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 March 31, 2017 and December 31, 2016 are summarized as follows. Net deferred loan costs were $997 and $1,077 at March 31, 2017 and December 31, 2016. March 31, 2017 December 31, 2016 Commercial $ 53,260 $ 51,166 Real estate: Construction 8,439 8,605 Commercial 267,473 212,550 Residential 128,833 130,874 Consumer 6,476 6,148 Total $ 464,481 $ 409,343 The changes in the allowance for the loan losses account by major classification of loan for the three months ended March 31, 2017 and 2016 are presented as follows: Real Estate March 31, 2017 Commercial Construction Commercial Residential Consumer Unallocated Total Allowance for loan losses: Beginning Balance January 1, 2017 $ 629 $ 160 $ 2,110 $ 789 $ 44 $ 3,732 Charge-offs (7 ) (5 ) (12 ) Recoveries 3 1 4 Provisions (4 ) 432 38 15 $ 124 605 Ending balance $ 625 $ 160 $ 2,545 $ 821 $ 54 $ 124 $ 4,329 Real Estate March 31, 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 (723 ) (24 ) (11 ) (758 ) Recoveries 9 1 1 11 Provisions (18 ) (109 ) 8 140 15 63 99 Ending balance $ 566 $ 93 $ 2,211 $ 754 $ 30 $ 63 $ 3,717 The allocation of the allowance for loan losses and the related loans by major classifications of loans at March 31, 2017 and December 31, 2016 is summarized as follows: Real Estate March 31, 2017 Commercial Construction Commercial Residential Consumer Unallocated Total Allowance for loan losses: Ending balance $ 625 $ 160 $ 2,545 $ 821 $ 54 $ 124 $ 4,329 Ending balance: individually evaluated for impairment 1 160 161 Ending balance: collectively evaluated for impairment $ 624 $ 160 $ 2,385 $ 821 $ 54 $ 124 $ 4,168 Loans receivable: Ending balance $ 53,260 $ 8,439 $ 267,473 $ 128,833 $ 6,476 $ 464,481 Ending balance: individually evaluated for impairment 850 4,032 2,447 7,329 Ending balance: collectively evaluated for impairment $ 52,410 $ 8,439 $ 263,441 $ 126,386 $ 6,476 $ 457,152 Real Estate December 31, 2016 Commercial Construction Commercial Residential Consumer Unallocated Total Allowance for loan losses: Ending balance $ 629 $ 160 $ 2,110 $ 789 $ 44 $ 3,732 Ending balance: individually evaluated for impairment 8 140 148 Ending balance: collectively evaluated for impairment $ 621 $ 160 $ 1,970 $ 789 $ 44 $ 3,584 Loans receivable: Ending balance $ 51,166 $ 8,605 $ 212,550 $ 130,874 $ 6,148 $ 409,343 Ending balance: individually evaluated for impairment 966 3,924 2,515 7,405 Ending balance: collectively evaluated for impairment $ 50,200 $ 8,605 $ 208,626 $ 128,359 $ 6,148 $ 401,938 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 March 31, 2017 and December 31, 2016: March 31, 2017 Pass Special Mention Substandard Doubtful Total Commercial $ 50,233 $ 1,357 $ 1,670 $ 53,260 Real estate: Construction 8,439 8,439 Commercial 256,199 7,627 3,647 267,473 Residential 127,410 28 1,395 128,833 Consumer 6,476 6,476 Total $ 448,757 $ 9,012 $ 6,712 $ 464,481 December 31, 2016: Pass Special Mention Substandard Doubtful Total Commercial $ 47,765 $ 1,604 $ 1,797 $ 51,166 Real estate: Construction 8,605 8,605 Commercial 200,636 8,063 3,851 212,550 Residential 129,320 28 1,526 130,874 Consumer 6,148 6,148 Total $ 392,474 $ 9,695 $ 7,174 $ 409,343 Information concerning nonaccrual loans by major loan classification at March 31, 2017 and December 31, 2016 is summarized as follows: March 31, 2017 December 31, 2016 Commercial $ 246 $ 356 Real estate: Construction Commercial 584 359 Residential 895 671 Consumer Total $ 1,725 $ 1,386 The major classifications of loans by past due status at March 31, 2017 and December 31, 2016 are summarized as follows: March 31, 2017 30-59 Days Past Due 60-89 Days Past Due Greater than 90 Days Total Past Due Current Total Loans Loans > 90 Days and Accruing Commercial $ 487 $ 1,136 $ 145 $ 1,768 $ 51,492 $ 53,260 $ 20 Real estate: Construction 8,439 8,439 Commercial 368 54 245 667 266,806 267,473 Residential 2,372 430 660 3,462 125,371 128,833 169 Consumer 17 1 18 6,458 6,476 Total $ 3,244 $ 1,621 $ 1,050 $ 5,915 $ 458,566 $ 464,481 $ 189 December 31, 2016 30-59 Days Past Due 60-89 Days Past Due Greater than 90 Days Total Past Due Current Total Loans Loans > 90 Days and Accruing Commercial $ 580 $ $ 214 $ 794 $ 50,372 $ 51,166 $ Real estate: Construction 22 22 8,583 8,605 Commercial 784 97 11 892 211,658 212,550 Residential 905 256 592 1,753 129,121 130,874 357 Consumer 6 2 8 6,140 6,148 2 Total $ 2,297 $ 353 $ 819 $ 3,469 $ 405,874 $ 409,343 $ 359 The following tables summarize information concerning impaired loans as of and for the three months ended March 31, 2017 and March 31, 2016, and as of and for the year ended, December 31, 2016 by major loan classification: This Quarter March 31, 2017 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized With no related allowance: Commercial $ 730 $ 730 $ $ 767 $ 8 Real estate: Construction Commercial 3,165 3,165 3,230 36 Residential 2,447 2,585 2,641 33 Consumer Total 6,342 6,480 6,638 77 With an allowance recorded: Commercial 120 120 1 122 Real estate: Construction Commercial 867 867 160 709 6 Residential Consumer Total 987 987 161 831 6 Commercial 850 850 1 889 8 Real estate: Construction Commercial 4,032 4,032 160 3,939 42 Residential 2,447 2,585 2,641 33 Consumer Total $ 7,329 $ 7,467 $ 161 $ 7,469 $ 83 For the Year Ended December 31, 2016 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized With no related allowance: Commercial $ 225 $ 225 $ $ 225 $ Real estate: Construction Commercial 3,094 3,094 3,168 147 Residential 2,515 2,652 2,747 130 Consumer Total 5,834 5,971 6,140 277 With an allowance recorded: Commercial 741 741 8 761 30 Real estate: Construction Commercial 830 830 140 840 Residential Consumer Total 1,571 1,571 148 1,601 30 Commercial 966 966 8 986 30 Real estate: Construction Commercial 3,924 3,924 140 4,008 147 Residential 2,515 2,652 2,747 130 Consumer Total $ 7,405 $ 7,542 $ 148 $ 7,741 $ 307 This Quarter March 31, 2016 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized With no related allowance: Commercial $ 898 $ 2,021 $ $ 1,395 $ 7 Real estate: Construction Commercial 3,997 4,004 4,016 45 Residential 2,781 2,918 3,015 34 Consumer Total 7,676 8,943 8, 426 86 With an allowance recorded: Commercial 135 135 1 136 Real estate: Construction Commercial 401 401 7 400 Residential 120 120 33 121 1 Consumer Total 656 656 41 657 1 Commercial 1,033 2,156 1 1,531 7 Real estate: Construction Commercial 4,398 4,405 7 4,416 45 Residential 2,901 3,038 33 3,136 35 Consumer Total $ 8,332 $ 9,599 $ 41 $ 9,083 $ 87 For the three months ended March 31, interest income, related to impaired loans, would have been $26 in 2017 and $47 in 2016 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 $6,021 at March 31, 2017, $6,208 at December 31, 2016 and $6,998 at March 31, 2016. 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 was one loan modified as a troubled debt restructuring for the three months ended March 31, 2017 for $29. There were no loans modified as troubled debt restructurings for the three months ended March 31, 2016. During the three months ending March 31, 2017, there were four defaults on loans restructured, totaling $1,229. During the three months ending March 31, 2016, there were no defaults on loans restructured. 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, 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 non-accretable non-accretable non-accretable 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 Purchased Loans 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 March 31, 2017 and December 31, 2016 were as follows: March 31 2017 December 31, 2016 Credit impaired purchased loans evaluated individually for incurred credit losses Outstanding balance $ 785 $ 793 Carrying Amount 458 463 Other purchased loans evaluated collectively for incurred credit losses Outstanding balance 36,111 38,901 Carrying Amount 35,347 38,077 Total Purchased Loans Outstanding balance 36,896 39,694 Carrying Amount $ 35,805 $ 38,540 As of the indicated dates, the changes in the accretable discount related to the purchased credit impaired loans were as follows: Three Months Ended March 31, 2017 March 31, 2016 Balance – beginning of period $ 164 $ 307 Accretion recognized during the period (13 ) (94 ) Net reclassification from non-accretable 7 46 Balance – end of period $ 158 $ 259 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 Purchased Loans 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 March 31, 2017 and December 31, 2016 were as follows: March 31, December 31, Credit impaired purchased loans evaluated individually for incurred credit losses Outstanding balance $ 512 $ 608 Carrying Amount 343 424 Other purchased loans evaluated collectively for incurred credit losses Outstanding balance 43,837 45,842 Carrying Amount 43,596 45,593 Total Purchased Loans Outstanding balance 44,349 46,450 Carrying Amount $ 43,939 $ 46,017 As of the indicated dates, the changes in the accretable discount related to the purchased credit impaired loans were as follows: March 31, March 31, Balance – beginning of period $ 206 $ 217 Accretion recognized during the period (10 ) (6 ) Net reclassification from non-accretable (31 ) 2 Balance – end of period $ 165 $ 213 The Company is a party to financial instruments with off-balance Off-balance off-balance |