | | |
Home equity | | - | | | - | | | - | | | | | | | | | |
Automobile | | - | | | - | | | - | | | | | | | | | |
Other consumer | | - | | | - | | | - | | | | | | | | | |
Total substandard loans | $ | 15,091 | | $ | 12,820 | | $ | 2,271 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Formula Classified: | | | | | | | | | | | | | | | | | |
Commercial & industrial | $ | 310 | | $ | 45 | | $ | 265 | | | | | | | | | |
Commercial mortgage | | 54 | | | 314 | | | (260 | ) | | | | | | | | |
Commercial construction | | - | | | - | | | - | | | | | | | | | |
Residential mortgage | | 4,440 | | | 3,856 | | | 584 | | | | | | | | | |
Home equity | | - | | | - | | | - | | | | | | | | | |
Automobile | | 946 | | | 13 | | | 933 | | | | | | | | | |
Other consumer | | - | | | 836 | | | (836 | ) | | | | | | | | |
Total formula classified loans | $ | 5,750 | | $ | 5,064 | | $ | 686 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Doubtful: | | | | | | | | | | | | | | | | | |
Commercial & industrial | $ | - | | $ | - | | $ | - | | | | | | | | | |
Commercial mortgage | | - | | | - | | | - | | | | | | | | | |
Commercial construction | | - | | | - | | | - | | | | | | | | | |
Residential mortgage | | - | | | - | | | - | | | | | | | | | |
Home equity | | - | | | - | | | - | | | | | | | | | |
Automobile | | - | | | - | | | - | | | | | | | | | |
Other consumer | | - | | | - | | | - | | | | | | | | | |
Total doubtful loans | $ | - | | $ | - | | $ | - | | | | | | | | | |
Total outstanding loans, gross | $ | 917,114 | | $ | 875,173 | | $ | 41,941 | | | | | | | | | |
|
The disaggregation of the portfolio by risk rating in the table reflects the following changes between June 30, 2014, and December 31, 2013: |
— | Loans rated “pass” increased by $45.1 million to $872.0 million at June 30, 2014, up from $826.9 million at December 31, 2013. The increase is primarily in commercial and industrial loans, which grew by $17.2 million. This is due to various large loans originated in the California region and Guam. These were supplemented by an increase in commercial mortgage loans by $12.7 million, and increase in commercial construction loans by $11.0 million due to disbursements of new loans, an increase in automobile loans by $6.2 million and an increase in other consumer loans by $4.2 million due to new dealer loan bookings and promotional programs. Residential mortgages decreased by $6.2 million due to loan payoffs and pay downs. | | | | | | | | | | | | | | | | |
— | The “special mention” category was $6.2 million lower at June 30, 2014, than at December 31, 2013. This is attributed to a drop in special mention commercial & industrial loans by $3.2 million, primarily as a result of $3.0 million in loan payoffs and the downgrade of a $238 thousand loan relationship from “special mention” to “substandard.” In addition, special mention commercial mortgage loans dropped by $2.9 million primarily due to the upgrade of two loan relationships totaling $3.1 million from “special mention” to “pass,” the downgrade of one loan relationship of $2.5 million from “special mention” to “substandard,” and loan payoffs, offset by newly classified commercial mortgage loans. | | | | | | | | | | | | | | | | |
— | Loans classified as “substandard” increased by $2.3 million to $15.1 million at June 30, 2014, from $12.8 million at December 31, 2013. The increase was mainly in commercial mortgage loans due to the downgrade of three loan relationship totaling $3.4 million from “special mention” to “substandard” and one loan relationship totaling $117 thousand from “pass” to “substandard.” These were offset by the upgrade of one loan relationship of $1.0 million from “substandard” to “special mention.” Additionally, “substandard” commercial & industrial loans increased by $202 thousand due to the downgrade of a $231 thousand loan relationship from “special mention” to “substandard.” Lastly, “substandard” residential mortgage loans increased by $195 thousand due to the reclassification of a $261 thousand loan relationship from “pass” to “substandard.” | | | | | | | | | | | | | | | | |
— | The “formula classified” category increased by $686 thousand during the period, resulting primarily from additional residential mortgage loans falling into this category. | | | | | | | | | | | | | | | | |
— | There were no loans classified as “doubtful” at either June 30, 2014, or December 31, 2013. | | | | | | | | | | | | | | | | |
Impaired Loans |
A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal and 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 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. |
Impaired loans include loans that are in non-accrual status and other loans that have been modified in Troubled Debt Restructurings (TDRs, where economic concessions have been granted to borrowers experiencing financial difficulties). These concessions typically result from the Bank’s loss mitigation actions, and could include reductions in the interest rate, payment extensions, forbearance, or other actions taken with the intention to maximize collections. |
The following table sets forth information regarding non-accrual loans and restructured loans, at June 30, 2014, and December 31, 2013: |
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| June 30, 2014 | | December 31, 2013 | | | | | | | | | | | | |
| (Dollars in thousands) | | | | | | | | | | | | |
Impaired loans: | | | | | | | | | | | | | | | | | |
Restructured loans: | | | | | | | | | | | | | | | | | |
Non-accruing restructured loans | $ | 5,273 | | $ | 5,554 | | | | | | | | | | | | |
Accruing restructured loans | | 6,894 | | | 3,552 | | | | | | | | | | | | |
Total restructured loans | | 12,167 | | | 9,106 | | | | | | | | | | | | |
Other non-accruing impaired loans | | 9,764 | | | 7,741 | | | | | | | | | | | | |
Total impaired loans | $ | 21,931 | | $ | 16,846 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Impaired loans less than 90 days delinquent | $ | 16,711 | | $ | 7,967 | | | | | | | | | | | | |
and included in total impaired loans | | | | | | | | | | | | |
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The table below contains additional information with respect to impaired loans, by portfolio type, for the years ended June 30, 2014, and December 31, 2013: |
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| Recorded | | Unpaid | | Average | | Interest | | | | | |
Investment | Principal | Recorded | Income | | | | | |
| Balance | Investment | Recognized | | | | | |
| (Dollars in thousands) | | | | | |
June 30, 2014, With no related allowance recorded: | | | | | | | | | | | | | | | | | |
Commercial & industrial | $ | 3,599 | | $ | 3,796 | | $ | 3,460 | | $ | 26 | | | | | | |
Commercial mortgage | | 9,399 | | | 11,146 | | | 7,038 | | | 29 | | | | | | |
Commercial construction | | - | | | - | | | - | | | - | | | | | | |
Residential mortgage | | 8,729 | | | 8,871 | | | 7,855 | | | (317 | ) | | | | | |
Home equity | | 71 | | | 71 | | | 57 | | | - | | | | | | |
Automobile | | - | | | - | | | - | | | - | | | | | | |
Other consumer | | 133 | | | 139 | | | 151 | | | - | | | | | | |
Total impaired loans with no related allowance | $ | 21,931 | | $ | 24,023 | | $ | 18,561 | | $ | (262 | ) | | | | | |
| | | | | | | | | | | | | | | | | |
June 30, 2014, With an allowance recorded: | | | | | | | | | | | | | | | | | |
Commercial & industrial | $ | - | | $ | - | | $ | - | | $ | - | | | | | | |
Commercial mortgage | | - | | | - | | | - | | | - | | | | | | |
Commercial construction | | - | | | - | | | - | | | - | | | | | | |
Residential mortgage | | - | | | - | | | - | | | - | | | | | | |
Home equity | | - | | | - | | | - | | | - | | | | | | |
Automobile | | - | | | - | | | - | | | - | | | | | | |
Other consumer | | - | | | - | | | - | | | - | | | | | | |
Total impaired loans with no related allowance | $ | - | | $ | - | | $ | - | | $ | - | | | | | | |
| | | | | | | | | | | | | | | | | |
December 31, 2013, With no related allowance recorded: | | | | | | | | | | | | | | | | | |
Commercial & industrial | $ | 3,459 | | $ | 3,646 | | $ | 3,231 | | $ | 14 | | | | | | |
Commercial mortgage | | 6,780 | | | 8,495 | | | 7,400 | | | - | | | | | | |
Commercial construction | | - | | | - | | | - | | | - | | | | | | |
Residential mortgage | | 6,351 | | | 6,449 | | | 6,594 | | | - | | | | | | |
Home equity | | 61 | | | 61 | | | 68 | | | - | | | | | | |
Automobile | | - | | | - | | | - | | | - | | | | | | |
Other consumer | | 195 | | | 204 | | | 215 | | | - | | | | | | |
Total impaired loans with no related allowance | $ | 16,846 | | $ | 18,855 | | $ | 17,508 | | $ | 14 | | | | | | |
| | | | | | | | | | | | | | | | | |
December 31, 2013, With an allowance recorded: | | | | | | | | | | | | | | | | | |
Commercial & industrial | $ | - | | $ | - | | $ | - | | $ | - | | | | | | |
Commercial mortgage | | - | | | - | | | - | | | - | | | | | | |
Commercial construction | | - | | | - | | | - | | | - | | | | | | |
Residential mortgage | | - | | | - | | | - | | | - | | | | | | |
Home equity | | - | | | - | | | - | | | - | | | | | | |
Automobile | | - | | | - | | | - | | | - | | | | | | |
Other consumer | | - | | | - | | | - | | | - | | | | | | |
Total impaired loans with no related allowance | $ | - | | $ | - | | $ | - | | $ | - | | | | | | |
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Impairment is measured on a loan-by-loan basis for commercial and real estate 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). Large groups of smaller-balance, homogeneous loans are collectively evaluated for impairment. The Bank performs direct write-downs of impaired loans with a charge to the allocated component of the allowance for loan losses, thereby reducing the allocated component of the allowance to zero at the end of each reporting period. |
Troubled Debt Restructurings |
In accordance with FASB ASU 2011-2, the Bank had $12.2 million of troubled debt restructurings (TDRs) as of June 30, 2014. The restructured loans recorded with the Bank have been modified for the purpose of alleviating temporary impairments to the borrower’s financial condition. The economic modifications that the Bank has extended to borrowers have come in the form of a change in the amortization terms, reduction in the interest rate, and interest-only payments. The workout plan between the borrower and the Bank is designed to provide a bridge for cash flow shortfalls in the near term. As the borrower works through the near term issues, in most cases, the original contractual terms will be reinstated. |
Additional information regarding performing and non-performing TDRs at June 30, 2014, and December 31, 2013, is set forth in the following table: |
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| | | Pre-Modification | | Post-Modification | | Outstanding Balance | | | | |
Outstanding | Outstanding | | | | |
| Number of | | Recorded | | Recorded | | June 30, | | December 31, | | | | |
Loans | Investment | Investment | 2014 | 2013 | | | | |
| (Dollars in thousands) | | | | |
Performing | | | | | | | | | | | | | | | | | |
Residential mortgage | 5 | | $ | 886 | | $ | 886 | | $ | 863 | | $ | - | | | | |
Commercial mortgage | 9 | | | 6,537 | | | 6,537 | | | 6,031 | | | 3,552 | | | | |
Automobile | - | | | - | | | - | | | - | | | - | | | | |
Consumer | - | | | - | | | - | | | - | | | - | | | | |
| 14 | | | 7,423 | | | 7,423 | | | 6,894 | | | 3,552 | | | | |
Nonperforming | | | | | | | | | | | | | | | | | |
Residential mortgage | - | | $ | - | | $ | - | | $ | - | | $ | - | | | | |
Commercial mortgage | 7 | | | 10,120 | | | 8,805 | | | 5,273 | | | 5,554 | | | | |
Automobile | - | | | - | | | - | | | - | | | - | | | | |
Consumer | - | | | - | | | - | | | - | | | - | | | | |
| 7 | | $ | 10,120 | | $ | 8,805 | | $ | 5,273 | | $ | 5,554 | | | | |
Total Troubled Debt Restructurings (TDRs) | 21 | | $ | 17,543 | | $ | 16,228 | | $ | 12,167 | | $ | 9,106 | | | | |
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