Loans, net and allowance for loan losses | 5. Loans, net and allowance for loan losses: The major classifications of loans outstanding, net of deferred loan origination fees and costs at September 30, 2016 and December 31, 2015 are summarized as follows. Net deferred loan costs were $986 and $764 at September 30, 2016 and December 31, 2015. September 30, 2016 December 31, 2015 Commercial $ 45,479 $ 46,076 Real estate: Construction 8,672 18,599 Commercial 206,661 205,500 Residential 131,651 135,106 Consumer 5,730 4,564 Total $ 398,193 $ 409,845 The changes in the allowance for loan losses account by major classification of loan for the three and nine months ended September 30, 2016 and 2015 are summarized as follows: Real Estate September 30, 2016 Commercial Construction Commercial Residential Consumer Unallocated Total Allowance for loan losses: Beginning Balance July 1, 2016 $ 558 $ 170 $ 2,100 $ 745 $ 36 $ 3,609 Charge-offs (1 ) (1 ) (25 ) (8 ) (35 ) Recoveries 25 1 1 7 34 Provisions (72 ) (13 ) 38 69 5 $ 2 29 Ending balance $ 510 $ 157 $ 2,138 $ 790 $ 40 $ 2 $ 3,637 Real Estate September 30, 2016 Commercial Construction Commercial Residential Consumer Unallocated Total Allowance for loan losses: Beginning Balance January 1, 2016 $ 1,298 $ 202 $ 2,227 $ 613 $ 25 $ 4,365 Charge-offs (724 ) (250 ) (65 ) (33 ) (24 ) (1,096 ) Recoveries 70 1 3 10 84 Provisions (134 ) 204 (24 ) 207 29 $ 2 284 Ending balance $ 510 $ 157 $ 2,138 $ 790 $ 40 $ 2 $ 3,637 Real Estate September 30, 2015 Commercial Construction Commercial Residential Consumer Unallocated Total Allowance for loan losses: Beginning Balance July 1, 2015 $ 640 $ 116 $ 2,408 $ 796 $ 22 $ 163 $ 4,145 Charge-offs (138 ) (24 ) (10 ) (172 ) Recoveries 19 2 21 Provisions (182 ) 43 128 (5 ) 12 4 Ending balance $ 458 $ 159 $ 2,417 $ 767 $ 26 $ 167 $ 3,994 Real Estate September 30, 2015 Commercial Construction Commercial Residential Consumer Unallocated Total Allowance for loan losses: Beginning Balance January 1, 2015 $ 330 $ 115 $ 2,462 $ 805 $ 15 $ 65 $ 3,792 Charge-offs (188 ) (60 ) (32 ) (280 ) Recoveries 8 19 5 32 Provisions 120 44 124 22 38 $ 102 450 Ending balance $ 458 $ 159 $ 2,417 $ 767 $ 26 $ 167 $ 3,994 The allocation of the allowance for loan losses and the related loans by major classifications of loans at September 30, 2016 and December 31, 2015 is summarized as follows: Real Estate September 30, 2016 Commercial Construction Commercial Residential Consumer Unallocated Total Allowance for loan losses: Ending balance $ 510 $ 157 $ 2,138 $ 790 $ 40 $ 2 $ 3,637 Ending balance: individually evaluated for impairment 2 55 33 90 Ending balance: collectively evaluated for impairment $ 508 $ 157 $ 2,083 $ 757 $ 40 $ 2 $ 3,547 Loans receivable: Ending balance $ 45,479 $ 8,672 $ 206,661 $ 131,651 $ 5,730 $ 398,193 Ending balance: individually evaluated for impairment 964 3,736 2,828 7,528 Ending balance: collectively evaluated for impairment $ 44,515 $ 8,672 $ 202,925 $ 128,823 $ 5,730 $ 390,665 Real Estate December 31, 2015 Commercial Construction Commercial Residential Consumer Unallocated Total Allowance for loan losses: Ending balance $ 1,298 $ 202 $ 2,227 $ 613 $ 25 $ 4,365 Ending balance: individually evaluated for impairment 700 8 7 715 Ending balance: collectively evaluated for impairment $ 598 $ 202 $ 2,219 $ 606 $ 25 $ 3,650 Loans receivable: Ending balance $ 46,076 $ 18,599 $ 205,500 $ 135,106 $ 4,564 $ 409,845 Ending balance: individually evaluated for impairment 1,787 4,714 3,047 9,548 Ending balance: collectively evaluated for impairment $ 44,289 $ 18,599 $ 200,786 $ 132,059 $ 4,564 $ 400,297 The Company segments 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. Loans are individually analyzed for credit risk by classifying them within the Company’s internal risk rating system. The Company’s risk rating classifications are defined as follows: • Pass- A loan to borrowers with acceptable credit quality and risk that is not adversely classified as Substandard, Doubtful, Loss nor designated as Special Mention. • Special Mention- A loan that has potential weaknesses that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position at some future date. Special Mention loans are not adversely classified since they do not expose the Company to sufficient risk to warrant adverse classification. • Substandard- A loan that is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. • Doubtful – A loan classified as Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make the collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. • Loss- A loan classified as Loss is considered uncollectible and of such little value that its continuance as bankable loan is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future. The following tables present the major classification of loans summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system at September 30, 2016 and December 31, 2015: September 30, 2016 Pass Special Substandard Doubtful Total Commercial $ 42,506 $ 1,610 $ 1,363 $ 45,479 Real estate: Construction 8,672 8,672 Commercial 194,279 8,400 3,982 206,661 Residential 129,822 28 1,801 131,651 Consumer 5,730 5,730 Total $ 381,009 $ 10,038 $ 7,146 $ 398,193 December 31, 2015: Pass Special Substandard Doubtful Total Commercial $ 43,377 $ 443 $ 2,256 $ 46,076 Real estate: Construction 18,349 250 18,599 Commercial 194,400 5,069 6,031 205,500 Residential 131,093 192 3,821 135,106 Consumer 4,564 4,564 Total $ 391,783 $ 5,704 $ 12,358 $ 409,845 Information concerning nonaccrual loans by major loan classification at September 30, 2016 and December 31, 2015 is summarized as follows: September 30, 2016 December 31, 2015 Commercial $ 350 $ 1,143 Real estate: Construction Commercial 410 1,118 Residential 703 921 Consumer Total $ 1,463 $ 3,182 The major classifications of loans by past due status are summarized as follows: September 30, 2016 30-59 Days 60-89 Days Greater Total Past Current Total Loans Loans > 90 Commercial $ 46 $ $ 215 $ 261 $ 45,218 $ 45,479 Real estate: Construction 8,672 8,672 Commercial 644 58 702 205,959 206,661 Residential 1,086 319 492 1,897 129,754 131,651 $ 133 Consumer 2 2 5,728 5,730 Total $ 1,778 $ 377 $ 707 $ 2,862 $ 395,331 $ 398,193 $ 133 December 31, 2015 30-59 Days 60-89 Days Greater Total Past Current Total Loans Loans > 90 Commercial $ 34 $ $ 1,007 $ 1,041 $ 45,035 $ 46,076 Real estate: Construction 250 250 18,349 18,599 Commercial 303 447 559 1,309 204,191 205,500 Residential 1,209 1,437 631 3,277 131,829 135,106 $ 89 Consumer 10 1 11 4,553 4,564 Total $ 1,556 $ 2,134 $ 2,198 $ 5,888 $ 403,957 $ 409,845 $ 89 The following tables summarize information concerning impaired loans as of and for the three and nine months ended September 30, 2016 and September 30, 2015, and as of and for the year ended, December 31, 2015 by major loan classification: This Quarter Year-to-Date September 30, 2016 Recorded Unpaid Related Average Interest Average Interest With no related allowance: Commercial $ 838 $ 838 $ 843 $ 8 $ 849 $ 22 Real estate: Construction Commercial 3,438 3,438 3,455 20 3,823 110 Residential 2,709 2,846 2,907 34 2,942 102 Consumer Total 6,985 7,122 7,205 62 7,614 234 With an allowance recorded: Commercial 126 126 $ 2 128 132 Real estate: Construction Commercial 298 298 55 269 231 Residential 119 119 33 119 2 120 4 Consumer Total 543 543 90 516 2 483 4 Commercial 964 964 2 971 8 981 22 Real estate: Construction Commercial 3,736 3,736 55 3,724 20 4,054 110 Residential 2,828 2,965 33 3,026 36 3,062 106 Consumer Total $ 7,528 $ 7,665 $ 90 $ 7,721 $ 64 $ 8,097 $ 238 For the Year Ended December 31, 2015 Recorded Investment Unpaid Principal Related Average Interest Income With no related allowance: Commercial $ 994 $ 994 $ $ 1,018 $ 28 Real estate: Construction Commercial 4,504 4,504 4,069 207 Residential 2,926 3,044 2,770 133 Consumer Total 8,424 8,542 7,857 368 With an allowance recorded: Commercial 793 1,193 700 663 21 Real estate: Construction Commercial 210 348 8 198 4 Residential 121 121 7 123 5 Consumer Total 1,124 1,662 715 984 30 Commercial 1,787 2,187 700 1,681 49 Real estate: Construction Commercial 4,714 4,852 8 4,267 211 Residential 3,047 3,165 7 2,893 138 Consumer Total $ 9,548 $ 10,204 $ 715 $ 8,841 $ 398 This Quarter Year-to-Date September 30, 2015 Recorded Unpaid Related Average Interest Average Interest Income With no related allowance: Commercial $ 1,011 $ 1,011 $ 1,014 $ 22 $ 1,023 $ 22 Real estate: Construction Commercial 4,579 4,579 4,583 48 4,079 144 Residential 2,597 2,597 2,788 33 2,860 135 Consumer Total 8,187 8,187 8,385 103 7,962 301 With an allowance recorded: Commercial 1,193 1,193 120 1,193 530 27 Real estate: Construction Commercial 186 186 7 188 191 Residential 122 122 6 122 2 123 4 Consumer Total 1,501 1,501 133 1,503 2 844 31 Commercial 2,204 2,204 120 2,207 22 1,553 49 Real estate: Construction Commercial 4,765 4,765 7 4,771 48 4,270 144 Residential 2,719 2,719 6 2,910 35 2,983 139 Consumer Total $ 9,688 $ 9,688 $ 133 $ 9,888 $ 105 $ 8,806 $ 332 For the three and nine months ended September 30, interest income, related to impaired loans, would have been $90 and $317 in 2016 and $155 and $470 in 2015 had the loans been current and the terms of the loans not been modified. Included in the commercial loan and commercial and residential real estate categories are troubled debt restructurings that are classified as impaired. Troubled debt restructurings totaled $6,342 at September 30, 2016, $7,083 at December 31, 2015 and $6,842 at September 30, 2015. Troubled debt restructured loans are loans with original terms, interest rate, or both, that have been modified as a result of a deterioration in the borrower’s financial condition and a concession has been granted that the Company would not otherwise consider. Unless on nonaccrual, interest income on these loans is recognized when earned, using the interest method. The Company offers a variety of modifications to borrowers that would be considered concessions. The modification categories offered generally fall within the following categories: • Rate Modification - A modification in which the interest rate is changed to a below market rate. • Term Modification - A modification in which the maturity date, timing of payments or frequency of payments is changed. • Interest Only Modification - A modification in which the loan is converted to interest only payments for a period of time. • Payment Modification - A modification in which the dollar amount of the payment is changed, other than an interest only modification described above. • Combination Modification - Any other type of modification, including the use of multiple categories above. There were no loans modified as a troubled debt restructuring for the three months and the nine months ended September 30, 2016. There were no loans modified as troubled debt restructurings for the three months ended September 30, 2015. There were four loans modified as troubled debt restructurings for the nine months ended September 30, 2015 in the amount of $622. These loans were comprised of three residential real estate loans totaling $473 and one owner occupied commercial real estate loan totaling $149. The residential loans were modified to extend the amortization period to reduce monthly payments to an affordable level for the customers who were experiencing financial difficulty. The owner occupied commercial real estate loan was modified to set a matured short term note to long term repayment as the customer did not have the ability to pay under the original terms. These restructurings result in collection of principal over a longer period than originally contracted for. During the three and nine months ending September 30, 2016, there were no defaults on loans restructured within the prior twelve months. During the three and nine months ending September 30, 2015, there were two defaults on loans restructured within the prior twelve months totaling $158. These loans were comprised of one residential real estate loan in the amount of $10 and one owner occupied commercial real estate loan in the amount of $148. Each of these loans defaulted as they were both more than 30 days past due as of September 30, 2015. The effect of these defaults on the allowance for loan losses was negligible as both loans were well secured and the delinquency was subsequently cured. Purchased loans are initially recorded at their acquisition date fair values. The carryover of the allowance for loan losses is prohibited as any credit losses in the loans are included in the determination of the fair value of the loans at the acquisition date. Fair values for purchased loans are based on a cash flow methodology that involves assumptions and judgments as to credit risk, default rates, loss severity, collateral values, discount rates, payment speeds, and prepayment risk. As part of its acquisition due diligence process, the Bank reviews the acquired institution’s loan grading system and the associated risk rating for loans. In performing this review, the Bank considers cash flows, debt service coverage, delinquency status, accrual status, and collateral for the loan. This process allows the Bank to clearly identify the population of acquired loans that had evidence of deterioration in credit quality since origination and for which it was probable, at acquisition, that the Bank would be unable to collect all contractually required payments. All such loans identified by the Bank are considered to be within the scope of ASC 310-30, Loan and Debt Securities Acquired with Deteriorated Credit Quality and are identified as “Purchased Credit Impaired Loans”. As a result of the merger with Citizens, effective December 31, 2015, the Bank identified ten purchased credit impaired (“PCI”) loans. As part of the consolidation with Union, effective November 1, 2013, the Bank identified fourteen PCI loans. For all PCI loans, the excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the non-accretable discount. The non-accretable discount represents estimated future credit losses expected to be incurred over the life of the loan. Subsequent decreases to the expected cash flows require the Bank to evaluate the need for an allowance for loan losses on these loans. Subsequent improvements in expected cash flows result in the reversal of a corresponding amount of the non-accretable discount which the Bank then reclassifies as an accretable discount that is recognized into interest income over the remaining life of the loan. The Bank’s evaluation of the amount of future cash flows that it expects to collect is based on a cash flow methodology that involves assumptions and judgments as to credit risk, collateral values, discount rates, payment speeds, and prepayment risk. Charge-offs of the principal amount on purchased impaired loans are first applied to the non-accretable discount. For purchased loans that are not deemed impaired at acquisition, credit discounts representing principal losses expected over the life of the loans are a component of the initial fair value, and the discount is accreted to interest income over the life of the asset. Subsequent to the purchase date, the method used to evaluate the sufficiency of the credit discount is similar to originated loans, and if necessary, additional reserves are recognized in the allowance for loan losses. The following is a summary of the loans acquired in the Union merger as of November 1, 2013, the date of the consolidation: Purchased Credit Impaired Loans Purchased Non- Impaired Loans Total Union Contractually required principal and interest at acquisition $ 10,290 $ 92,704 $ 102,994 Contractual cash flows not expected to be collected (5,487 ) (9,492 ) (14,979 ) Expected cash flows at acquisition 4,803 83,212 88,015 Interest component of expected cash flows (386 ) (12,278 ) (12,664 ) Basis in acquired loans at acquisition – estimated fair value $ 4,417 $ 70,934 $ 75,351 The unpaid principal balances and the related carrying amount of Union acquired loans as of September 30, 2016 and December 31, 2015 were as follows: September 30, 2016 December 31, Credit impaired purchased loans evaluated individually for incurred credit losses Outstanding balance $ 804 $ 1,478 Carrying Amount 470 668 Other purchased loans evaluated collectively for incurred credit losses Outstanding balance 40,947 49,762 Carrying Amount 40,084 47,723 Total Purchased Loans Outstanding balance 41,751 51,240 Carrying Amount $ 40,554 $ 48,391 As of the indicated dates, the changes in the accretable discount related to the purchased credit impaired loans were as follows: Three Months Ended Nine Months Ended September 30, 2016 September 30, 2015 September 30, 2016 September 30, 2015 Balance – beginning of period $ 251 $ 326 $ 307 $ 310 Accretion recognized during the period (403 ) (48 ) (518 ) (104 ) Net reclassification from non-accretable to accretable 322 38 381 110 Balance – end of period $ 170 $ 316 $ 170 $ 316 The following is a summary of the loans acquired in the Citizens’ merger as of December 31, 2015, the effective date of the merger: Purchased Credit Impaired Loans Purchased Non- Impaired Loans Total Citizens Contractually required principal and interest at acquisition $ 894 $ 81,780 $ 82,674 Contractual cash flows not expected to be collected (237 ) (13,517 ) (13,754 ) Expected cash flows at acquisition 657 68,263 68,920 Interest component of expected cash flows (217 ) (10,841 ) (11,058 ) Basis in acquired loans at acquisition – estimated fair value $ 440 $ 57,422 $ 57,862 The unpaid principal balances and the related carrying amount of Citizens acquired loans as of September 30, 2016 and December 31, 2015 were as follows: September 30, December 31, Credit impaired purchased loans evaluated individually for incurred credit losses Outstanding balance $ 608 $ 608 Carrying Amount 428 440 Other purchased loans evaluated collectively for incurred credit losses Outstanding balance 48,619 57,581 Carrying Amount 48,369 57,422 Total Purchased Loans Outstanding balance 49,228 58,189 Carrying Amount $ 48,797 $ 57,862 As of the indicated dates, the changes in the accretable discount related to the purchased credit impaired loans were as follows: Three Months Nine Months Balance – beginning of period $ 206 $ 217 Accretion recognized during the period (7 ) (21 ) Net reclassification from non-accretable to accretable 4 7 Balance – end of period $ 203 $ 203 The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, unused portions of lines of credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets. Unused commitments at September 30, 2016, totaled $64,126, consisting of $60,589 in unfunded commitments of existing loan facilities and $3,537 in standby letters of credit. Due to fixed maturity dates, specified conditions within these instruments, and the ultimate needs of our customers, many will expire without being drawn upon. We believe that amounts actually drawn upon can be funded in the normal course of operations and therefore, do not represent a significant liquidity risk to us. In comparison, unused commitments, at December 31, 2015, totaled $49,397, consisting of $46,081 in unfunded commitments of existing loans and $3,316 in standby letters of credit. |