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, 2019 and December 31, 2018 are summarized as follows. Net deferred loan costs were $1,128 and $1,026 at September 30, 2019 and December 31, 2018 . September 30, December 31, Commercial $ 129,252 $ 122,919 Real estate: Construction 58,558 39,556 Commercial 479,265 497,597 Residential 207,215 221,115 Consumer 9,216 11,997 Total $ 883,506 $ 893,184 The changes in the allowance for loan losses account by major classification of loan for the three and nine months ended September 30, 2019 and 2018 are summarized as follows: Real Estate September 30, 2019 Commercial Construction Commercial Residential Consumer Unallocated Total Allowance for loan losses: Beginning Balance, July 1, 2019 $ 1,117 $ 491 $ 3,591 $ 1,649 $ 154 $ $ 7,002 Charge-offs (759 ) (110 ) (5 ) (111 ) (985 ) Recoveries 1 2 28 31 Provisions 876 30 95 (28 ) 74 2 1,049 Ending balance $ 1,235 $ 521 $ 3,578 $ 1,616 $ 145 $ 2 $ 7,097 Real Estate September 30, 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 (1,148 ) (110 ) (25 ) (364 ) (1,647 ) Recoveries 12 4 4 126 146 Provisions 1,209 117 386 351 333 (146 ) 2,250 Ending balance $ 1,235 $ 521 $ 3,578 $ 1,616 $ 145 $ 2 $ 7,097 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-off (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 The allocation of the allowance for loan losses and the related loans by major classifications of loans at September 30, 2019 and December 31, 2018 is summarized as follows: Real Estate September 30, 2019 Commercial Construction Commercial Residential Consumer Unallocated Total Allowance for loan losses: Ending balance $ 1,235 $ 521 $ 3,578 $ 1,616 $ 145 $ 2 $ 7,097 Ending balance: individually evaluated for impairment 29 251 45 325 Ending balance: collectively evaluated for impairment 1,206 521 3,327 1,571 145 2 6,772 Ending balance: purchased credit impaired loans $ $ $ $ $ $ $ Loans receivable: Ending balance $ 129,252 $ 58,558 $ 479,265 $ 207,215 $ 9,216 $ $ 883,506 Ending balance: individually evaluated for impairment 1,723 1,312 2,110 5,145 Ending balance: collectively evaluated for impairment 127,514 58,558 476,432 204,860 9,216 876,580 Ending balance: purchased credit impaired loans $ 15 $ $ 1,521 $ 245 $ $ $ 1,781 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 September 30, 2019 and December 31, 2018: September 30, 2019 Pass Special Substandard Doubtful Total Commercial $ 117,183 $ 8,221 $ 3,848 $ 129,252 Real estate: Construction 58,399 159 58,558 Commercial 447,077 13,889 18,299 479,265 Residential 202,774 2,038 2,403 207,215 Consumer 9,216 9,216 Total $ 834,649 $ 24,307 $ 24,550 $ 883,506 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 September 30, 2019 and December 31, 2018. Purchase credit impaired (“PCI”) loans are excluded from the aging and nonaccrual loan schedules. Accrual Loans September 30, 2019 30-59 Days 60-89 Days 90 or More Total Past Current Nonaccrual Total Loans Commercial $ 149 $ $ $ 149 $ 127,467 $ 1,621 $ 129,237 Real estate: Construction 10 10 58,548 58,558 Commercial 380 1,379 1,759 475,446 538 477,743 Residential 1,325 469 63 1,857 204,346 768 206,971 Consumer 62 19 37 118 9,098 9,216 Total $ 1,926 $ 1,867 $ 100 $ 3,893 $ 874,905 $ 2,927 $ 881,725 Purchased credit impaired loans 1,781 Total Loans $ 883,506 Accrual Loans December 31, 2018 30-59 Days 60-89 Days 90 or More Total Past Current Nonaccrual 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 and nine months ended September 30, 2019 and 2018, and as of and for the year ended, December 31, 2018 by major loan classification: This Quarter Year-to-Date September 30, 2019 Recorded Unpaid Related Average Interest Average Interest With no related allowance: Commercial $ 1,617 $ 2,256 $ $ 871 $ 96 $ 399 $ 604 Real estate: Construction 29 Commercial 2,048 2,048 3,135 1,204 3,882 1,408 Residential 2,178 2,178 2,189 33 2,247 158 Consumer Total 5,843 6,482 6,195 1,333 6,557 2,170 With an allowance recorded: Commercial 121 121 29 448 767 Real estate: Construction Commercial 785 939 251 579 4 468 12 Residential 177 315 45 178 2 179 5 Consumer Total 1,083 1,375 325 1,205 6 1,414 17 Commercial 1,738 2,377 29 1,319 96 1,166 604 Real estate: Construction 29 Commercial 2,833 2,987 251 3,714 1,208 4,350 1,420 Residential 2,355 2,493 45 2,367 35 2,426 163 Consumer Total $ 6,926 $ 7,857 $ 325 $ 7,400 $ 1,339 $ 7,971 $ 2,187 For the Year Ended December 31, 2018 Recorded Unpaid Related Average Interest 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 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 three and nine months ended September 30, interest income related to impaired loans, would have been $48 and $133 in 2019 and $23 and $79 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 $2,729 at September 30, 2019, $2,925 at December 31, 2018 and $4,766 at September 30, 2018. There were no loans modified as troubled debt restructuring during the third quarter of 2019 and one loan modified during the nine months ended September 30, 2019. There were no loans modified as troubled debt restructuring for the three and nine months ended September 30, 2018. During the three months ended September 30, 2019, there were no defaults on loans restructured and one default on a restructured loan totaling $222 during the nine months ended September 30, 2019. 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. 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 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 September 30, 2019 and December 31, 2018 were as follows: September 30, December 31, Credit impaired purchased loans evaluated individually for incurred credit losses: Outstanding balance $ 2,975 $ 7,491 Carrying Amount 1,781 3,825 Other purchased loans evaluated collectively for incurred credit losses: Outstanding balance 265,901 315,013 Carrying Amount 265,778 314,328 Total Purchased Loans: Outstanding balance 268,876 322,504 Carrying Amount $ 267,559 $ 318,153 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 2019 2018 2019 2018 Balance—beginning of period $ 305 $ 1,439 $ 579 $ 2,129 Accretion recognized during the period (1,301 ) (819 ) (2,075 ) (2,673 ) Net reclassification from non-accretable to accretable 1,103 208 1,603 1,372 Balance—end of period $ 107 $ 828 $ 107 $ 828 The Company is a party to financial instruments with off-balance Unused commitments at September 30, 2019, totaled $167,736 consisting of $96,519 in commitments to extend credit, $65,893 in unused portions of lines of credit and $5,324 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. |