Loans and the Allowance for Loan Losses | Note 6 – Loans and the Allowance for Loan Losses – Loans receivable at June 30, 2016 and December 31, 2015 are summarized as follows: June 30, December 31, (Dollars in thousands) Real estate loans: Construction and land $ 107,832 $ 97,872 Farmland 7,115 8,897 1-4 family residential 122,024 112,954 Multi-family residential 20,736 26,058 Nonfarm nonresidential 290,703 312,207 Commercial 205,847 185,276 Consumer 43,593 29,128 Total loans held for investment 797,850 772,392 Less: Allowance for loan losses (7,380 ) (7,244 ) Net loans $ 790,470 $ 765,148 The performing one-to-four family residential, multi-family residential, commercial real estate, and commercial loans are pledged, under a blanket lien, as collateral securing advances from the FHLB at June 30, 2016 and December 31, 2015. Net deferred loan origination fees were $800,000 and $740,000 at June 30, 2016 and December 31, 2015, respectively, and are netted in their respective loan categories above. In addition to loans issued in the normal course of business, the Company considers overdrafts on customer deposit accounts to be loans, and reclassifies overdrafts as loans in its consolidated balance sheets. At June 30, 2016 and December 31, 2015, overdrafts of $326,000 and $150,000, respectively, have been reclassified to loans. The Bank is the lead lender on participations sold, without recourse, to other financial institutions which are not included in the consolidated balance sheets. The unpaid principal balances of mortgages and other loans serviced for others were approximately $58.0 million and $44.7 million at June 30, 2016 and December 31, 2015, respectively. The Bank grants loans and extensions of credit to individuals and a variety of businesses and corporations located in its general market areas throughout Louisiana. Management segregates the loan portfolio into portfolio segments which is defined as the level at which the Bank develops and documents a systematic method for determining its allowance for loan losses. The portfolio segments are segregated based on loan types and the underlying risk factors present in each loan type. Such risk factors are periodically reviewed by management and revised as deemed appropriate. Loans acquired in business combinations are initially recorded at fair value, which includes an estimate of credit losses expected to be realized over the remaining lives of the loans, and therefore no corresponding allowance for loan losses is recorded for these loans at acquisition. Methods utilized to estimate any subsequently required allowance for loan losses for acquired loans not deemed credit-impaired at acquisition are similar to originated loans; however, the estimate of loss is based on the unpaid principal balance and then compared to any remaining unaccreted purchase discount. To the extent the calculated loss is greater than the remaining unaccreted discount, an allowance is recorded for such difference. The following table sets forth, as of June 30, 2016 and December 31, 2015, the balance of the allowance for loan losses by portfolio segment, disaggregated by impairment methodology, which is then further segregated by amounts evaluated for impairment collectively and individually. The allowance for loan losses allocated to each portfolio segment is not necessarily indicative of future losses in any particular portfolio segment and does not restrict the use of the allowance to absorb losses in other portfolio segments. Allowance for Credit Losses and Recorded Investment in Loans Receivable June 30, 2016 (Dollars in thousands) Real Estate: Real Estate: Real Estate: Real Estate: Multi-family Real Estate: Commercial Consumer Total Allowance for credit losses: Beginning Balance $ 600 $ 30 $ 1,021 $ 101 $ 1,416 $ 3,618 $ 458 $ 7,244 Charge-offs (2 ) — (99 ) — (361 ) (390 ) — (852 ) Recoveries 9 — 95 — 1 30 33 168 Provision 251 21 369 75 739 (371 ) (264 ) 820 Ending Balance $ 858 $ 51 $ 1,386 $ 176 $ 1,795 $ 2,887 $ 227 $ 7,380 Ending Balance: Individually evaluated for impairment $ 505 $ — $ 180 $ — $ — $ 317 $ — $ 1,002 Collectively evaluated for impairment $ 353 $ 51 $ 1,152 $ 132 $ 1,795 $ 2,570 $ 227 $ 6,280 Purchased Credit Impaired (1) $ — $ — $ 54 $ 44 $ — $ — $ — $ 98 Loans receivable: Ending Balance $ 107,832 $ 7,115 $ 122,024 $ 20,736 $ 290,703 $ 205,847 $ 43,593 $ 797,850 Ending Balance: Individually evaluated for impairment $ 1,434 $ — $ 3,755 $ — $ 4,286 $ 3,441 $ — $ 12,916 Collectively evaluated for impairment $ 106,225 $ 7,115 $ 117,789 $ 20,534 $ 284,553 $ 202,406 $ 43,593 $ 782,215 Purchased Credit Impaired (1) $ 173 $ — $ 480 $ 202 $ 1,864 $ — $ — $ 2,719 (1) Purchased credit impaired loans are evaluated for impairment on an individual basis. December 31, 2015 (Dollars in thousands) Real Estate: Real Estate: Real Estate: Real Estate: Multi-family Real Estate: Commercial Consumer Total Allowance for credit losses: Beginning balance $ 525 $ 19 $ 775 $ 35 $ 1,140 $ 3,813 $ 325 $ 6,632 Charge-offs (102 ) — (144 ) — (44 ) (695 ) — (985 ) Recoveries 34 — 94 — 13 164 92 397 Provision 143 11 296 66 307 336 41 1,200 Ending Balance $ 600 $ 30 $ 1,021 $ 101 $ 1,416 $ 3,618 $ 458 $ 7,244 Ending Balance: Individually evaluated for impairment $ 504 $ — $ 129 $ — $ — $ 475 $ — $ 1,108 Collectively evaluated for impairment $ 96 $ 30 $ 838 $ 57 $ 1,416 $ 3,143 $ 458 $ 6,038 Purchased Credit Impaired (1) $ — $ — $ 54 $ 44 $ — $ — $ — $ 98 Loans receivable: Ending Balance $ 97,872 $ 8,897 $ 112,954 $ 26,058 $ 312,207 $ 185,276 $ 29,128 $ 772,392 Ending Balance: Individually evaluated for impairment $ 1,732 $ — $ 3,666 $ — $ 4,172 $ 2,226 $ — $ 11,796 Collectively evaluated for impairment $ 96,046 $ 8,897 $ 108,778 $ 25,829 $ 305,234 $ 183,050 $ 29,128 $ 756,962 Purchased Credit Impaired (1) $ 94 $ — $ 510 $ 229 $ 2,801 $ — $ — $ 3,634 (1) Purchased credit impaired loans are evaluated for impairment on an individual basis. Management further disaggregates the loan portfolio segments into classes of loans, which are based on the initial measurement of the loan, risk characteristics of the loan and the method for monitoring and assessing the credit risk of the loan. As of June 30, 2016 and December 31, 2015, the credit quality indicators, disaggregated by class of loan, are as follows: Credit Quality Indicators June 30, 2016 Pass Special Mention Substandard Doubtful Total (Dollars in thousands) Real Estate Loans: Construction and land $ 102,205 $ 2,319 $ 1,775 $ 1,533 $ 107,832 Farmland 7,115 — — — 7,115 1-4 family residential 113,267 2,342 3,126 3,289 122,024 Multi-family residential 19,879 — 655 202 20,736 Nonfarm nonresidential 263,811 13,782 11,320 1,790 290,703 Commercial 173,740 22,302 7,511 2,294 205,847 Consumer 43,156 268 169 — 43,593 Total $ 723,173 $ 41,013 $ 24,556 $ 9,108 $ 797,850 December 31, 2015 Pass Special Mention Substandard Doubtful Total (Dollars in thousands) Real Estate Loans: Construction and land $ 93,740 $ 1,300 $ 1,094 $ 1,738 $ 97,872 Farmland 8,897 — — — 8,897 1-4 family residential 104,720 1,824 3,205 3,205 112,954 Multi-family residential 24,884 945 — 229 26,058 Nonfarm nonresidential 281,503 12,727 16,171 1,806 312,207 Commercial 157,734 22,222 4,341 979 185,276 Consumer 28,702 396 30 — 29,128 Total $ 700,180 $ 39,414 $ 24,841 $ 7,957 $ 772,392 The above classifications follow regulatory guidelines and can generally be described as follows: • Pass loans are of satisfactory quality. • Special mention loans have an existing weakness that could cause future impairment, including the deterioration of financial ratios, past due status, questionable management capabilities and possible reduction in the collateral values. • Substandard loans have an existing specific and well defined weakness that may include poor liquidity and deterioration of financial ratios. The loan may be past due and related deposit accounts experiencing overdrafts. Immediate corrective action is necessary. • Doubtful loans have specific weaknesses that are severe enough to make collection or liquidation in full highly questionable and improbable. The following table reflects certain information with respect to the loan portfolio delinquencies by loan class and amount as of June 30, 2016 and December 31, 2015. All loans greater than 90 days past due are generally placed on non-accrual status. Aged Analysis of Past Due Loans Receivable June 30, 2016 (Dollars in thousands) 30-59 Days 60-89 Days Greater Total Current Total Loans Recorded Real Estate Loans: Construction and land $ 385 $ — $ 196 $ 581 $ 107,251 $ 107,832 $ — Farmland — — — — 7,115 7,115 — 1-4 family residential 1,314 76 793 2,183 119,841 122,024 — Multi-family residential — — — — 20,736 20,736 — Nonfarm nonresidential 317 — 681 998 289,705 290,703 — Commercial — 246 — 246 205,601 205,847 — Consumer — — — — 43,593 43,593 — Total $ 2,016 $ 322 $ 1,670 $ 4,008 $ 793,842 $ 797,850 $ — December 31, 2015 (Dollars in thousands) 30-59 Days 60-89 Days Greater Total Current Total Loans Recorded Real Estate Loans: Construction and land $ — $ 10 $ 384 $ 394 $ 97,478 $ 97,872 $ — Farmland — — — — 8,897 8,897 — 1-4 family residential 289 132 1,086 1,507 111,447 112,954 — Multi-family residential — — — — 26,058 26,058 — Nonfarm nonresidential 1,185 178 309 1,672 310,535 312,207 — Commercial 78 13 — 91 185,185 185,276 — Consumer — — — — 29,128 29,128 — Total $ 1,552 $ 333 $ 1,779 $ 3,664 $ 768,728 $ 772,392 $ — The following is a summary of information pertaining to impaired loans as of June 30, 2016 and December 31, 2015. Acquired non-impaired loans are placed on nonaccrual status and reported as impaired using the same criteria applied to the originated portfolio. Purchased impaired credits are excluded from this table. The interest income recognized for impaired loans was $138,000 and $303,000 for the six months ending June 30, 2016 and 2015, respectively. June 30, 2016 (Dollars in thousands) Recorded Unpaid Related Average With an allowance recorded: Real Estate Loans: Construction and land $ 1,288 $ 1,514 $ 505 $ 1,309 Farmland — — — — 1-4 family residential 340 373 180 304 Multi-family residential — — — — Nonfarm nonresidential — — — — Other Loans: Commercial 1,831 1,851 317 1,141 Consumer — — — — $ 3,459 $ 3,738 $ 1,002 $ 2,754 With no allowance recorded: Real Estate Loans: Construction and land $ 146 $ 153 $ — $ 158 Farmland — — — — 1-4 family residential 3,415 3,983 — 3,432 Multi-family residential — — — — Nonfarm nonresidential 4,286 5,755 — 4,272 Other Loans: Commercial 1,610 2,721 — 1,820 Consumer — — — — $ 9,457 $ 12,612 $ — $ 9,682 Total Impaired Loans: Real Estate Loans: Construction and land $ 1,434 $ 1,667 $ 505 $ 1,467 Farmland — — — — 1-4 family residential 3,755 4,356 180 3,736 Multi-family residential — — — — Nonfarm nonresidential 4,286 5,755 — 4,272 Other Loans: Commercial 3,441 4,572 317 2,961 Consumer — — — — $ 12,916 $ 16,350 $ 1,002 $ 12,436 December 31, 2015 (Dollars in thousands) Recorded Unpaid Related Average With an allowance recorded: Real Estate Loans: Construction and land $ 1,336 $ 1,514 $ 504 $ 1,392 Farmland — — — — 1-4 family residential 305 313 129 78 Multi-family residential — — — — Nonfarm nonresidential — — — — Other Loans: Commercial 975 1,653 475 908 Consumer — — — — $ 2,616 $ 3,480 $ 1,108 $ 2,378 With no allowance recorded: Real Estate Loans: Construction and land $ 396 $ 401 $ — $ 1,530 Farmland — — — — 1-4 family residential 3,361 3,898 — 1,933 Multi-family residential — — — — Nonfarm nonresidential 4,172 5,588 — 4,062 Other Loans: Commercial 1,251 1,255 — 3,368 Consumer — — — 14 $ 9,180 $ 11,142 $ — $ 10,907 Total Impaired Loans: Real Estate Loans: Construction and land $ 1,732 $ 1,915 $ 504 $ 2,922 Farmland — — — — 1-4 family residential 3,666 4,211 129 2,011 Multi-family residential — — — — Nonfarm nonresidential 4,172 5,588 — 4,062 Other Loans: Commercial 2,226 2,908 475 4,276 Consumer — — — 14 $ 11,796 $ 14,622 $ 1,108 $ 13,285 The Company elected to account for certain loans acquired in the AGFC merger as acquired impaired loans under FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”) The following table presents the fair value of loans acquired with deteriorated credit quality as of the date of the AGFC merger. The expected cash flows approximated fair value as of the date of merger and, as a result, no accretable yield was recognized at acquisition. April 1, 2015 (Dollars in thousands) Purchased Impaired Credits: Contractually required principal and interest $ 11,294 Nonaccretable difference 6,375 Cash flows expected to be collected 4,919 Accretable yield — Fair value of Purchased Impaired Credits at Acquisition $ 4,919 The following table presents the changes in the carrying amount of the purchased impaired credits from the April 1, 2015 merger date to June 30, 2016. Purchased (Dollars in thousands) Carrying amount - April 1, 2015 (acquisition) $ 4,919 Payments received, net of discounts realized (469 ) Charge-offs (204 ) Transfer to Other Real Estate (612 ) Carrying amount - December 31, 2015 3,634 Payments received, net of discounts realized (502 ) Charge-offs (263 ) Transfer to Other Real Estate (150 ) Carrying amount - June 30, 2016 $ 2,719 Total loans acquired in the AGFC merger included $142.8 million of performing loans not accounted for under ASC 310-30, which had an estimated fair value of $138.1 million as of the date of acquisition. As of June 30, 2016 and December 31, 2015, the AGFC performing loans totaled $76.9 million and $93.1 million, respectively, with a related purchase discount of $2.7 million and $3.2 million, respectively. The Bank seeks to assist customers that are experiencing financial difficulty by renegotiating loans within lending regulations and guidelines. The Bank makes loan modifications, primarily utilizing internal renegotiation programs via direct customer contact, that manage customers’ debt exposures held only by the Bank. Additionally, the Bank makes loan modifications with customers who have elected to work with external renegotiation agencies and these modifications provide solutions to customers’ entire unsecured debt structures. During the periods ended June 30, 2016 and December 31, 2015, the concessions granted to certain borrowers included extending the payment due dates, lowering the contractual interest rate, reducing accrued interest, and reducing the debt’s face or maturity amount. Once modified in a troubled debt restructuring, a loan is generally considered impaired until its contractual maturity. At the time of the restructuring, the loan is evaluated for an asset-specific allowance for credit losses. The Bank continues to specifically reevaluate the loan in subsequent periods, regardless of the borrower’s performance under the modified terms. If a borrower subsequently defaults on the loan after it is restructured the Bank provides an allowance for credit losses for the amount of the loan that exceeds the value of the related collateral. The following tables present informative data regarding loan modifications occurring as of June 30, 2016 and December 31, 2015. The Bank had $54,000 in troubled debt restructurings that had subsequently defaulted during the year ended December 31, 2015, and none that subsequently defaulted during the six months ended June 30, 2016. Modifications as of June 30, 2016: Number Pre-Modification Post-Modification (Dollars in thousands) Troubled Debt Restructuring Real Estate Loans: 1-4 family residential 5 $ 1,568 $ 907 Nonfarm nonresidential 3 5,143 3,521 Other Loans: Commercial 4 3,294 2,690 Total Loans 12 $ 10,005 $ 7,118 Modifications as of December 31, 2015: Number Pre-Modification Post-Modification (Dollars in thousands) Troubled Debt Restructuring Real Estate Loans: 1-4 family residential 5 $ 1,568 $ 1,008 Nonfarm nonresidential 3 5,143 3,623 Other Loans: Commercial 3 1,736 1,234 Total Loans 11 $ 8,447 $ 5,865 |