| Loans and Allowance | Note 5: Loans and Allowance The Company’s loan and allowance policies are as follows: Loans Receivable 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. The accrual of interest on loans 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. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. There were no changes in the Company’s nonaccrual policy during the three month-end periods ended March 31, 2016 (unaudited) and March 31, 2015 (unaudited). 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. For all loan portfolio segments, 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. 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 uncollectibility 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 collectibility 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 nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data. 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. 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 commercial 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. Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’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 receivable include:
March 31, December 31,
2016 2015
(Unaudited)
Real estate loans:
Residential 1-4 family $ 44,548,538 $ 45,402,431
Commercial 34,125,440 32,374,013
Construction and land 3,983,938 1,975,842
Total real estate 82,657,916 79,752,286
Commercial and industrial 6,839,642 8,147,480
Warehouse line 10,000,000 10,000,000
Consumer loans:
Home equity loans and lines of credit 8,234,164 9,003,016
Other consumer loans 1,170,684 1,101,856
Total consumer 9,404,848 10,104,872
Gross loans 108,902,406 108,004,638
Net deferred loan fees (21,254 ) (26,191 )
Allowance for loan losses 1,074,315 1,075,374
Net loans $ 107,849,345 $ 106,955,455 The risk characteristics of each loan portfolio segment are as follows: Residential 1-4 Family, Home Equity Loans and Lines of Credit and Other Consumer: Commercial Real Estate including Construction and Land: Commercial and Industrial: Warehouse Line: The following presents by portfolio segment, the activity in the allowance for loan losses:
Residential Commercial Commercial Warehouse
1-4 Family Real Estate and Industrial Line Consumer Total
(Unaudited)
Three Months Ended March 31, 2016:
Balance, beginning of period $ 337,230 $ 504,023 $ 69,337 $ 60,787 $ 103,997 $ 1,075,374
Provision (credit) for loan losses (35,318 ) 101,860 (43,180 ) (6,155 ) (17,207 ) -
Loans charged to the allowance (2,020 ) - - - - (2,020 )
Recoveries of loans previously charged off 562 399 - - - 961
Balance, end of period $ 300,454 $ 606,282 $ 26,157 $ 54,632 $ 86,790 $ 1,074,315
Three Months Ended March 31, 2015:
Balance, beginning of period $ 222,618 $ 503,621 $ 248,388 $ - $ 100,724 $ 1,075,351
Provision (credit) for loan losses (15,535 ) 20,742 (21,672 ) 28,812 (12,347 ) -
Loans charged to the allowance - (5,364 ) - - - (5,364 )
Recoveries of loans previously charged off - 1,100 - - - 1,100
Balance, end of period $ 207,083 $ 520,099 $ 226,716 $ 28,812 $ 88,377 $ 1,071,087 The following presents the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of March 31, 2016 and December 31, 2015:
Residential Commercial Commercial Warehouse
1-4 Family Real Estate and Industrial Line Consumer Total
(Unaudited)
At March 31, 2016:
Allowance:
Balance, end of period $ 300,454 $ 606,282 $ 26,157 $ 54,632 $ 86,790 $ 1,074,315
Ending balance: individually evaluated for impairment $ 8,175 $ 251 $ - $ - $ 347 $ 8,773
Ending balance: collectively evaluated for impairment $ 292,279 $ 606,031 $ 26,157 $ 54,632 $ 86,443 $ 1,065,542
Loans:
Ending balance $ 44,548,538 $ 38,109,378 $ 6,839,642 $ 10,000,000 $ 9,404,848 $ 108,902,406
Ending balance individually evaluated for impairment $ 1,367,743 $ 287,673 $ - $ - $ 117,216 $ 1,772,632
Ending balance collectively evaluated for impairment $ 43,180,795 $ 37,821,705 $ 6,839,642 $ 10,000,000 $ 9,287,632 $ 107,129,774
Residential Commercial Commercial Warehouse
1-4 Family Real Estate and Industrial Line Consumer Total
At December 31, 2015:
Allowance:
Balance, end of period $ 337,230 $ 504,023 $ 69,337 $ 60,787 $ 103,997 $ 1,075,374
Ending balance: individually evaluated for impairment $ 13,969 $ 302 $ - $ - $ 372 $ 14,643
Ending balance: collectively evaluated for impairment $ 323,261 $ 503,721 $ 69,337 $ 60,787 $ 103,625 $ 1,060,731
Loans:
Ending balance $ 45,402,431 $ 34,349,855 $ 8,147,480 $ 10,000,000 $ 10,104,872 $ 108,004,638
Ending balance individually evaluated for impairment $ 2,051,278 $ 315,658 $ - $ - $ 122,809 $ 2,489,745
Ending balance collectively evaluated for impairment $ 43,351,153 $ 34,034,197 $ 8,147,480 $ 10,000,000 $ 9,982,063 $ 105,514,893 Internal Risk Categories In adherence with policy, the Bank uses the following internal risk grading categories and definitions for loans: RISK RATING 1 – EXCELLENT General: The highest quality asset rating reflects superior, in-depth management, and superior financial flexibility. Conservative balance sheets are both strong and liquid, and historic cash flows (last five years) have provided exceptionally large and stable margins of protection. Specific: Financial statements are current, audited, of superior quality and in complete detail. Financial condition is superior and compares favorably to the industry average. Cash flow is outstanding relative to historical and projected debt service requirements. The borrower adheres to all loan covenants. Management (or individual) integrity and ability are outstanding. RISK RATING 2 – STRONG General: The borrower is fully responsible for the credit. Asset quality and liquidity are very good, and debt capacity and coverage are strong. The company has strong management in all positions, and is highly regarded with excellent financial flexibility including access to other sources of financing. Specific: Financial statements are current, of excellent quality and in adequate detail. Financial condition is very good and compares favorably to the industry average. Statements reflect a stable record of earnings over time and consistent profitability. Cash flow is strong relative to historical and projected debt service requirements. The borrower consistently adheres to the repayment schedules for both principal and interest. The borrower adheres to all loan covenants. Management (or individual) integrity and ability are outstanding. RISK RATING 3 – GOOD General: Asset quality and liquidity are strong, and debt capacity and coverage are good to above average. General financial trends are stable to favorable and financial and profitability ratios are consistent with industry peers. Management strength is apparent. The industry is average. Some modest elements of uncertainty may be present due to liquidity, margin and cash flow stability, asset of customer concentrations, dependence on one business type, or cyclical trends that may affect the borrower. Specific: The financial statements are generally current, of adequate detail, and of good quality. Publication of statements is at least once annually but in most cases more frequent. Financial condition is good relative to the industry. The earnings record is stable and consistent, although modest year-to-year earnings may fluctuate more than for borrowers rated Excellent (1) or Strong (2). Cash flow may vary during the repayment of the loan but does not fall below debt service requirements. Historical profitability may be inconsistent but losses are typically non-existent or infrequent. Liquidity and leverage are at the industry average. The borrower consistently adheres to repayment schedules for both principal and interest, and adheres to all loan covenants. Any waivers are immaterial, and do not negatively impact the strength of the credit. Management (or individual) integrity and ability are sound. Depth and breadth of management is also sound. RISK RATING 4 – ACCEPTABLE General: Asset quality and liquidity are good, and debt capacity and coverage are average to good. General financial trends are stable to favorable and financial and profitability ratios are consistent with industry peers. Management strength is apparent but may be limited to key positions. The industry is average. Some elements of uncertainty may be present due to liquidity, margin and cash flow stability, asset of customer concentrations, dependence on one business type, or cyclical trends that may affect the borrower. Adverse economic conditions may lead to declining trends. Specific: The financial statements are generally current, of adequate detail, and of average quality. Publication of statements is at least once annually. Financial condition is average relative to the industry. The earnings record is satisfactory, although year-to-year earnings patterns may fluctuate more than for borrowers rated Good (3). Cash flow may vary during the repayment of the loan but does not fall below debt service requirements. Historical profitability may be inconsistent and may have losses in recent years. Liquidity and leverage may be below the industry average, and the borrower may be highly leveraged. The borrower consistently adheres to repayment schedules for both principal and interest, and adheres to all loan covenants. Any waivers are immaterial, and do not negatively impact the strength of the credit. Management (or individual) integrity and ability are sound. Depth and breadth of management is also sound. RISK RATING 5 – WATCH General: Loans in this category are considered to be acceptable credit quality, but contain greater credit risk than Risk Rating 4 loans due to weak balance sheets, marginal earnings or cash flow, lack of financial information, weakening markets, insufficient or questionable collateral coverage, or other uncertainties. These loans warrant a higher than average level of monitoring to ensure that potential weaknesses do not emerge. The level of risk in a Watch loan is within acceptable underwriting guidelines so long as the loan is given the proper level of management supervision. Specific: The financial statements may be missing, outdated, of poor quality, or lacking in important details. Financial condition is below the industry average. The borrower may be experiencing negative trends and/or erratic or unstable financial performance. The borrower may have suffered a loss in a recent period; however, losses have not been of the magnitude to have adversely affected the balance sheet. The borrower generally adheres to repayment schedules for principal and consistently for interest. Cash flow from primary sources has generally been adequate but, if existing trends continue may not be adequate to meet projected debt service requirements in the future. The borrower may have violated one or more financial or other covenants, but such has not materially impacted financial condition or performance. Industry outlook may be unfavorable. The integrity and quality of management remains good; however, management depth may be limited. RISK RATING 6 – SPECIAL MENTION General: Assets in this category have potential weaknesses that deserve the Bank’s close attention. If potential weaknesses are left unchecked or uncorrected, they may result in deterioration of the repayment prospects for the asset or inadequately protect the Bank’s credit position at some future date. These assets pose elevated risk, but their weakness does not expose the Bank to sufficient risk to warrant adverse classification. Specific: Borrowers may be experiencing adverse operating trends (declining revenues or margins) or an ill-proportioned balance sheet (increasing inventory without an increase in sales, high leverage, tight liquidity). Adverse economic or market conditions, such as interest rate increases or the entry of a new competitor, may also support a Special Mention (6) rating. Nonfinancial reasons for rating a credit Special Mention (6) include management problems, pending litigation, an ineffective loan agreement or other material structural weaknesses, and any other significant deviation from prudent lending practices. RISK RATING 7 – SUBSTANDARD General: Assets in this category are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. These assets have a well-defined weakness or weaknesses that jeopardize the timely liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Specific: Substandard assets have a high probability of payment default, or they have other well-defined weaknesses. The financial statements may be missing, seriously outdated, of poor quality, or lacking in important details. Financial condition is less than satisfactory. The borrower is experiencing negative trends and material losses. The primary source of cash flow is inadequate to meet current debt service requirements, and unless present conditions improve is potentially inadequate to meet projected debt service requirements. The borrower may have reached the point of employing its secondary source of cash flow. The borrower inconsistently adheres to repayment schedules for either principal or interest. The borrower may have violated one or more financial or other covenants, reflecting unsatisfactory liquidity and/or capitalization. Either the integrity or the ability of management may be in question. For some Substandard (7) assets, the likelihood of full collection of interest and principal may be in doubt; such assets should be placed on nonaccrual. RISK RATING 8 – DOUBTFUL General: Assets in this category have all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Specific: An asset in this category has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification as loss is deferred. Doubtful borrowers are usually in default, lack adequate liquidity and capital, and lack the resources necessary to remain an operating entity. Pending events can include mergers, acquisitions, liquidations, capital injections, and the perfection of liens on additional collateral, the valuation of collateral and refinancing. Generally, pending events should be resolved within a relatively short period and the ratings will be adjusted based on new information. Because of high probability of loss, nonaccrual accounting treatment is required for Doubtful (8) assets. RISK RATING 9 – LOSS General: Assets in this category are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be obtained in the future. Specific: With Loss (9) assets, the underlying borrowers are often in bankruptcy, have formally suspended debt repayments, or have otherwise ceased normal business operations. Once an asset is classified Loss (9), there is little prospect of collecting either its principal or interest. Losses are to be recorded in the period an obligation becomes uncollectable. The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of March 31, 2016:
Residential Commercial Construction Commercial Warehouse Other
1-4 Family Real Estate and Land and Industrial Line Home Equity Consumer Total
(Unaudited)
Pass (1-5) $ 43,967,789 $ 32,348,698 $ 3,975,380 $ 6,839,642 $ 10,000,000 $ 8,193,326 $ 1,170,684 $ 106,495,519
Special Mention (6) - - - - - - - -
Substandard (7) 580,749 1,776,742 8,558 - - 40,838 - 2,406,887
Doubtful (8) - - - - - - - -
Loss (9) - - - - - - - -
Total $ 44,548,538 $ 34,125,440 $ 3,983,938 $ 6,839,642 $ 10,000,000 $ 8,234,164 $ 1,170,684 $ 108,902,406 The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of December 31, 2015:
Residential Commercial Construction Commercial Warehouse Other
1-4 Family Real Estate and Land and Industrial Line Home Equity Consumer Total
Pass (1-5) $ 44,838,588 $ 30,037,894 $ 1,966,182 $ 8,147,480 $ 10,000,000 $ 9,003,016 $ 1,101,856 $ 105,095,016
Special Mention (6) - 1,553,936 - - - - - 1,553,936
Substandard (7) 563,843 782,183 9,660 - - - - 1,355,686
Doubtful (8) - - - - - - - -
Loss (9) - - - - - - - -
Total $ 45,402,431 $ 32,374,013 $ 1,975,842 $ 8,147,480 $ 10,000,000 $ 9,003,016 $ 1,101,856 $ 108,004,638 The following tables present the Company’s loan portfolio aging analysis as of March 31, 2016:
Total Loans >
30-59 Days 60-89 Days Greater Than Total Total 90 Days &
Past Due Past Due 90 Days Past Due Current Loans Accruimg
(Unaudited)
Residential 1-4 family $ 760,462 $ 156,835 $ 580,749 $ 1,498,046 $ 43,050,492 $ 44,548,538 $ -
Commercial real estate - - 9,715 9,715 34,115,725 34,125,440 -
Construction and land 21,402 - 8,558 29,960 3,953,978 3,983,938 -
Commercial and industrial - - - - 6,839,642 6,839,642 -
Warehouse Line - - - - 10,000,000 10,000,000 -
Home equity 38,668 2,913 - 41,581 8,192,583 8,234,164 -
Other consumer 1,996 - - 1,996 1,168,688 1,170,684 -
$ 822,528 $ 159,748 $ 599,022 $ 1,581,298 $ 107,321,108 $ 108,902,406 $ - The following tables present the Company’s loan portfolio aging analysis as of December 31, 2015:
Total Loans >
30-59 Days 60-89 Days Greater Than Total Total 90 Days &
Past Due Past Due 90 Days Past Due Current Loans Accruimg
Residential 1-4 family $ 1,124,518 $ 312,454 $ 555,497 $ 1,992,469 $ 43,409,962 $ 45,402,431 $ -
Commercial real estate 9,715 - - 9,715 32,364,298 32,374,013 -
Construction and land - 23,118 9,660 32,778 1,943,064 1,975,842 -
Commercial and industrial 99,541 - - 99,541 8,047,939 8,147,480 -
Warehouse Line - - - - 10,000,000 10,000,000 -
Home equity 72,128 10,288 8,309 90,725 8,912,291 9,003,016 -
Other consumer - 2,852 - 2,852 1,099,004 1,101,856 -
$ 1,305,902 $ 348,712 $ 573,466 $ 2,228,080 $ 105,776,558 $ 108,004,638 $ - The following table presents the Company’s nonaccrual loans at March 31, 2016 and December 31, 2015. This table excludes performing troubled debt restructurings.
March 31 December 31,
2016 2015
(Unaudited)
Residential 1-4 family $ 580,749 $ 1,233,905
Commercial real estate 9,715 9,715
Construction and land 8,558 32,777
Commercial and industrial - -
Warehouse Line - -
Home equity 40,838 43,712
Other consumer - -
$ 639,860 $ 1,320,109 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. The following table presents impaired loans and specific valuation allowance based on class level at March 31, 2016:
Residential Commercial Construction Commercial Warehouse
1-4 Family Real Estate and Land and Industrial Line Home Equity Total
(Unaudited)
Impaired loans without a specific allowance:
Recorded investment $ 594,124 $ 269,400 $ - $ - $ - $ 76,378 $ 939,902
Unpaid principal balance 663,903 269,400 - - - 76,378 1,009,681
Impaired loans with a specific allowance:
Recorded investment 773,619 9,715 8,558 - - 40,838 832,730
Unpaid principal balance 798,921 11,111 9,116 - - 44,161 863,309
Specific allowance 8,175 151 100 - - 347 8,773
Total impaired loans:
Recorded investment 1,367,743 279,115 8,558 - - 117,216 1,772,632
Unpaid principal balance 1,462,824 280,511 9,116 - - 120,539 1,872,990
Specific allowance 8,175 151 100 - - 347 8,773 The following table presents average impaired loans based on class level for the three months ended March 31, 2016 and 2015:
Residential Commercial Construction Commercial Warehouse
1-4 Family Real Estate and Land and Industrial Line Home Equity Total
(Unaudited)
Average recorded investment in impaired loans for the three months ended March 31, 2016 $ 1,319,341 $ 280,998 $ 8,558 $ - $ - $ 120,012 $ 1,728,909
Average recorded investment in impaired loans for the three months ended March 31, 2015 $ 1,786,178 $ 295,734 $ 330,402 $ - $ - $ 153,885 $ 2,566,199 The following table presents impaired loans and specific valuation allowance based on class level at December 31, 2015:
Residential Commercial Construction Commercial Warehouse
1-4 Family Real Estate and Land and Industrial Line Home Equity Total
Impaired loans without a specific allowance:
Recorded investment $ 848,467 $ 273,166 $ - $ - $ - $ 79,097 $ 1,200,730
Unpaid principal balance 921,718 273,166 - - - 79,097 1,273,981
Impaired loans with a specific allowance:
Recorded investment 1,202,811 9,715 32,777 - - 43,712 1,289,015
Unpaid principal balance 1,259,063 11,111 36,696 - - 45,687 1,352,557
Specific allowance 13,969 129 173 - - 372 14,643
Total impaired loans:
Recorded investment 2,051,278 282,881 32,777 - - 122,809 2,489,745
Unpaid principal balance 2,180,781 284,277 36,696 - - 124,784 2,626,538
Specific allowance 13,969 129 173 - - 372 14,643 Interest income of $11,622, $10,696 and $41,740 was recognized on impaired loans for the three months ended March 31, 2016 (unaudited) and March 31, 2015 (unaudited) and for year-end December 31, 2015, respectively. At March 31, 2016, the Company had several loans that were modified in troubled debt restructurings and impaired. The modification of terms of such loans included one or a combination of the following: an extension of maturity, a reduction of the stated interest rate or a permanent reduction of the recorded investment in the loan. Total troubled debt restructured loan balance on ten loans was $1.2 million for the three months ended March 31, 2016 (unaudited). There were no troubled debt restructurings for the three months ended March 31, 2016 and 2015. There were no troubled debt restructured loans modified in the past 12 months that subsequently defaulted. At March 31, 2016, the Company held no residential real estate as foreclosed property. Also, at March 31, 2016, there were no consumer mortgage loans in the process of foreclosure according to local requirements of the applicable jurisdictions. |
