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, 2019 and December 31, 2018 are summarized as follows. Net deferred loan costs were $1,018 and $1,026 at March 31, 2019 and December 31, 2018. March 31, 2019 December 31, 2018 Commercial $ 117,324 $ 122,919 Real estate: Construction 43,291 39,556 Commercial 491,650 497,597 Residential 214,501 221,115 Consumer 11,304 11,997 Total $ 878,070 $ 893,184 The changes in the allowance for loan losses account by major classification of loan for the three months ended March 31, 2019 and 2018 are summarized as follows: Real Estate March 31, 2019 Commercial Construction Commercial Residential Consumer Unallocated Total Allowance for loan losses: Beginning Balance January 1, 2019 $ 1,162 $ 404 $ 3,298 $ 1,286 $ 50 $ 148 $ 6,348 Charge-offs (376 ) (144 ) (520 ) Recoveries 5 1 1 68 75 Provisions 232 (123 ) 160 279 183 (148 ) 583 Ending balance $ 1,023 $ 281 $ 3,459 $ 1,566 $ 157 $ $ 6,486 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 2 1 39 45 Provisions (316 ) 5 493 (112 ) 55 265 390 Ending balance $ 816 $ 384 $ 3,458 $ 1,179 $ 32 $ 646 $ 6,515 The allocation of the allowance for loan losses and the related loans by major classifications of loans at March 31, 2019 and December 31, 2018 is summarized as follows: Real Estate March 31, 2019 Commercial Construction Commercial Residential Consumer Unallocated Total Allowance for loan losses: Ending balance $ 1,023 $ 281 $ 3,459 $ 1,566 $ 157 $ $ 6,486 Ending balance: individually evaluated for impairment 77 91 55 223 Ending balance: collectively evaluated for impairment 946 281 3,368 1,511 157 6,263 Ending balance: purchased credit impaired loans $ $ $ $ $ $ $ Loans receivable: Ending balance $ 117,324 $ 43,291 $ 491,650 $ 214,501 $ 11,304 $ $ 878,070 Ending balance: individually evaluated for impairment 946 85 1,475 2,147 4,653 Ending balance: collectively evaluated for impairment 116,294 43,206 487,022 212,104 11,304 869,930 Ending balance: purchased credit impaired loans $ 84 $ $ 3,153 $ 250 $ $ $ 3,487 Real Estate December 31, 2018 Commercial Construction Commercial Residential Consumer Unallocated Total Allowance for loan losses: Ending balance $ 1,162 $ 404 $ 3,298 $ 1,286 $ 50 $ 148 $ 6,348 Ending balance: individually evaluated for impairment 382 78 28 488 Ending balance: collectively evaluated for impairment 780 404 3,220 1,258 50 148 5,680 Ending balance: purchased credit impaired loans $ $ $ $ $ $ $ Loans receivable: Ending balance $ 122,919 $ 39,556 $ 497,597 $ 221,115 $ 11,997 $ $ 893,184 Ending balance: individually evaluated for impairment 1,249 1,643 2,146 5,038 Ending balance: collectively evaluated for impairment 121,521 39,556 492,779 218,468 11,997 884,321 Ending balance: purchased credit impaired loans $ 149 $ $ 3,175 $ 501 $ $ $ 3,825 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 March 31, 2019 and December 31, 2018: March 31, 2019 Pass Special Mention Substandard Doubtful Total Commercial $ 104,705 $ 9,043 $ 3,576 $ 117,324 Real estate: Construction 43,043 163 85 43,291 Commercial 458,865 19,076 13,709 491,650 Residential 210,296 2,084 2,121 214,501 Consumer 11,304 11,304 Total $ 828,213 $ 30,366 $ 19,491 $ 878,070 December 31, 2018 Pass Special Substandard Doubtful Total Commercial $ 109,609 $ 9,123 $ 4,187 $ 122,919 Real estate: Construction 39,265 291 39,556 Commercial 471,364 13,106 13,127 497,597 Residential 216,218 2,126 2,771 221,115 Consumer 11,997 11,997 Total $ 848,453 $ 24,355 $ 20,376 $ 893,184 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, 2019 and December 31, 2018. Purchase credit impaired (“PCI”) loans are excluded from the aging and nonaccrual loan schedules. Accrual Loans March 31, 2019 30-59 Days Past Due 60-89 Days Past Due 90 or More Days Past Due Total Past Due Current Nonaccrual Loans Total Loans Commercial $ 56 $ $ $ 56 $ 116,343 $ 841 $ 117,240 Real estate: Construction 250 250 42,957 84 43,291 Commercial 1,244 4 81 1,329 486,471 697 488,497 Residential 1,668 249 20 1,937 211,293 1,021 214,251 Consumer 65 27 21 113 11,191 11,304 Total $ 3,283 $ 280 $ 122 $ 3,685 $ 868,255 $ 2,643 $ 874,583 Purchased credit impaired loans 3,487 Total Loans $ 878,070 Accrual Loans December 31, 2018 30-59 Days Past Due 60-89 Days Past Due 90 or More Days Past Due Total Past Due Current Nonaccrual Loans Total Loans Commercial $ 69 $ 128 $ 82 $ 279 $ 121,350 $ 1,141 $ 122,770 Real estate: Construction 11 655 247 913 38,643 39,556 Commercial 467 538 170 1,175 492,545 702 494,422 Residential 4,537 1,322 290 6,149 213,579 886 220,614 Consumer 124 57 50 231 11,766 11,997 Total $ 5,208 $ 2,700 $ 839 $ 8,747 $ 877,883 $ 2,729 $ 889,359 Purchased credit impaired loans 3,825 Total Loans $ 893,184 The following tables summarize information concerning impaired loans as of and for the three months ended March 31, 2019 and 2018, and as of and for the year ended, December 31, 2018 by major loan classification: This Quarter March 31, 2019 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized With no related allowance: Commercial $ 189 $ 189 $ 169 $ 23 Real estate: Construction 85 85 43 Commercial 4,257 4,257 4,271 100 Residential 2,217 2,217 2,342 91 Consumer Total 6,748 6,748 6,825 214 With an allowance recorded: Commercial 841 841 $ 77 1,045 Real estate: Construction Commercial 371 371 91 453 4 Residential 180 318 55 181 1 Consumer Total 1,392 1,530 223 1,679 5 Commercial 1,030 1,030 77 1,214 23 Real estate: Construction 85 85 43 Commercial 4,628 4,628 91 4,724 104 Residential 2,397 2,535 55 2,523 92 Consumer Total $ 8,140 $ 8,278 $ 223 $ 8,504 $ 219 For the Year Ended December 31, 2018 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized With no related allowance: Commercial $ 149 $ 149 $ 459 $ 564 Real estate: Construction Commercial 4,284 4,284 6,382 2,846 Residential 2,466 2,466 2,875 460 Consumer Total 6,899 6,899 9,716 3,870 With an allowance recorded: Commercial 1,249 1,249 $ 382 1,117 7 Real estate: Construction Commercial 534 534 78 676 17 Residential 181 319 28 184 3 Consumer Total 1,964 2,102 488 1,977 27 Commercial 1,398 1,398 382 1,576 571 Real estate: Construction Commercial 4,818 4,818 78 7,058 2,863 Residential 2,647 2,785 28 3,059 463 Consumer Total $ 8,863 $ 9,001 $ 488 $ 11,693 $ 3,897 This Quarter March 31, 2018 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized 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 three months ended March 31, interest income, related to impaired loans, would have been $60 in 2019 and $47 in 2018 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 $2,765 at March 31, 2019, $2,925 at December 31, 2018 and $5,429 at March 31, 2018. There was one loan modified as troubled debt restructuring for the three months ended March 31, 2019. There were no loans modified as troubled debt restructuring for the three months ended March 31, 2018. During the three months ended March 31, 2019 there was one default on a residential loan restructured. In 2018, 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, Loan and Debt Securities Acquired with Deteriorated Credit Quality and are identified as “Purchased Credit Impaired Loans”. 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 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 unpaid principal balances and the related carrying amount of acquired loans as of March 31, 2019 and December 31, 2018 were as follows: March 31, 2019 December 31, 2018 Credit impaired purchased loans evaluated individually for incurred credit losses: Outstanding balance $ 6,970 $ 7,491 Carrying Amount 3,487 3,825 Other purchased loans evaluated collectively for incurred credit losses: Outstanding balance 297,987 315,013 Carrying Amount 297,522 314,328 Total Purchased Loans: Outstanding balance 304,957 322,504 Carrying Amount $ 301,009 $ 318,153 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, 2019 2018 Balance—beginning of period $ 579 $ 2,129 Additions Accretion recognized during the period (183 ) (1,443 ) Net reclassification from non-accretable to accretable 34 969 Balance—end of period $ 430 $ 1,655 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 March 31, 2019, totaled $139,086 consisting of $71,867 in commitments to extend credit, $61,488 in unused portions of lines of credit and $5,731 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, 2018, totaled $161,732, consisting of $96,431 in commitments to extend credit, $59,512 in unused portions of lines of credit and $5,789 in standby letters of credit. |