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, 2018 and December 31, 2017 are summarized as follows. Net deferred loan costs were $1,019 and $863 at September 30, 2018 and December 31, 2017. September 30, December 31, Commercial $ 128,265 $ 140,116 Real estate: Construction 36,478 34,405 Commercial 510,840 526,230 Residential 227,132 240,626 Consumer 12,814 14,594 Total $ 915,529 $ 955,971 The changes in the allowance for loan losses account by major classification of loan for the three and nine months ended September 30, 2018 and 2017 are summarized as follows: Real Estate September 30, 2018 Commercial Construction Commercial Residential Consumer Unallocated Total Allowance for loan losses: Beginning Balance, July 1, 2018 $ 1,026 $ 249 $ 3,606 $ 1,295 $ 36 $ 189 $ 6,401 Charge-offs (23 ) (33 ) (133 ) (189 ) Recoveries 2 1 8 24 35 Provisions 411 61 (212 ) 26 120 (181 ) 225 Ending balance $ 1,416 $ 310 $ 3,395 $ 1,296 $ 47 $ 8 $ 6,472 Real Estate September 30, 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 (193 ) (93 ) (295 ) (581 ) Recoveries 10 5 29 88 132 Provisions 393 (69 ) 427 20 217 (373 ) 615 Ending balance $ 1,416 $ 310 $ 3,395 $ 1,296 $ 47 $ 8 $ 6,472 Real Estate September 30, 2017 Commercial Construction Commercial Residential Consumer Unallocated Total Allowance for loan losses: Beginning Balance, July 1, 2017 $ 757 $ 192 $ 2,965 $ 828 $ 49 $ 43 $ 4,834 Charge-offs (24 ) (18 ) (42 ) Recoveries 1 1 2 Provisions 421 (3 ) (56 ) 127 (4 ) 125 610 Ending balance $ 1,155 $ 189 $ 2,909 $ 937 $ 46 $ 168 $ 5,404 Real Estate September 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 (34 ) (34 ) (7 ) (75 ) Recoveries 1 3 7 2 13 Provisions 559 29 796 175 7 $ 168 1,732 Ending balance $ 1,155 $ 189 $ 2,909 $ 937 $ 46 $ 168 $ 5,404 The allocation of the allowance for loan losses and the related loans by major classifications of loans at September 30, 2018 and December 31, 2017 is summarized as follows: Real Estate September 30, 2018 Commercial Construction Commercial Residential Consumer Unallocated Total Allowance for loan losses: Ending balance $ 1,416 $ 310 $ 3,395 $ 1,296 $ 47 $ 8 $ 6,472 Ending balance: individually evaluated for impairment 398 139 34 571 Ending balance: collectively evaluated for impairment 1,018 310 3,256 1,262 47 8 5,901 Ending balance: purchased credit impaired loans $ $ $ $ $ $ Loans receivable: Ending balance $ 128,265 $ 36,478 $ 510,840 $ 227,132 $ 12,814 $ 915,529 Ending balance: individually evaluated for impairment 1,280 3,413 2,256 6,949 Ending balance: collectively evaluated for impairment 126,697 36,478 503,555 224,085 12,814 903,629 Ending balance: purchased credit impaired loans $ 288 $ $ 3,872 $ 791 $ $ 4,951 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 occur 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, 2018 and December 31, 2017: September 30, 2018 Pass Special Substandard Doubtful Total Commercial $ 111,392 $ 9,423 $ 7,450 $ 128,265 Real estate: Construction 35,770 1 707 36,478 Commercial 489,199 8,805 12,836 510,840 Residential 221,778 2,524 2,830 227,132 Consumer 12,814 12,814 Total $ 870,953 $ 20,753 $ 23,823 $ 915,529 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 September 30, 2018 and December 31, 2017. Purchase credit impaired (“PCI”) loans are excluded from the aging and nonaccrual loan schedules. Accrual Loans September 30, 2018 30-59 Days 60-89 Days 90 or More Total Past Current Nonaccrual Total Loans Commercial $ 187 $ 113 $ 300 $ 126,505 $ 1,172 $ 127,977 Real estate: Construction 373 373 36,105 36,478 Commercial 379 520 $ 99 998 505,260 710 506,968 Residential 1,618 367 106 2,091 223,352 898 226,341 Consumer 107 48 20 175 12,639 12,814 Total $ 2,664 $ 1,048 $ 225 $ 3,937 $ 903,861 $ 2,780 $ 910,578 Purchased credit impaired loans 4,951 Total Loans $ 915,529 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 and nine months ended September 30, 2018 and 2017, and as of and for the year ended, December 31, 2017 by major loan classification: This Quarter Year-to-Date September 30, 2018 Recorded Unpaid Related Average Interest Average Interest With no related allowance: Commercial $ 288 $ 288 $ $ 327 $ 27 $ 562 $ 399 Real estate: Construction Commercial 6,181 6,181 6,580 795 7,081 2,165 Residential 2,865 2,883 2,941 64 3,011 201 Consumer Total 9,334 9,352 9,848 886 10,654 2,765 With an allowance recorded: Commercial 1,280 1,280 398 1,056 2 1,072 5 Real estate: Construction Commercial 1,104 1,104 139 818 4 723 11 Residential 182 320 34 184 184 3 Consumer Total 2,566 2,704 571 2,058 6 1,979 19 Commercial 1,568 1,568 398 1,383 29 1,634 404 Real estate: Construction Commercial 7,285 7,285 139 7,398 799 7,804 2,176 Residential 3,047 3,203 34 3,125 64 3,195 204 Consumer Total $ 11,900 $ 12,056 $ 571 $ 11,906 $ 892 $ 12,633 $ 2,784 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 Year-to-Date September 30, 2017 Recorded Unpaid Related Average Interest Average Interest With no related allowance: Commercial $ 724 $ 724 $ 798 $ 8 $ 803 $ 23 Real estate: Construction Commercial 2,753 2,753 2,760 32 2,992 90 Residential 2,274 2,292 2,304 28 2,408 87 Consumer Total 5,751 5,769 5,862 68 6,203 200 With an allowance recorded: Commercial 75 75 $ 25 78 76 1 Real estate: Construction Commercial 918 918 194 820 8 798 20 Residential 188 326 54 189 2 126 6 Consumer Total 1,181 1,319 273 1,087 10 1,000 27 Commercial 799 799 25 876 8 879 24 Real estate: Construction Commercial 3,671 3,671 194 3,580 40 3,790 110 Residential 2,462 2,618 54 2,493 30 2,534 93 Consumer Total $ 6,932 $ 7,088 $ 273 $ 6,949 $ 78 $ 7,203 $ 227 For the three and nine months ended September 30, interest income related to impaired loans, would have increased by $23 and $79 in 2018 and $23 and $77 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 $4,766 at September 30, 2018, $5,606 at December 31, 2017 and $5,793 at September 30, 2017. There were no loans modified as troubled debt restructuring for the three and nine months ended September 30, 2018. There were no loans modified as troubled debt restructuring for the three months ended September 30, 2017 and two residential real estate loans modified as troubled debt restructuring for the nine months ended September 30, 2017 in the amount of $138. During the three months ended September 30, 2018, there were no defaults on loans restructured and six defaults on loans restructured totaling $1,474 during the nine months ended September 30, 2018. During the three months ended September 30, 2017, there was one default on loans restructured within the last twelve months. During the nine months ended September 30, 2017, there were five defaults on loan restructured within the last twelve months totaling $1,374. 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 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 September 30, 2018 and December 31, 2017 were as follows: September 30, December 31, Credit impaired purchased loans evaluated individually for incurred credit losses: Outstanding balance $ 9,853 $ 16,803 Carrying Amount 4,951 8,512 Other purchased loans evaluated collectively for incurred credit losses: Outstanding balance 339,136 421,620 Carrying Amount 337,280 418,146 Total Purchased Loans: Outstanding balance 348,989 438,423 Carrying Amount $ 342,231 $ 426,658 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 2018 2017 2018 2017 Balance – beginning of period $ 1,439 $ 323 $ 2,129 $ 370 Accretion recognized during the period (819 ) (21 ) (2,673 ) (44 ) Net reclassification from non-accretable 208 11 1,372 (13 ) Balance – end of period $ 828 $ 313 $ 828 $ 313 The Company is a party to financial instruments with off-balance Unused commitments at September 30, 2018, totaled $137,801 consisting of $71,813 in commitments to extend credit, $60,276 in unused portions of lines of credit and $5,712 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. |