Allowance for Loan Losses and Impaired Loans | Note 4. Allowance for Loan Losses and Impaired Loans Allowance for Loan Losses The allowance for loan losses is maintained at a level believed to be sufficient to provide for estimated loan losses based on evaluating known and inherent risks in the loan portfolio. The allowance is provided based upon management’s comprehensive analysis of the pertinent factors underlying the quality of the loan portfolio. These factors include changes in the amount and composition of the loan portfolio, delinquency levels, actual loss experience, current economic conditions, and detailed analysis of individual loans for which the full collectability may not be assured. The detailed analysis includes methods to estimate the fair value of loan collateral and the existence of potential alternative sources of repayment. The allowance consists of specific and general components. The specific component is calculated on an individual basis for larger-balance, non-homogeneous loans, which are considered impaired. A specific allowance is established when the discounted cash flows, collateral value (less disposal costs), or observable market price of the impaired loan is lower than its carrying value. The specific component of the allowance for smaller-balance loans whose terms have been modified in a troubled debt restructuring (TDR) is calculated on a pooled basis considering historical experience adjusted for qualitative factors. These smaller-balance TDRs were collectively evaluated for impairment. The general component covers the remaining loan portfolio, and is based on historical loss experience adjusted for qualitative factors. The appropriateness of the allowance for loan losses on loans is estimated based upon these factors and trends identified by management at the time financial statements are prepared. A provision for loan losses is charged against operations and is added to the allowance for loan losses based on quarterly comprehensive analyses of the loan portfolio. The allowance for loan losses is allocated to certain loan categories based on the relative risk characteristics, asset classifications and actual loss experience of the loan portfolio. While management has allocated the allowance for loan losses to various loan portfolio segments, the allowance is general in nature and is available for the loan portfolio in its entirety. As of September 30, 2017 and December 31, 2016, the Bank had no unallocated reserves included in the allowance for loan losses. The following table presents activity in the allowance for loan losses by loan category three months ended September 30, 2017 and 2016 and the related asset balances as of September 30, 2017 and December 31, 2016: Allowance for Loan Losses and Recorded Investment in Loans Commercial Construction & Commercial & Consumer (dollars in thousands) Agricultural Mortgage Development Farmland Residential & Other Total For the Three Months Ended September 30, 2017 Allowance for loan losses: Balance, June 30, 2017 $ 214 $ 620 $ 329 $ 393 $ 1,938 $ 74 $ 3,568 Charge-offs — — — (34 ) (76 ) (13 ) (123 ) Recoveries 2 — — — 4 4 10 Provision 57 28 (75 ) 8 46 11 75 Balance, September 30, 2017 $ 273 $ 648 $ 254 $ 367 $ 1,912 $ 76 $ 3,530 For the Three Months Ended September 30, 2016 Allowance for loan losses Balance, June 30, 2016 $ 188 $ 571 $ 269 $ 522 $ 1,717 $ 42 $ 3,309 Charge-offs — (10 ) (20 ) — (19 ) (19 ) (68 ) Recoveries 2 — 49 55 6 18 130 Provision 35 45 (52 ) (5 ) 61 25 109 Balance, September 30, 2016 $ 225 $ 606 $ 246 $ 572 $ 1,765 $ 66 $ 3,480 For the Nine Months Ended September 30, 2017 Allowance for loan losses: Balance, December 31, 2016 $ 210 $ 600 $ 319 $ 342 $ 1,841 $ 108 $ 3,420 Charge-offs (27 ) (42 ) — (34 ) (89 ) (51 ) (243 ) Recoveries 31 — 56 — 19 14 120 Provision 59 90 (121 ) 59 141 5 233 Balance, September 30, 2017 $ 273 $ 648 $ 254 $ 367 $ 1,912 $ 76 $ 3,530 For the Nine Months Ended September 30, 2016 Allowance for loan losses: Balance, December 31, 2015 $ 136 $ 578 $ 344 $ 435 $ 1,887 $ 38 $ 3,418 Charge-offs (19 ) (21 ) (20 ) — (44 ) (56 ) (160 ) Recoveries 6 — 93 55 22 32 208 Provision 102 49 (171 ) 82 (100 ) 52 14 Balance, September 30, 2016 $ 225 $ 606 $ 246 $ 572 $ 1,765 $ 66 $ 3,480 September 30, 2017 Allowance for loan losses: Ending balance $ 273 $ 648 $ 254 $ 367 $ 1,912 $ 76 $ 3,530 Ending balance: individually evaluated for impairment $ — $ — $ — $ 47 $ 86 $ — $ 133 Ending balance: collectively evaluated for impairment $ 273 $ 648 $ 254 $ 320 $ 1,826 $ 76 $ 3,397 Loans outstanding: Ending balance $ 28,605 $ 125,149 $ 25,557 $ 34,096 $ 198,141 $ 11,725 $ 423,273 Ending balance: individually evaluated for impairment $ — $ 113 $ 180 $ 5,435 $ 1,565 $ — $ 7,293 Ending balance: collectively evaluated for impairment $ 28,605 $ 125,036 $ 25,377 $ 28,661 $ 196,576 $ 11,725 $ 415,980 December 31, 2016 Allowance for loan losses: Ending balance $ 210 $ 600 $ 319 $ 342 $ 1,841 $ 108 $ 3,420 Ending balance: individually evaluated for impairment $ — $ — $ — $ 57 $ 184 $ — $ 241 Ending balance: collectively evaluated for impairment $ 210 $ 600 $ 319 $ 285 $ 1,657 $ 108 $ 3,179 Loans outstanding: Ending balance $ 26,086 $ 128,515 $ 26,464 $ 33,531 $ 187,188 $ 10,184 $ 411,968 Ending balance: individually evaluated for impairment $ — $ 114 $ 580 $ 5,030 $ 1,533 $ — $ 7,257 Ending balance: collectively evaluated for impairment $ 26,086 $ 128,401 $ 25,884 $ 28,501 $ 185,655 $ 10,184 $ 404,711 Management closely monitors the quality of the loan portfolio and has established a loan review process designed to help grade the quality of the Bank’s loan portfolio. The Bank’s loan ratings coincide with the “Substandard,” “Doubtful” and “Loss” classifications used by federal regulators in their examination of financial institutions. Generally, an asset is considered Substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. Substandard assets include those characterized by the distinct possibility that the insured financial institution will sustain some loss if the deficiencies are not corrected. Assets classified as Doubtful have all the weaknesses inherent in assets classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable. Assets classified as Loss are those considered uncollectible, and of such little value that its continuance on the books is not warranted. Assets that do not currently expose the insured financial institutions to sufficient risk to warrant classification in one of the aforementioned categories but otherwise possess weaknesses are designated “Special Mention.” Management also maintains a listing of loans designated “Watch”. These loans represent borrowers with declining earnings, strained cash flow, increasing leverage and/or weakening market fundamentals that indicate above average risk. As of September 30, 2017 and December 31, 2016, respectively, the Bank had no loans graded “Doubtful” or “Loss” included in the balance of total loans outstanding. The following table lists the loan grades utilized by the Bank and the corresponding total of outstanding loans in each category as of September 30, 2017 and December 31, 2016: Credit Risk Profile by Internally Assigned Grades Loan Grades Special (dollars in thousands) Pass Watch Mention Substandard Total September 30, 2017 Real Estate Secured: 1-4 residential construction $ 2,860 $ — $ — $ — $ 2,860 Commercial construction 2,446 — — — 2,446 Land development & other land 19,093 615 — 543 20,251 Farmland 23,436 5,790 8 4,862 34,096 1-4 residential mortgage 127,760 10,155 258 2,668 140,841 Multifamily 28,360 1,095 — — 29,455 Home equity and second mortgage 25,832 1,883 — 130 27,845 Commercial mortgage 105,056 12,938 1,815 5,340 125,149 Non-Real Estate Secured: Commercial & agricultural 25,563 1,866 640 536 28,605 Civic organizations 4,166 — — — 4,166 Consumer-auto 1,689 81 — — 1,770 Consumer-other 5,632 157 — — 5,789 Total $ 371,893 $ 34,580 $ 2,721 $ 14,079 $ 423,273 Loan Grades (dollars in thousands) Pass Watch Special Substandard Total December 31, 2016 Real Estate Secured: 1-4 residential construction $ 4,056 $ 370 $ — $ — $ 4,426 Commercial construction 2,603 — — — 2,603 Land development & other land 18,000 532 — 903 19,435 Farmland 23,201 5,276 — 5,054 33,531 1-4 residential mortgage 122,301 11,517 — 2,111 135,929 Multifamily 25,365 1,321 — — 26,686 Home equity and second mortgage 23,219 1,243 — 111 24,573 Commercial mortgage 105,317 13,449 3,353 6,396 128,515 Non-Real Estate Secured: Commercial & agricultural 22,719 2,333 485 549 26,086 Civic organizations 3,603 — — — 3,603 Consumer-auto 1,400 21 — — 1,421 Consumer-other 5,015 105 — 40 5,160 Total $ 356,799 $ 36,167 $ 3,838 $ 15,164 $ 411,968 Loans may be placed in nonaccrual status when, in management’s opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. Payments received are first applied to principal, and any remaining funds are then applied to interest. Loans are removed from nonaccrual status when they are deemed a loss and charged to the allowance, transferred to foreclosed assets, or returned to accrual status based upon performance consistent with the original terms of the loan or a subsequent restructuring thereof. The following table presents an age analysis of nonaccrual and past due loans by category as of September 30, 2017 and December 31, 2016: Analysis of Past Due and Nonaccrual Loans (dollars in thousands) 30-59 Days 60-89 Days 90 Days or Total Past Current Total 90+ Days Nonaccrual September 30, 2017 Real Estate Secured: 1-4 residential construction $ — $ — $ — $ — $ 2,860 $ 2,860 $ — $ — Commercial construction — — — — 2,446 2,446 — — Land development & other land — 33 475 508 19,743 20,251 — 475 Farmland — — 728 728 33,368 34,096 — 4,031 1-4 residential mortgage 433 145 607 1,185 139,656 140,841 — 795 Multifamily — — — — 29,455 29,455 — — Home equity and second mortgage 149 214 125 488 27,357 27,845 — 130 Commercial mortgage — — 203 203 124,946 125,149 — 211 Non-Real Estate Secured: Commercial & agricultural 26 20 23 69 28,536 28,605 — 96 Civic organizations — — — — 4,166 4,166 — — Consumer-auto — — — — 1,770 1,770 — — Consumer-other 9 — — 9 5,780 5,789 — — Total $ 617 $ 412 $ 2,161 $ 3,190 $ 420,083 $ 423,273 $ — $ 5,738 (dollars in thousands) 30-59 Days 60-89 Days 90 Days or Total Past Current Total 90+ Days Nonaccrual December 31, 2016 Real Estate Secured: 1-4 residential construction $ — $ — $ — $ — $ 4,426 $ 4,426 $ — $ — Commercial construction — — — — 2,603 2,603 — — Land development & other land — — 390 390 19,045 19,435 — 647 Farmland 343 — — 343 33,188 33,531 — 3,310 1-4 residential mortgage 315 48 14 377 135,552 135,929 — 26 Multifamily — — — — 26,686 26,686 — — Home equity and second mortgage 98 — 5 103 24,470 24,573 — 5 Commercial mortgage 25 227 426 678 127,837 128,515 — 640 Non-Real Estate Secured: Commercial & agricultural 67 — 25 92 25,994 26,086 — 31 Civic organizations — — — — 3,603 3,603 — — Consumer-auto 5 — — 5 1,416 1,421 — — Consumer-other — 6 — 6 5,154 5,160 — 5 Total $ 853 $ 281 $ 860 $ 1,994 $ 409,974 $ 411,968 $ — $ 4,664 Impaired Loans A loan is considered impaired when it is probable that the Bank will be unable to collect all contractual principal and interest payments due in accordance with the original or modified terms of the loan agreement. Smaller balance homogenous loans may be collectively evaluated for impairment. Non-homogenous impaired loans are either measured based on the estimated fair value of the collateral less estimated cost to sell if the loan is considered collateral dependent, or measured based on the present value of expected future cash flows if not collateral dependent. The valuation of real estate collateral is subjective in nature and may be adjusted in future periods because of changes in economic conditions. Management considers third-party appraisals, as well as independent fair market value assessments in determining the estimated fair value of particular properties. In addition, as certain of these third-party appraisals and independent fair market value assessments are only updated periodically, changes in the values of specific properties may have occurred subsequent to the most recent appraisals. Accordingly, the amounts of any such potential changes and any related adjustments are generally recorded at the time such information is received. When the measurement of the impaired loan is less than the recorded investment in the loan, impairment is recognized by creating or adjusting an allocation of the allowance for loan losses and uncollected accrued interest is reversed against interest income. If ultimate collection of principal is in doubt, all cash receipts on impaired loans are applied to reduce the principal balance. As of September 30, 2017 and December 31, 2016, respectively, the recorded investment in impaired loans totaled $13.2 million and $13.3 million. The total amount of collateral-dependent impaired loans at September 30, 2017 and December 31, 2016, respectively, was $4.4 million and $4.0 million. As of September 30, 2017 and December 31, 2016, respectively, $4.1 million and $4.4 million of the recorded investment in impaired loans did not have a related allowance. The Bank had $9.1 million and $10.0 million in troubled debt restructured loans included in impaired loans at September 30, 2017 and December 31, 2016, respectively. The categories of non-accrual loans and impaired loans overlap, although they are not coextensive. The Bank considers all circumstances regarding the loan and borrower on an individual basis when determining whether an impaired loan should be placed on non-accrual status, such as the financial strength of the borrower, the estimated collateral value, reasons for the delay, payment record, the amount past due and the number of days past due. In 2015, management began collectively evaluating performing TDRs with a loan balance of $250,000 or less for impairment. As of September 30, 2017 and December 31, 2016, respectively, $5.9 million and $6.1 million of TDRs included in the following table were evaluated collectively for impairment and were deemed to have $328 thousand and $315 thousand of related allowance. The following table is a summary of information related to impaired loans as of September 30, 2017 and December 31, 2016: Impaired Loans Nine months ended Three months ended Unpaid Average Interest Average Interest Recorded Principal Related Recorded Income Recorded Income (dollars in thousands) Investment 1 Balance Allowance Investment Recognized Investment Recognized September 30, 2017 With no related allowance recorded: 1-4 Residential Construction $ — $ — $ — $ — $ — $ — $ — Land development & other land 181 181 — 336 — 238 — Farmland 3,778 3,812 — 3,895 1 3,861 — 1-4 residential mortgage — — — — — — — Home equity and second mortgage — — — — — — — Commercial mortgage 113 113 — 114 — 113 — Commercial & agricultural — — — — — — — Consumer & other — — — — — — — Subtotal 4,072 4,106 — 4,345 1 4,212 — With an allowance recorded: 1-4 Residential Construction — — — — — — — Land development & other land 398 398 22 417 10 406 3 Farmland 2,096 2,096 73 2,234 95 2,106 28 1-4 residential mortgage 5,732 5,917 309 6,246 220 6,185 70 Home equity and second mortgage 291 291 26 298 6 297 2 Commercial mortgage 496 632 27 910 49 720 6 Commercial & agricultural 69 95 4 121 9 99 1 Consumer & other — — — 2 2 — 1 Subtotal 9,082 9,429 461 10,228 391 9,813 111 Totals: 1-4 Residential Construction — — — — — — — Land development & other land 579 579 22 753 10 644 3 Farmland 5,874 5,908 73 6,129 96 5,967 28 1-4 residential mortgage 5,732 5,917 309 6,246 220 6,185 70 Home equity and second mortgage 291 291 26 298 6 297 2 Commercial mortgage 609 745 27 1,024 49 833 6 Commercial & agricultural 69 95 4 121 9 99 1 Consumer & other — — — 2 2 — 1 Total $ 13,154 $ 13,535 $ 461 $ 14,573 $ 392 $ 14,025 $ 111 1 Recorded investment is the loan balance, net of any charge-offs Unpaid Average Interest Recorded Principal Related Recorded Income (dollars in thousands) Investment 1 Balance Allowance Investment Recognized December 31, 2016 With no related allowance recorded: 1-4 Residential Construction $ — $ — $ — $ — $ — Land development & other land 581 581 — 840 17 Farmland 3,660 3,660 — 4,170 18 1-4 residential mortgage — — — 347 10 Home equity and second mortgage — — — — — Commercial mortgage 114 114 — 115 4 Commercial & agricultural — — — — — Consumer & other — — — — 1 Subtotal 4,355 4,355 — 5,472 50 With an allowance recorded: 1-4 Residential Construction — — — — — Land development & other land 193 193 10 201 16 Farmland 1,679 1,679 73 1,705 84 1-4 residential mortgage 5,964 6,121 414 6,375 294 Home equity and second mortgage 174 179 9 254 8 Commercial mortgage 838 974 44 1,035 39 Commercial & agricultural 113 113 6 155 9 Consumer & other 4 4 — 10 1 Subtotal 8,965 9,263 556 9,735 451 Totals: 1-4 Residential Construction — — — — — Land development & other land 774 774 10 1,041 33 Farmland 5,339 5,339 73 5,875 102 1-4 residential mortgage 5,964 6,121 414 6,722 304 Home equity and second mortgage 174 179 9 254 8 Commercial mortgage 952 1,088 44 1,150 43 Commercial & agricultural 113 113 6 155 9 Consumer & other 4 4 — 10 2 Total $ 13,320 $ 13,618 $ 556 $ 15,207 $ 501 1 Recorded investment is the loan balance, net of any charge-offs Troubled Debt Restructuring A troubled debt restructured loan is a loan for which the Bank, for reasons related to the borrower’s financial difficulties, grants a concession to the borrower that the Bank would not otherwise consider. The loan terms which have been modified or restructured due to a borrower’s financial difficulty, include but are not limited to: a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-aging, extensions, deferrals and renewals. Troubled debt restructured loans are considered impaired loans. The following table sets forth information with respect to the Bank’s troubled debt restructurings as of September 30, 2017 and September 30, 2016: For the Nine Months Ended September 30, 2017 TDRs identified in the last twelve (dollars in thousands) TDRs identified during the period months that subsequently defaulted (1) Pre- Post- Pre- Post- modification modification modification modification Number outstanding outstanding Number outstanding outstanding of recorded recorded of recorded recorded contracts investment investment contracts investment investment Land development & other land — $ — $ — — $ — $ — Farmland 2 298 298 — — — 1-4 residential mortgage 1 48 48 — — — Commercial mortgage — — — — — — Commercial & agricultural — — — — — — Consumer & other — — — — — — Total 3 $ 346 $ 346 — $ — $ — During the nine months ended September 30, 2017, three loans were modified that were considered to be TDRs. Term concessions only were granted and no additional funds were advanced. No TDRs identified in the last twelve months subsequently defaulted in the quarter ended September 30, 2017. (1) Loans past due 30 days or more are considered to be in default. During the three months ended September 30, 2017, no loans were modified that were considered to be a TDR. (1) Loans past due 30 days or more are considered to be in default. For the Nine Months Ended September 30, 2016 TDRs identified in the last twelve (dollars in thousands) TDRs identified during the period months that subsequently defaulted (1) Pre- Post- Pre- Post- modification modification modification modification Number outstanding outstanding Number outstanding outstanding of recorded recorded of recorded recorded contracts investment investment contracts investment investment Land development & other land — $ — $ — — $ — $ — Farmland — — — — — — 1-4 residential mortgage 5 565 588 — — — Commercial mortgage — — — — — — Commercial & agricultural — — — — — — Consumer & other — — — — — — Total 5 $ 565 $ 588 — $ — $ — During the nine months ended September 30, 2016, five loans were modified that were considered to be TDRs. Term concessions only were granted for five loans; and additional funds were advanced on two loans to pay real estate taxes and closing costs. No TDRs identified in twelve months prior to September 30, 2016 subsequently defaulted in the quarter ended September 30, 2016. During the three months ended September 30, 2016, no loans were modified that were considered to be a TDR. (1) Loans past due 30 days or more are considered to be in default. |