Loans and Allowance for Loan and Lease Losses | NOTE 4 – LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES Loans at December 31, 2016 and 2015 were as follows (in thousands): December 31, 2016 December 31, 2015 Commercial real estate $ 302,322 $ 251,197 Consumer real estate 97,015 93,785 Construction and land development 94,491 52,522 Commercial and industrial 379,620 353,442 Consumer 5,974 8,668 Other 56,796 50,197 Total 936,218 809,811 Less net unearned income (967 ) (1,415 ) 935,251 808,396 Allowance for loan and lease losses (11,634 ) (10,132 ) $ 923,617 $ 798,264 At December 31, 2016, variable-rate and fixed-rate loans totaled $546,848,000 and $389,370,000, respectively. At December 31, 2015, variable-rate and fixed-rate loans totaled $401,800,000 and $408,011,000, respectively. Fixed-rate loans include certain variable-rate loans that have reached their respective floor rates. The Company categorizes 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. The Company analyzes all commercial loans, and consumer relationships with an outstanding balance greater than $500,000, individually and assigns each loan a risk rating. This analysis is performed on a continual basis by the relationship managers and credit department personnel. On at least an annual basis an independent party performs a formal credit risk review of a sample of the loan portfolio. Among other things, this review assesses the appropriateness of the loan’s risk rating. The Company uses the following definitions for risk ratings: Special Mention – A special mention asset possesses deficiencies or potential weaknesses deserving of management’s attention. If uncorrected, such weaknesses or deficiencies may expose the Company to an increased risk of loss in the future. Substandard – A substandard asset is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets 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 Company will sustain some loss if deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard. Doubtful – A doubtful asset has all weaknesses inherent in one classified substandard, with the added characteristic that weaknesses make collection or liquidation in full, on the basis of existing facts, conditions, and values, highly questionable and improbable. The probability of loss is extremely high, but certain important and reasonable specific pending factors which may work to the advantage and strengthening of the asset exist, therefore, its classification as an estimated loss is deferred until a more exact status may be determined. Pending factors include proposed merger, acquisition or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans. Loans not falling into the criteria above are considered to be pass-rated loans. The Company utilizes six loan grades within the pass risk rating. The following table provides the risk category of loans by applicable class of loans as of December 31, 2016 and 2015 (in thousands): Performing Loans December 31, 2016 Pass Special Mention Substandard Total Performing Total Loans Total Commercial real estate $ 301,012 $ — $ — $ 301,012 $ 1,310 $ 302,322 Consumer real estate 96,722 — 293 97,015 — 97,015 Construction and land development 94,491 — — 94,491 — 94,491 Commercial and industrial 349,857 11,035 16,419 377,311 2,309 379,620 Consumer 5,958 — 16 5,974 — 5,974 Other 56,796 — — 56,796 — 56,796 Total $ 904,836 $ 11,035 $ 16,728 $ 932,599 $ 3,619 $ 936,218 December 31, 2015 Commercial real estate $ 249,249 $ — $ — $ 249,249 $ 1,948 $ 251,197 Consumer real estate 93,181 — — 93,181 604 93,785 Construction and land development 52,522 — — 52,522 — 52,522 Commercial and industrial 338,106 6,230 9,106 353,442 — 353,442 Consumer 8,543 — — 8,543 125 8,668 Other 50,197 — — 50,197 — 50,197 Total $ 791,798 $ 6,230 $ 9,106 $ 807,134 $ 2,677 $ 809,811 None of the Company’s loans had a risk rating of “Doubtful” as of December 31, 2016 and 2015, respectively. The following tables detail the changes in the ALLL from December 31, 2013 through December 31, 2016 by loan classification and the allocation of the ALLL (in thousands): Commercial real estate Consumer real estate Construction and land development Commercial and industrial Consumer Other Total Allowance for Loan and Lease Losses: Balances, December 31, 2013 $ 1,408 $ 688 $ 332 $ 5,870 $ 81 $ 80 $ 8,459 Charged-off loans (92 ) (57 ) — (816 ) (182 ) — (1,147 ) Recoveries — 21 — 52 28 — 101 Provision for loan and lease losses 219 (31 ) 76 3,434 148 23 3,869 Balances, December 31, 2014 $ 1,535 $ 621 $ 408 $ 8,540 $ 75 $ 103 $ 11,282 Collectively evaluated for impairment $ 1,250 $ 448 $ 235 $ 6,140 $ 75 $ 103 $ 8,251 Individually evaluated for impairment 285 173 — 2,400 — — 2,858 Loans acquired with deteriorated credit quality — — 173 — — — 173 Balances, December 31, 2014 $ 1,535 $ 621 $ 408 $ 8,540 $ 75 $ 103 $ 11,282 Loans: Collectively evaluated for impairment $ 217,628 $ 77,056 $ 45,058 $ 329,807 $ 7,911 $ 29,393 $ 706,853 Individually evaluated for impairment 2,165 592 — 3,806 — — 6,563 Loans acquired with deteriorated credit quality — 40 1,135 — — — 1,175 Balances, December 31, 2014 $ 219,793 $ 77,688 $ 46,193 $ 333,613 $ 7,911 $ 29,393 $ 714,591 Commercial real estate Consumer real estate Construction and land development Commercial and industrial Consumer Other Total Allowance for Loan and Lease Losses: Balances, December 31, 2014 $ 1,535 $ 621 $ 408 $ 8,540 $ 75 $ 103 $ 11,282 Charged-off loans — (173 ) — (3,033 ) — — (3,206 ) Recoveries 31 68 — 299 7 — 405 Provision for loan and lease losses 1,313 452 506 (1,113 ) 21 472 1,651 Balances, December 31, 2015 $ 2,879 $ 968 $ 914 $ 4,693 $ 103 $ 575 $ 10,132 Collectively evaluated for impairment $ 2,314 $ 968 $ 914 $ 4,693 $ 103 $ 575 $ 9,567 Individually evaluated for impairment 565 — — — — — 565 Loans acquired with deteriorated credit quality — — — — — — — Balances, December 31, 2015 $ 2,879 $ 968 $ 914 $ 4,693 $ 103 $ 575 $ 10,132 Loans: Collectively evaluated for impairment $ 249,249 $ 93,181 $ 52,522 $ 353,442 $ 8,543 $ 50,197 $ 807,134 Individually evaluated for impairment 1,948 604 — — 125 — 2,677 Loans acquired with deteriorated credit quality — — — — — — — Balances, December 31, 2015 $ 251,197 $ 93,785 $ 52,522 $ 353,442 $ 8,668 $ 50,197 $ 809,811 Commercial real estate Consumer real estate Construction and land development Commercial and industrial Consumer Other Total Allowance for Loan and Lease Losses: Balances, December 31, 2015 $ 2,879 $ 968 $ 914 $ 4,693 $ 103 $ 575 $ 10,132 Charged-off loans (350 ) — — (956 ) (146 ) — (1,452 ) Recoveries 52 — — 23 50 — 125 Provision for loan and lease losses 74 45 660 1,858 69 123 2,829 Balances, December 31, 2016 $ 2,655 $ 1,013 $ 1,574 $ 5,618 $ 76 $ 698 $ 11,634 Collectively evaluated for impairment $ 2,655 $ 1,013 $ 1,574 $ 5,118 $ 76 $ 698 $ 11,134 Individually evaluated for impairment — — — 500 — — 500 Loans acquired with deteriorated credit quality — — — — — — — Balances, December 31, 2016 $ 2,655 $ 1,013 $ 1,574 $ 5,618 $ 76 $ 698 $ 11,634 Loans: Collectively evaluated for impairment $ 301,012 $ 97,015 $ 94,491 $ 377,311 $ 5,974 $ 56,796 $ 932,599 Individually evaluated for impairment 1,310 — — 2,309 — — 3,619 Loans acquired with deteriorated credit quality — — — — — — — Balances, December 31, 2016 $ 302,322 $ 97,015 $ 94,491 $ 379,620 $ 5,974 $ 56,796 $ 936,218 The following table presents the allocation of the ALLL for each respective loan category with the corresponding percentage of loans in each category to total loans, net of deferred fees as of December 31, 2016 and 2015 (dollars in thousands): December 31, 2016 December 31, 2015 Amount Percent of total loans, net of deferred fees Amount Percent of total loans, net of deferred fees Commercial real estate $ 2,655 0.28 % $ 2,879 0.36 % Consumer real estate 1,013 0.11 968 0.12 Construction and land development 1,574 0.17 914 0.11 Commercial and industrial 5,618 0.60 4,693 0.58 Consumer 76 0.01 103 0.01 Other 698 0.07 575 0.07 Total allowance for loan and lease losses $ 11,634 1.24 % $ 10,132 1.25 % The following table presents information related to impaired loans as of and for the years ended December 31, 2016 and 2015 (in thousands): Year Ended December 31, 2016 December 31, 2016 Recorded investment Unpaid principal balance Related allowance Average recorded investment Interest income recognized With no related allowance recorded: Commercial real estate $ 1,310 $ 1,686 $ — $ 655 $ — Consumer real estate — — — 302 — Construction and land development — — — — — Commercial and industrial — — — — — Consumer — — — 63 — Other — — — — — Subtotal 1,310 1,686 — 1,020 — With an allowance recorded: Commercial real estate — — — 974 — Consumer real estate — — — — — Construction and land development — — — — — Commercial and industrial 2,309 2,921 500 1,155 44 Consumer — — — — — Other — — — — — Subtotal 2,309 2,921 500 2,129 44 Total $ 3,619 $ 4,607 $ 500 $ 3,148 $ 44 Year End December 31, 2015 December 31, 2015 Recorded investment Unpaid principal balance Related allowance Average recorded investment Interest income recognized With no related allowance recorded: Commercial real estate $ — $ — $ — $ 42 $ — Consumer real estate 604 681 — 357 — Construction and land development — — — — — Commercial and industrial — — — 594 — Consumer 125 125 — 63 5 Other — — — — — Subtotal 729 806 — 1,056 5 With an allowance recorded: Commercial real estate 1,948 1,948 565 2,015 — Consumer real estate — — — 262 — Construction and land development — — — 568 — Commercial and industrial — — — 1,309 — Consumer — — — — — Other — — — — — Subtotal 1,948 1,948 565 4,154 — Total $ 2,677 $ 2,754 $ 565 $ 5,210 $ 5 The recorded investment in loans excludes accrued interest receivable and loan origination fees, net due to immateriality. For purposes of this disclosure, the unpaid principal balance is not reduced for partial charge-offs. Non-accrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. Impaired loans include commercial loans that are individually evaluated for impairment and deemed impaired (i.e., individually classified impaired loans) as well as TDRs for all loan classifications. The following table presents the aging of the recorded investment in past-due loans as of December 31, 2016 and 2015 by class of loans (in thousands): 30 - 59 60 - 89 Greater Than Days Days 89 Days Total Loans Not December 31, 2016 Past Due Past Due Past Due Past Due Past Due Total Commercial real estate $ — $ — $ — $ — $ 302,322 $ 302,322 Consumer real estate 81 282 — 363 96,652 97,015 Construction and land development — — — — 94,491 94,491 Commercial and industrial — — — — 379,620 379,620 Consumer — — — — 5,974 5,974 Other — — — — 56,796 56,796 Total $ 81 $ 282 $ — $ 363 $ 935,855 $ 936,218 December 31, 2015 Commercial real estate $ — $ — $ 1,948 $ 1,948 $ 249,249 $ 251,197 Consumer real estate 100 54 616 770 93,015 93,785 Construction and land development — — — — 52,522 52,522 Commercial and industrial — — — — 353,442 353,442 Consumer — — 125 125 8,543 8,668 Other — — — — 50,197 50,197 Total $ 100 $ 54 $ 2,689 $ 2,843 $ 806,968 $ 809,811 The Company had no loans past due 90 days or more that were not on nonaccrual status as of December 31, 2016 and 2015. The following table presents the recorded investment in non-accrual loans and troubled debt restructurings (TDR) by class of loans as of December 31, 2016 and 2015 (in thousands): Non-Accrual Troubled Debt Restructurings December 31, 2016 December 31, 2015 December 31, 2016 December 31, 2015 Commercial real estate $ 1,310 $ 1,948 $ 1,272 $ — Consumer real estate — 616 — — Construction and land development — — — — Commercial and industrial 2,309 — — — Consumer — 125 — 125 Other — — — — Total $ 3,619 $ 2,689 $ 1,272 $ 125 As of December 31, 2016 and 2015, all loans classified as nonperforming were deemed to be impaired. As of December 31, 2016 and 2015, the Company had recorded investments in TDR of $1.3 million and $0.1 million, respectively. The Company did not allocate a specific allowance for those loans at December 31, 2016 or 2015 and there were no commitments to lend additional amounts. Loans accounted for as TDR include modifications from original terms such as those due to bankruptcy proceedings, certain modifications of amortization periods or extended suspension of principal payments due to customer financial difficulties. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s loan policy. Loans accounted for as TDR are individually evaluated for impairment. The following table presents loans by class modified as TDR that occurred during the year ended December 31, 2016 and 2015 (in thousands). Year Ended December 31, Number of contracts Pre modification outstanding recorded investment Post modification outstanding recorded investment, net of related allowance 2016 Commercial real estate 1 $ 1,948 $ 1,170 Consumer real estate — — — Construction and land development — — — Commercial and industrial — — — Consumer — — — Other — — — Total 1 $ 1,948 $ 1,170 2015 Commercial real estate — $ — $ — Consumer real estate — — — Construction and land development — — — Commercial and industrial — — — Consumer 1 125 125 Other — — — Total 1 $ 125 $ 125 The following table presents loans by class modified as TDR for which there was a payment default within twelve months following the modification during the year ended December 31, 2016 and 2015 (in thousands). Year Ended December 31, Number of contracts Recorded investment 2016 Commercial real estate — $ — Consumer real estate — — Construction and land development — — Commercial and industrial — — Consumer 1 124 Other — — Total 1 $ 124 2015 Commercial real estate — $ — Consumer real estate — — Construction and land development — — Commercial and industrial 1 — Consumer — — Other — — Total 1 $ — The consumer loan TDR that subsequently defaulted during the year ended December 31, 2016 had no specific reserve in the ALLL and resulted in a $0.1 million charge-off. The commercial and industrial loan TDR that subsequently defaulted during the year ended December 31, 2015 had a $2.4 million specific reserve in the ALLL and resulted in a $2.5 million charge-off. A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. Purchased Credit Impaired Loans At December 31, 2016 and 2015, the Company had no purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. Accretable yield, or income expected to be collected, was as follows for the years ended December 31 (in thousands): 2016 2015 2014 Balance at January 1 $ — $ (190 ) $ (297 ) New loans purchased — — — Accretion of income — 499 255 Reclassifications from nonaccretable difference — (309 ) (148 ) Disposals — — — Balance at December 31 $ — $ — $ (190 ) Purchased impaired loans had no impact on the ALLL for the year ended December 31, 2016. For those purchased impaired loans disclosed above, the Company reduced the allowance for loan and lease losses by $173,000 during the year ended December 31, 2015. Leases The Company has entered into various direct finance leases. The leases are reported as part of other loans. The lease terms vary from two to six years. The components of the direct financing leases as of December 31, 2016 and 2015 were as follows (in thousands): December 31, 2016 December 31, 2015 Total minimum lease payments receivable $ 2,567 $ 5,215 Less: Unearned income (96 ) (321 ) Net leases $ 2,471 $ 4,894 The future minimum lease payments receivable under the direct financing leases as of December 31, 2016 were as follows (in thousands): Year ending December 31: 2017 $ 1,877 2018 332 2019 303 2020 55 2021 — $ 2,567 |