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 June 30, 2017 and December 31, 2016 are summarized as follows. Net deferred loan costs were $873 and $1,077 at June 30, 2017 and December 31, 2016. June 30, 2017 December 31, 2016 Commercial $ 60,057 $ 51,166 Real estate: Construction 9,491 8,605 Commercial 302,092 212,550 Residential 126,895 130,874 Consumer 6,214 6,148 Total $ 504,749 $ 409,343 The changes in the allowance for loan losses account by major classification of loan for the three and six months ended June 30, 2017 and 2016 are summarized as follows: Real Estate June 30, 2017 Commercial Construction Commercial Residential Consumer Unallocated Total Allowance for loan losses: Beginning Balance April 1, 2017 $ 625 $ 160 $ 2,545 $ 821 $ 54 $ 124 $ 4,329 Charge-offs (10 ) (9 ) (2 ) (21 ) Recoveries 6 1 7 Provisions 142 32 420 10 (4 ) (81 ) 519 Ending balance $ 757 $ 192 $ 2,965 $ 828 $ 49 $ 43 $ 4,834 Real Estate June 30, 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 (10 ) (16 ) (7 ) (33 ) Recoveries 3 7 1 11 Provisions 138 32 852 48 11 $ 43 1,124 Ending balance $ 757 $ 192 $ 2,965 $ 828 $ 49 $ 43 $ 4,834 Real Estate June 30, 2016 Commercial Construction Commercial Residential Consumer Unallocated Total Allowance for loan losses: Beginning Balance April 1, 2016 $ 566 $ 93 $ 2,211 $ 754 $ 30 $ 63 $ 3,717 Charge-offs (249 ) (41 ) (8 ) (5 ) (303 ) Recoveries 36 2 1 39 Provisions (44 ) 326 (70 ) (3 ) 10 (63 ) 156 Ending balance $ 558 $ 170 $ 2,100 $ 745 $ 36 $ $ 3,609 Real Estate June 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 (723 ) (249 ) (65 ) (8 ) (16 ) (1,061 ) Recoveries 46 2 2 50 Provisions (63 ) 217 (62 ) 138 25 255 Ending balance $ 558 $ 170 $ 2,100 $ 745 $ 36 $ $ 3,609 The allocation of the allowance for loan losses and the related loans by major classifications of loans at June 30, 2017 and December 31, 2016 is summarized as follows: Real Estate June 30, 2017 Commercial Construction Commercial Residential Consumer Unallocated Total Allowance for loan losses: Ending balance $ 757 $ 192 $ 2,965 $ 828 $ 49 $ 43 $ 4,834 Ending balance: individually evaluated for impairment 33 205 58 296 Ending balance: collectively evaluated for impairment $ 724 $ 192 $ 2,760 $ 770 $ 49 $ 43 $ 4,538 Loans receivable: Ending balance $ 60,057 $ 9,491 $ 302,092 $ 126,895 $ 6,214 $ 504,749 Ending balance: individually evaluated for impairment 923 3,550 2,533 7,006 Ending balance: collectively evaluated for impairment $ 59,134 $ 9,491 $ 298,542 $ 124,362 $ 6,214 $ 497,743 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 or 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 by 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 a 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 effected 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 June 30, 2017 and December 31, 2016: June 30, 2017 Pass Special Substandard Doubtful Total Commercial $ 56,500 $ 1,840 $ 1,717 $ 60,057 Real estate: Construction 9,081 410 9,491 Commercial 290,502 7,820 3,770 302,092 Residential 125,196 28 1,671 126,895 Consumer 6,214 6,214 Total $ 487,493 $ 10,098 $ 7,158 $ 504,749 December 31, 2016: Pass Special 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 June 30, 2017 and December 31, 2016 is summarized as follows: June 30, December 31, Commercial $ 323 $ 356 Real estate: Construction Commercial 564 359 Residential 815 671 Consumer Total $ 1,702 $ 1,386 The major classifications of loans by past due status at June 30, 2017 and December 31, 2016 are summarized as follows: June 30, 2017 30-59 Days 60-89 Days Greater Total Past Current Total Loans > 90 Commercial $ 1,100 $ 546 $ 208 $ 1,854 $ 58,203 $ 60,057 Real estate: Construction 409 409 9,082 9,491 Commercial 681 159 288 1,128 300,964 302,092 Residential 240 46 656 942 125,953 126,895 $ 35 Consumer 1 1 2 6,212 6,214 Total $ 2,022 $ 1,161 $ 1,152 $ 4,335 $ 500,414 $ 504,749 $ 35 December 31, 2016 30-59 Days 60-89 Days Greater Total Past Current Total Loans > 90 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 and six months ended June 30, 2017 and June 30, 2016, and as of and for the year ended, December 31, 2016 by major loan classification: This Quarter Year-to-Date June 30, 2017 Recorded Unpaid Related Average Interest Average Interest With no related allowance: Commercial $ 840 840 $ 842 $ 7 $ 805 $ 15 Real estate: Construction Commercial 2,685 2,685 2,991 22 3,110 58 Residential 2,342 2,342 2,280 26 2,461 59 Consumer Total 5,867 5,867 6,113 55 6,376 132 With an allowance recorded: Commercial 83 83 33 28 1 75 1 Real estate: Construction Commercial 865 865 205 865 6 787 12 Residential 189 327 58 189 4 94 4 Consumer Total 1,137 1,275 296 1,082 11 956 17 Commercial 923 923 33 870 8 880 16 Real estate: Construction Commercial 3,550 3,550 205 3,856 28 3,897 70 Residential 2,531 2,669 58 2,469 30 2,555 63 Consumer Total $ 7,004 $ 7,142 $ 296 $ 7,195 $ 66 $ 7,332 $ 149 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 Year-to-Date June 30, 2016 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With no related allowance: Commercial $ 848 $ 848 $ $ 850 $ 7 $ 852 $ 14 Real estate: Construction Commercial 3,976 3,976 3,993 45 4,009 90 Residential 2,726 2,863 2,925 34 2,959 68 Consumer Total 7,550 7,687 7,768 86 7,820 172 With an allowance recorded: Commercial 131 131 1 132 134 Real estate: Construction Commercial 207 207 2 209 212 Residential 119 119 33 120 1 120 2 Consumer Total 457 457 36 461 1 466 2 Commercial 979 979 1 982 7 986 14 Real estate: Construction Commercial 4,183 4,183 2 4,202 45 4,221 90 Residential 2,845 2,982 33 3,045 35 3,079 70 Consumer Total $ 8,007 $ 8,144 $ 36 $ 8,229 $ 87 $ 8,286 $ 174 For the three and six months ended June 30, interest income, related to impaired loans, would have been $28 and $54 in 2017 and $28 and $56 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 $5,635 at June 30, 2017, $6,208 at December 31, 2016 and $6,853 at June 30, 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 troubled debt restructuring for the three months ended June 30, 2017 in the amount of $109 and two loans modified as troubled debt restructuring for the six months ended June 30, 2017 in the amount of $138. These loans are residential real estate loans. There were no loans modified as troubled debt restructuring for the three months and six months ending June 30, 2016. During the three months ending June 30, 2017, there were no defaults on loans restructured within the last 12 months. During the six months ending June 30, 2017, there were four defaults on loans restructured within the last twelve months totaling $1,229. These loans were comprised of four residential real estate loans. Each of these loans defaulted as they were all more than 30 days past due as of June 30, 2017. The effect of these defaults on the allowance for loan losses was negligible as all loans were well secured and the delinquencies were promptly cured. During the three months and six months ending June 30, 2016, there was one default on loans restructured within the last 12 months totaling $64. 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 June 30, 2017 and December 31, 2016 were as follows: June 30, 2017 December 31, 2016 Credit impaired purchased loans evaluated individually for incurred credit losses Outstanding balance $ 773 $ 793 Carrying Amount 451 463 Other purchased loans evaluated collectively for incurred credit losses Outstanding balance 33,755 38,901 Carrying Amount 33,321 38,077 Total Purchased Loans Outstanding balance 34,528 39,694 Carrying Amount $ 33,772 $ 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 Six Months Ended June 30, 2017 June 30, 2016 June 30, 2017 June 30, 2016 Balance – beginning of period $ 158 $ 259 $ 164 $ 307 Accretion recognized during the period (14 ) (21 ) (27 ) (115 ) Net reclassification from non-accretable 8 13 15 59 Balance – end of period $ 152 $ 251 $ 152 $ 251 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 June 30, 2017 and December 31, 2016 were as follows: June 30, 2017 December 31, 2016 Credit impaired purchased loans evaluated individually for incurred credit losses Outstanding balance $ 509 $ 608 Carrying Amount 340 424 Other purchased loans evaluated collectively for incurred credit losses Outstanding balance 41,857 45,842 Carrying Amount 41,672 45,593 Total Purchased Loans Outstanding balance 42,366 46,450 Carrying Amount $ 42,012 $ 46,017 As of the indicated dates, the changes in the accretable discount related to the purchased credit impaired loans were as follows: Three Months Ended Six Months Ended June 30, 2017 June 30, 2016 June 30, 2017 June 30, 2016 Balance – beginning of period $ 165 $ 213 $ 206 $ 217 Accretion recognized during the period (7 ) (8 ) (17 ) (14 ) Net reclassification from non-accretable 3 1 (28 ) 3 Balance – end of period $ 161 $ 206 $ 161 $ 206 The Company is a party to financial instruments with off-balance Unused commitments at June 30, 2017, totaled $105,163, consisting of $64,448 in commitments to extend credit, $36,951 in unused portions of lines of credit and $3,764 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, 2016, totaled $58,475, consisting of $27,829 in commitments to extend credit, $26,729 in unused portions of lines of credit and $3,917 in standby letters of credit. |