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, 2018 and December 31, 2017 are summarized as follows. Net deferred loan costs were $891 and $863 at March 31, 2018 and December 31, 2017. March 31, December 31, Commercial $ 135,049 $ 140,116 Real estate: Construction 33,209 34,405 Commercial 516,333 526,230 Residential 236,390 240,626 Consumer 13,209 14,594 Total $ 934,190 $ 955,971 The changes in the allowance for loan losses account by major classification of loan for the three months ended March 31, 2018 and 2017 are summarized as follows: Real Estate March 31, 2018 Commercial Construction Commercial Residential Consumer Unallocated Total Allowance for loan losses: Beginning Balance January 1, 2018 $ 1,206 $ 379 $ 2,963 $ 1,340 $ 37 $ 381 $ 6,306 Charge-offs (77 ) (50 ) (99 ) (226 ) Recoveries 3 22 1 39 45 Provisions (316 ) 5 493 (112 ) 55 265 390 Ending balance $ 816 $ 384 $ 3,458 $ 1,179 $ 32 $ 646 $ 6,515 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 2 1 4 Provisions (4 ) 432 38 15 $ 124 605 Ending balance $ 625 $ 160 $ 2,545 $ 821 $ 54 $ 124 $ 4,329 The allocation of the allowance for loan losses and the related loans by major classifications of loans at March 31, 2018 and December 31, 2017 is summarized as follows: Real Estate March 31, 2018 Commercial Construction Commercial Residential Consumer Unallocated Total Allowance for loan losses: Ending balance $ 816 $ 384 $ 3,458 $ 1,179 $ 32 $ 646 $ 6,515 Ending balance: individually evaluated for impairment 69 78 47 194 Ending balance: collectively evaluated for impairment 747 384 3,380 1,132 32 646 6,321 Ending balance: purchased credit impaired loans $ $ $ $ $ $ $ Loans receivable: Ending balance $ 135,049 $ 33,209 $ 516,333 $ 236,390 $ 13,209 $ $ 934,190 Ending balance: individually evaluated for impairment 1,693 2,919 2,414 7,026 Ending balance: collectively evaluated for impairment 132,912 33,209 507,714 233,052 13,209 920,096 Ending balance: purchased credit impaired loans $ 444 $ $ 5,700 $ 924 $ $ $ 7,068 Real Estate December 31, 2017 Commercial Construction Commercial Residential Consumer Unallocated Total Allowance for loan losses: Ending balance $ 1,206 $ 379 $ 2,963 $ 1,340 $ 37 $ 381 $ 6,306 Ending balance: individually evaluated for impairment 56 76 92 224 Ending balance: collectively evaluated for impairment 1,150 379 2,887 1,248 37 381 6,082 Ending balance: purchased credit impaired loans $ $ $ $ $ $ $ Loans receivable: Ending balance $ 140,116 $ 34,405 $ 526,230 $ 240,626 $ 14,594 $ $ 955,971 Ending balance: individually evaluated for impairment 777 2,988 2,482 6,247 Ending balance: collectively evaluated for impairment 138,824 34,405 516,300 237,089 14,594 941,212 Ending balance: purchased credit impaired loans $ 515 $ $ 6,942 $ 1,055 $ $ $ 8,512 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 March 31, 2018 and December 31, 2017: March 31, 2018 Pass Special Substandard Doubtful Total Commercial $ 121,929 $ 8,623 $ 4,497 $ 135,049 Real estate: Construction 32,028 1,058 123 33,209 Commercial 489,204 11,724 15,405 516,333 Residential 230,320 2,187 3,883 236,390 Consumer 13,111 98 13,209 Total $ 886,592 $ 23,690 $ 23,908 $ 934,190 December 31, 2017 Pass Special Substandard Doubtful Total Commercial $ 126,506 $ 9,372 $ 4,238 $ 140,116 Real estate: Construction 32,840 1,442 123 34,405 Commercial 497,852 15,305 13,073 526,230 Residential 234,808 2,214 3,604 240,626 Consumer 14,474 120 14,594 Total $ 906,480 $ 28,453 $ 21,038 $ 955,971 The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of March 31, 2018 and December 31, 2017. Purchase credit impaired (“PCI”) loans are excluded from the aging and nonaccrual loan schedules. Accrual Loans March 31, 2018 30-59 Days 60-89 Days 90 or More Total Past Current Nonaccrual Total Loans Commercial $ 864 $ 23 $ 887 $ 132,723 $ 995 $ 134,605 Real estate: Construction 14 14 33,195 33,209 Commercial 1,767 60 $ 150 1,977 508,309 347 510,633 Residential 2,121 231 234 2,586 231,598 1,282 235,466 Consumer 125 19 9 153 13,056 13,209 Total $ 4,891 $ 333 $ 393 $ 5,617 $ 918,881 $ 2,624 $ 927,122 Purchased credit impaired loans 7,068 Total Loans $ 934,190 Accrual Loans December 31, 2017 30-59 Days 60-89 Days 90 or More Total Past Current Nonaccrual Total Loans Commercial $ 1,829 $ 85 $ 1,914 $ 137,612 $ 75 $ 139,601 Real estate: Construction 8 8 34,397 34,405 Commercial 2,213 152 $ 150 2,515 516,410 363 519,288 Residential 2,110 551 533 3,194 235,070 1,307 239,571 Consumer 149 60 9 218 14,376 14,594 Total $ 6,309 $ 848 $ 692 $ 7,849 $ 937,865 $ 1,745 $ 947,459 Purchased credit impaired loans 8,512 Total Loans $ 955,971 The following tables summarize information concerning impaired loans as of and for the three months ended March 31, 2018 and 2017, and as of and for the year ended, December 31, 2017 by major loan classification: This Quarter March 31, 2018 Recorded Unpaid Related Average Interest With no related allowance: Commercial $ 1,033 $ 1,033 $ 1,119 $ 353 Real estate: Construction Commercial 8,084 8,084 8,736 1,035 Residential 3,152 3,170 3,252 79 Consumer Total 12,269 12,287 13,107 1,467 With an allowance recorded: Commercial 1,105 1,105 $ 69 442 2 Real estate: Construction Commercial 534 534 78 535 6 Residential 186 324 47 187 2 Consumer Total 1,825 1,963 194 1,164 10 Commercial 2,138 2,138 69 1,561 355 Real estate: Construction Commercial 8,618 8,618 78 9,271 1,041 Residential 3,338 3,494 47 3,439 81 Consumer Total $ 14,094 $ 14,250 $ 194 $ 14,271 $ 1,477 For the Year Ended December 31, 2017 Recorded Unpaid Related Average Interest With no related allowance: Commercial $ 1,107 $ 1,107 $ 1,210 $ 77 Real estate: Construction Commercial 9,399 9,399 10,164 340 Residential 3,197 3,215 2,896 149 Consumer Total 13,703 13,721 14,270 566 With an allowance recorded: Commercial 185 185 $ 56 186 1 Real estate: Construction Commercial 531 531 76 532 23 Residential 340 478 92 339 12 Consumer Total 1,056 1,194 224 1,057 36 Commercial 1,292 1,292 56 1,396 78 Real estate: Construction Commercial 9,930 9,930 76 10,696 363 Residential 3,537 3,693 92 3,235 161 Consumer Total $ 14,759 $ 14,915 $ 224 $ 15,327 $ 602 This Quarter March 31, 2017 Recorded Unpaid Related Average Interest 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 three months ended March 31, interest income, related to impaired loans, would have been $47 in 2018 and $26 in 2017 had the loans been current and the terms of the loans not been modified. 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. 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 $5,429 at March 31, 2018, $5,606 at December 31, 2017 and $6,021 at March 31, 2017. The following tables present the number of loans and recorded investment in loans restructured and identified as troubled debt restructurings for the three months ended March 31, 2017, as well as the number and recorded investment in these loans that subsequently defaulted. Defaulted loans are those which are 30 days or more past due for payment under the modified terms. There were no loans restructured as troubled debt restructuring for the three months ended March 31, 2018. March 31, 2017 Number of Pre-Modification Post-Modification Recorded Troubled Debt Restructurings: Residential real estate 1 $ 59 $ 29 $ 29 During 2018, there were no defaults on loans restructured and four defaults on loans restructured totaling $1,229 during 2017. 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 CBT, effective October 1, 2017, the Bank identified 37 purchased credit impaired (“PCI”) loans. As part of the merger with Citizens, effective December 31, 2015, the Bank identified 10 PCI loans. As a result of the consolidation with Union, effective November 1, 2013, the Bank identified 14 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 unpaid principal balances and the related carrying amount of acquired loans as of March 31, 2018 and December 31, 2017 were as follows: March 31, December 31, Credit impaired purchased loans evaluated individually for incurred credit losses: Outstanding balance $ 13,861 $ 16,803 Carrying Amount 7,068 8,512 Other purchased loans evaluated collectively for incurred credit losses: Outstanding balance 405,063 421,620 Carrying Amount 402,084 418,146 Total Purchased Loans: Outstanding balance 418,924 438,423 Carrying Amount $ 409,152 $ 426,658 As of the indicated dates, the changes in the accretable discount related to the purchased credit impaired loans were as follows: Quarter Ended March 31, 2018 2017 Balance—beginning of period $ 2,129 $ 370 Additions Accretion recognized during the period (1,443 ) (23 ) Net reclassification from non-accretable 969 (24 ) Balance—end of period $ 1,655 $ 323 The Company is a party to financial instruments with off-balance Unused commitments at March 31, 2018, totaled $123,691, consisting of $47,834 in commitments to extend credit, $71,162 in unused portions of lines of credit and $4,695 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, 2017, totaled $129,734, consisting of $52,706 in commitments to extend credit, $72,157 in unused portions of lines of credit and $4,871 in standby letters of credit. |