Loans, Allowance for Loan Losses and Credit Quality | 6 Months Ended |
Dec. 31, 2013 |
Loans, Allowance for Loan Losses and Credit Quality | ' |
Loans, Allowance for Loan Losses and Credit Quality | ' |
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4. Loans, Allowance for Loan Losses and Credit Quality |
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Loans are carried at the principal amounts outstanding, or amortized acquired fair value in the case of acquired loans, adjusted by partial charge-offs and net of deferred loan costs or fees. Loan fees and certain direct origination costs are deferred and amortized into interest income over the expected term of the loan using the level-yield method. When a loan is paid off, the unamortized portion is recognized in interest income. Interest income is accrued based upon the daily principal amount outstanding except for loans on nonaccrual status. |
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Loans purchased by the Company are accounted for under ASC 310-30, Receivables — Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”). At acquisition, the effective interest rate is determined based on the discount rate that equates the present value of the Company’s estimate of cash flows with the purchase price of the loan. Prepayments are not assumed in determining a purchased loan’s effective interest rate and income accretion. The application of ASC 310-30 limits the yield that may be accreted on the purchased loan, or the “accretable yield,” to the excess of the Company’s estimate, at acquisition, of the expected undiscounted principal, interest, and other cash flows over the Company’s initial investment in the loan. The excess of contractually required payments receivable over the cash flows expected to be collected on the loan represents the purchased loan’s “nonaccretable difference.” Subsequent improvements in expected cash flows of loans with nonaccretable differences result in a prospective increase to the loan’s effective yield through a reclassification of some, or all, of the nonaccretable difference to accretable yield. The effect of subsequent declines in expected cash flows of purchased loans are recorded through a specific allocation in the allowance for loan losses. |
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Loans are generally placed on nonaccrual status when they are past due 90 days as to either principal or interest, or when in management’s judgment the collectability of interest or principal of the loan has been significantly impaired. Loans accounted for under ASC 310-30 are placed on nonaccrual when it is not possible to reach a reasonable expectation of the timing and amount of cash flows to be collected on the loan. When a loan has been placed on nonaccrual status, previously accrued and uncollected interest is reversed against interest on loans. Interest on nonaccrual loans is accounted for on a cash-basis or using the cost-recovery method when collectability is doubtful. A loan is returned to accrual status when collectability of principal is reasonably assured and the loan has performed for a reasonable period of time. |
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In cases where a borrower experiences financial difficulties and the Company makes certain concessionary modifications to contractual terms, the loan is classified as a troubled debt restructuring (“TDR”), and therefore by definition is an impaired loan. Concessionary modifications may include adjustments to interest rates, extensions of maturity, and other actions intended to minimize economic loss and avoid foreclosure or repossession of collateral. For loans accounted for under ASC 310-30, the Company evaluates whether it has granted a concession by comparing the restructured debt terms to the expected cash flows at acquisition plus any additional cash flows expected to be collected arising from changes in estimate after acquisition. As a result, if an ASC 310-30 loan is modified to be consistent with, or better than, the Company’s expectations at acquisition, the loan would not qualify as a TDR. Nonaccrual loans that are restructured generally remain on nonaccrual status for a minimum period of six months to demonstrate that the borrower can meet the restructured terms. If the restructured loan is on accrual status prior to being modified, it is reviewed to determine if the modified loan should remain on accrual status. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan is classified as a nonaccrual loan. With limited exceptions, loans classified as TDRs remain classified as such until the loan is paid off. |
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The composition of the Company’s loan portfolio follows. |
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| | December 31, 2013 | | June 30, 2013 | | | | | | | |
| | Originated | | Purchased | | Total | | Originated | | Purchased | | Total | | | | | | | |
| | (Dollars in thousands) | | | | | | | |
Residential real estate | | $ | 120,814 | | $ | 2,606 | | $ | 123,420 | | $ | 89,734 | | $ | 2,706 | | $ | 92,440 | | | | | | | |
Home equity | | 30,065 | | — | | 30,065 | | 35,389 | | — | | 35,389 | | | | | | | |
Commercial real estate | | 117,986 | | 174,816 | | 292,802 | | 100,402 | | 164,046 | | 264,448 | | | | | | | |
Construction | | — | | — | | — | | 42 | | — | | 42 | | | | | | | |
Commercial business | | 43,687 | | 13 | | 43,700 | | 29,686 | | 34 | | 29,720 | | | | | | | |
Consumer | | 11,722 | | — | | 11,722 | | 13,337 | | — | | 13,337 | | | | | | | |
Total loans | | $ | 324,274 | | $ | 177,435 | | $ | 501,709 | | $ | 268,590 | | $ | 166,786 | | $ | 435,376 | | | | | | | |
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Allowance for Loan Losses and Impaired Loans |
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The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. For residential and consumer loans, a charge-off is recorded no later than the point at which a loan is 180 days past due if the loan balance exceeds the fair value of the collateral, less costs to sell. For commercial loans, a charge-off is recorded on a case-by-case basis when all or a portion of the loan is deemed to be uncollectible. Subsequent recoveries, if any, are credited to the allowance. |
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The allowance for loan losses consists of general, specific, and unallocated reserves and reflects management’s estimate of probable loan losses inherent in the loan portfolio at the balance sheet date. Management uses a consistent and systematic process and methodology to evaluate the adequacy of the allowance for loan losses on a quarterly basis. The calculation of the allowance for loan losses is segregated by portfolio segments, which include: commercial real estate, commercial business, consumer, residential real estate, and purchased loans. Risk characteristics relevant to each portfolio segment are as follows: |
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Residential real estate: All loans in this segment are collateralized by residential real estate and repayment is primarily dependent on the credit quality of the individual borrower. The overall health of the economy, particularly unemployment rates and housing prices, has a significant effect on the credit quality in this segment. For purposes of the Company’s allowance for loan loss calculation, home equity loans and lines of credit are included in residential real estate. |
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Commercial real estate: Loans in this segment are primarily income-producing properties. For owner-occupied properties, the cash flows are derived from an operating business, and the underlying cash flows may be adversely affected by deterioration in the financial condition of the operating business. The underlying cash flows generated by non-owner occupied properties may be adversely affected by increased vacancy rates. Management periodically obtains rent rolls, with which it monitors the cash flows of these loans. Adverse developments in either of these areas will have an adverse effect on the credit quality of this segment. For purposes of the allowance for loan losses, this segment also includes construction loans. |
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Commercial business: Loans in this segment are made to businesses and are generally secured by the assets of the business. Repayment is expected from the cash flows of the business. Continued weakness in national or regional economic conditions, and a corresponding weakness in consumer or business spending, will have an adverse effect on the credit quality of this segment. |
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Consumer: Loans in this segment are generally secured, and repayment is dependent on the credit quality of the individual borrower. Repayment of consumer loans is generally based on the earnings of individual borrowers, which may be adversely impacted by regional labor market conditions. |
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Purchased: Loans in this segment are typically secured by commercial real estate, multi-family residential real estate, or business assets and have been acquired by the Bank’s Loan Acquisition and Servicing Group (“LASG”). Loans acquired by the LASG are, with limited exceptions, performing loans at the date of purchase. Loans in this segment acquired with specific material credit deterioration since origination are identified as purchased credit-impaired. Repayment of loans in this segment is largely dependent on cash flow from the successful operation of the property, in the case of non-owner occupied property, or operating business, in the case of owner-occupied property. Loan performance may be adversely affected by factors affecting the general economy or conditions specific to the real estate market, such as geographic location or property type. |
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The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by loan segment. The Company does not weight periods used in that analysis to determine the average loss rate in each portfolio segment. This historical loss factor is adjusted for the following qualitative factors: |
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· Levels and trends in delinquencies and nonperforming loans |
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· Trends in the volume and nature of loans |
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· Trends in credit terms and policies, including underwriting standards, procedures and practices, and the experience and ability of lending management and staff |
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· Trends in portfolio concentration |
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· National and local economic trends and conditions |
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· Effects of changes or trends in internal risk ratings |
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· Other effects resulting from trends in the valuation of underlying collateral |
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There were no significant changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses during the three and six months ended December 31, 2013 or 2012. |
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The allocated component of the allowance for loan losses relates to loans that are classified as impaired. Impairment is measured on a loan-by-loan basis for commercial business and commercial real estate loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash flows or collateral value of the impaired loan is lower than the carrying value of that loan. Large groups of smaller-balance homogeneous loans, such as consumer and residential real estate loans are collectively evaluated for impairment based on the group’s historical loss experience adjusted for qualitative factors. Accordingly, the Company does not separately identify individual consumer and residential loans for individual impairment and disclosure. However, all TDRs are individually reviewed for impairment. |
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For all portfolio segments, except loans accounted for under ASC 310-30, a loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. For the purchased loan segment, a loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to realize cash flows as estimated at acquisition. For loans accounted for under ASC 310-30, loan impairment is measured based on the decrease in expected cash flows from those estimated at acquisition, excluding changes due to changes in interest rate indices and other non-credit related factors, discounted at the loan’s effective rate assumed at acquisition. Factors considered by management in determining impairment include payment status, collateral value, and the probability of the collecting scheduled principal and interest payments when due. |
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The following table sets forth activity in the Company’s allowance for loan losses. |
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| | Three Months Ended December 31, 2013 | | | | |
| | Residential | | Commercial | | Commercial | | | | | | | | | | | | |
| | Real Estate | | Real Estate | | Business | | Consumer | | Purchased | | Unallocated | | Total | | | | |
| | (Dollars in thousands) | | | | |
Beginning balance | | $ | 695 | | $ | 163 | | $ | 50 | | $ | 148 | | $ | 101 | | $ | 67 | | $ | 1,224 | | | | |
Provision | | (33 | ) | 158 | | 2 | | (24 | ) | 106 | | (58 | ) | 151 | | | | |
Recoveries | | — | | — | | — | | 12 | | — | | — | | 12 | | | | |
Charge-offs | | (13 | ) | — | | — | | (24 | ) | — | | — | | (37 | ) | | | |
Ending balance | | $ | 649 | | $ | 321 | | $ | 52 | | $ | 112 | | $ | 207 | | $ | 9 | | $ | 1,350 | | | | |
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| | Three Months Ended December 31, 2012 | | | | |
| | Residential | | Commercial | | Commercial | | | | | | | | | | | | |
| | Real Estate | | Real Estate | | Business | | Consumer | | Purchased | | Unallocated | | Total | | | | |
| | (Dollars in thousands) | | | | |
Beginning balance | | $ | 301 | | $ | 71 | | $ | 53 | | $ | 243 | | $ | — | | $ | — | | $ | 668 | | | | |
Provision | | 199 | | 32 | | (6 | ) | 22 | | — | | — | | 247 | | | | |
Recoveries | | — | | — | | — | | 5 | | — | | — | | 5 | | | | |
Charge-offs | | (8 | ) | (1 | ) | — | | (36 | ) | — | | — | | (45 | ) | | | |
Ending balance | | $ | 492 | | $ | 102 | | $ | 47 | | $ | 234 | | $ | — | | $ | — | | 875 | | | | |
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| | Six Months Ended December 31, 2013 | | | | |
| | Residential | | Commercial | | Commercial | | | | | | | | | | | | |
| | Real Estate | | Real Estate | | Business | | Consumer | | Purchased | | Unallocated | | Total | | | | |
| | (Dollars in thousands) | | | | |
Beginning balance | | $ | 594 | | $ | 173 | | $ | 70 | | $ | 189 | | $ | 76 | | $ | 41 | | $ | 1,143 | | | | |
Provision | | 82 | | 148 | | (24 | ) | (78 | ) | 131 | | (32 | ) | 227 | | | | |
Recoveries | | 6 | | — | | 6 | | 31 | | — | | — | | 43 | | | | |
Charge-offs | | (33 | ) | — | | — | | (30 | ) | — | | — | | (63 | ) | | | |
Ending balance | | $ | 649 | | $ | 321 | | $ | 52 | | $ | 112 | | $ | 207 | | $ | 9 | | $ | 1,350 | | | | |
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| | Six Months Ended December 31, 2012 | | | | |
| | Residential | | Commercial | | Commercial | | | | | | | | | | | | |
| | Real Estate | | Real Estate | | Business | | Consumer | | Purchased | | Unallocated | | Total | | | | |
| | (Dollars in thousands) | | | | |
Beginning balance | | $ | 214 | | $ | 93 | | $ | 292 | | $ | 225 | | $ | — | | $ | — | | $ | 824 | | | | |
Provision | | 412 | | 9 | | (42 | ) | 96 | | — | | — | | 475 | | | | |
Recoveries | | 1 | | — | | — | | 7 | | — | | — | | 8 | | | | |
Charge-offs | | (135 | ) | — | | (203 | ) | (94 | ) | — | | — | | (432 | ) | | | |
Ending balance | | $ | 492 | | $ | 102 | | $ | 47 | | $ | 234 | | $ | — | | $ | — | | 875 | | | | |
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The following table sets forth information regarding the allowance for loan losses by portfolio segment and impairment methodology. |
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| | December 31, 2013 | | | | |
| | Residential | | Commercial | | Commercial | | | | | | | | | | | | |
| | Real Estate | | Real Estate | | Business | | Consumer | | Purchased | | Unallocated | | Total | | | | |
| | (Dollars in thousands) | | | | |
Allowance for loan losses: | | | | | | | | | | | | | | | | | | |
Individually evaluated | | $ | 189 | | $ | 108 | | $ | 44 | | $ | 4 | | $ | 86 | | $ | — | | $ | 431 | | | | |
Collectively evaluated | | 460 | | 213 | | 8 | | 108 | | — | | 9 | | 798 | | | | |
ASC 310-30 | | — | | — | | — | | — | | 121 | | — | | 121 | | | | |
Total | | $ | 649 | | $ | 321 | | $ | 52 | | $ | 112 | | $ | 207 | | $ | 9 | | $ | 1,350 | | | | |
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Loans: | | | | | | | | | | | | | | | | | | |
Individually evaluated | | $ | 2,208 | | $ | 1,637 | | $ | 108 | | $ | 224 | | $ | 5,255 | | $ | — | | $ | 9,432 | | | | |
Collectively evaluated | | 148,671 | | 116,349 | | 43,579 | | 11,498 | | — | | — | | 320,097 | | | | |
ASC 310-30 | | — | | — | | — | | — | | 172,180 | | — | | 172,180 | | | | |
Total | | $ | 150,879 | | $ | 117,986 | | $ | 43,687 | | $ | 11,722 | | $ | 177,435 | | $ | — | | $ | 501,709 | | | | |
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| | June 30, 2013 | | | | |
| | Residential | | Commercial | | Commercial | | | | | | | | | | | | |
| | Real Estate | | Real Estate | | Business | | Consumer | | Purchased | | Unallocated | | Total | | | | |
| | (Dollars in thousands) | | | | |
Allowance for loan losses: | | | | | | | | | | | | | | | | | | |
Individually evaluated | | $ | 235 | | $ | 85 | | $ | 63 | | $ | 23 | | $ | 65 | | $ | — | | $ | 471 | | | | |
Collectively evaluated | | 359 | | 88 | | 7 | | 166 | | — | | 41 | | 661 | | | | |
ASC 310-30 | | — | | — | | — | | — | | 11 | | — | | 11 | | | | |
Total | | $ | 594 | | $ | 173 | | $ | 70 | | $ | 189 | | $ | 76 | | $ | 41 | | $ | 1,143 | | | | |
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Loans: | | | | | | | | | | | | | | | | | | |
Individually evaluated | | $ | 2,626 | | $ | 1,558 | | $ | 110 | | $ | 149 | | $ | 1,129 | | $ | — | | $ | 5,572 | | | | |
Collectively evaluated | | 122,497 | | 98,886 | | 29,576 | | 13,188 | | — | | — | | 264,147 | | | | |
ASC 310-30 | | — | | — | | — | | — | | 165,657 | | — | | 165,657 | | | | |
Total | | $ | 125,123 | | $ | 100,444 | | $ | 29,686 | | $ | 13,337 | | $ | 166,786 | | $ | — | | $ | 435,376 | | | | |
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The following table sets forth information regarding impaired loans. Loans accounted for under ASC 310-30 that have performed based on cash flow and accretable yield expectations determined at date of acquisition are not considered impaired assets and have been excluded from the tables below. |
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| | December 31, 2013 | | June 30, 2013 | | | | | | | |
| | | | Unpaid | | | | | | Unpaid | | | | | | | | | |
| | Recorded | | Principal | | Related | | Recorded | | Principal | | Related | | | | | | | |
| | Investment | | Balance | | Allowance | | Investment | | Balance | | Allowance | | | | | | | |
| | (Dollars in thousands) | | | | | | | |
Impaired loans without a valuation allowance: | | | | | | | | | | | | | | | | | | | |
Originated: | | | | | | | | | | | | | | | | | | | |
Residential real estate | | $ | 837 | | $ | 879 | | $ | — | | $ | 1,158 | | $ | 1,225 | | $ | — | | | | | | | |
Consumer | | 111 | | 121 | | — | | 88 | | 93 | | — | | | | | | | |
Commercial real estate | | 383 | | 404 | | — | | 434 | | 479 | | — | | | | | | | |
Commercial business | | 64 | | 118 | | — | | 47 | | 101 | | — | | | | | | | |
Purchased: | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | 3,320 | | 5,436 | | — | | 928 | | 1,279 | | — | | | | | | | |
Total | | 4,715 | | 6,958 | | — | | 2,655 | | 3,177 | | — | | | | | | | |
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Impaired loans with a valuation allowance: | | | | | | | | | | | | | | | | | | | |
Originated: | | | | | | | | | | | | | | | | | | | |
Residential real estate | | 1,371 | | 1,342 | | 189 | | 1,468 | | 1,420 | | 235 | | | | | | | |
Consumer | | 113 | | 113 | | 4 | | 61 | | 61 | | 23 | | | | | | | |
Commercial real estate | | 1,254 | | 1,259 | | 108 | | 1,124 | | 1,131 | | 85 | | | | | | | |
Commercial business | | 44 | | 78 | | 44 | | 63 | | 98 | | 63 | | | | | | | |
Purchased: | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | 1,935 | | 2,228 | | 86 | | 201 | | 276 | | 65 | | | | | | | |
Total | | 4,717 | | 5,020 | | 431 | | 2,917 | | 2,986 | | 471 | | | | | | | |
Total impaired loans | | $ | 9,432 | | $ | 11,978 | | $ | 431 | | $ | 5,572 | | $ | 6,163 | | $ | 471 | | | | | | | |
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The following tables set forth information regarding interest income recognized on impaired loans. |
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| | Three Months Ended December 31, | | | | | | | | | | | | | |
| | 2013 | | 2012 | | | | | | | | | | | | | |
| | Average | | Interest | | Average | | Interest | | | | | | | | | | | | | |
| | Recorded | | Income | | Recorded | | Income | | | | | | | | | | | | | |
| | Investment | | Recognized | | Investment | | Recognized | | | | | | | | | | | | | |
| | (Dollars in thousands) | | | | | | | | | | | | | |
Impaired loans without a valuation allowance: | | | | | | | | | | | | | | | | | | | | | |
Originated: | | | | | | | | | | | | | | | | | | | | | |
Residential real estate | | $ | 901 | | $ | 8 | | $ | 904 | | $ | 8 | | | | | | | | | | | | | |
Consumer | | 96 | | 1 | | 64 | | 1 | | | | | | | | | | | | | |
Commercial real estate | | 413 | | 7 | | 1,285 | | 19 | | | | | | | | | | | | | |
Commercial business | | 72 | | 3 | | 119 | | — | | | | | | | | | | | | | |
Purchased: | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | 2,833 | | 41 | | — | | — | | | | | | | | | | | | | |
Total | | 4,315 | | 60 | | 2,372 | | 28 | | | | | | | | | | | | | |
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Impaired loans with a valuation allowance: | | | | | | | | | | | | | | | | | | | | | |
Originated: | | | | | | | | | | | | | | | | | | | | | |
Residential real estate | | 1,344 | | 19 | | 1,178 | | 17 | | | | | | | | | | | | | |
Consumer | | 117 | | 2 | | 74 | | 1 | | | | | | | | | | | | | |
Commercial real estate | | 1,186 | | 19 | | 628 | | 7 | | | | | | | | | | | | | |
Commercial business | | 44 | | 1 | | 46 | | — | | | | | | | | | | | | | |
Purchased: | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | 1,067 | | 46 | | — | | — | | | | | | | | | | | | | |
Total | | 3,758 | | 87 | | 1,926 | | 25 | | | | | | | | | | | | | |
Total impaired loans | | $ | 8,073 | | $ | 147 | | $ | 4,298 | | $ | 53 | | | | | | | | | | | | | |
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| | Six Months Ended December 31, | | | | | | | | | | | | | |
| | 2013 | | 2012 | | | | | | | | | | | | | |
| | Average | | Interest | | Average | | Interest | | | | | | | | | | | | | |
| | Recorded | | Income | | Recorded | | Income | | | | | | | | | | | | | |
| | Investment | | Recognized | | Investment | | Recognized | | | | | | | | | | | | | |
| | (Dollars in thousands) | | | | | | | | | | | | | |
Impaired loans without a valuation allowance: | | | | | | | | | | | | | | | | | | | | | |
Originated: | | | | | | | | | | | | | | | | | | | | | |
Residential real estate | | $ | 986 | | $ | 14 | | $ | 700 | | $ | 13 | | | | | | | | | | | | | |
Consumer | | 93 | | 2 | | 42 | | 2 | | | | | | | | | | | | | |
Commercial real estate | | 420 | | 14 | | 1,351 | | 29 | | | | | | | | | | | | | |
Commercial business | | 63 | | 6 | | 205 | | 3 | | | | | | | | | | | | | |
Purchased: | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | 2,198 | | 48 | | 352 | | — | | | | | | | | | | | | | |
Total | | 3,760 | | 84 | | 2,650 | | 47 | | | | | | | | | | | | | |
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Impaired loans with a valuation allowance: | | | | | | | | | | | | | | | | | | | | | |
Originated: | | | | | | | | | | | | | | | | | | | | | |
Residential real estate | | 1,385 | | 37 | | 821 | | 26 | | | | | | | | | | | | | |
Consumer | | 98 | | 3 | | 49 | | 2 | | | | | | | | | | | | | |
Commercial real estate | | 1,165 | | 45 | | 610 | | 13 | | | | | | | | | | | | | |
Commercial business | | 50 | | 1 | | 280 | | — | | | | | | | | | | | | | |
Purchased: | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | 778 | | 48 | | — | | — | | | | | | | | | | | | | |
Total | | 3,476 | | 134 | | 1,760 | | 41 | | | | | | | | | | | | | |
Total impaired loans | | $ | 7,236 | | $ | 218 | | $ | 4,410 | | $ | 88 | | | | | | | | | | | | | |
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Credit Quality |
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The Company utilizes a ten-point internal loan rating system for commercial real estate, construction, commercial business, and certain residential loans as follows: |
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Loans rated 1 — 6: Loans in these categories are considered “pass” rated loans. Loans in categories 1-5 are considered to have low to average risk. Loans rated 6 are considered marginally acceptable business credits and have more than average risk. |
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Loans rated 7: Loans in this category are considered “special mention.” These loans show signs of potential weakness and are being closely monitored by management. |
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Loans rated 8: Loans in this category are considered “substandard.” Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified have a well defined weakness or weaknesses that jeopardize the orderly liquidation of the debt. |
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Loans rated 9: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in one graded 8 with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. |
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Loans rated 10: Loans in this category are considered “loss” and of such little value that their continuance as loans is not warranted. |
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On an annual basis, or more often if needed, the Company formally reviews the ratings of all loans subject to risk ratings. Semi-annually, the Company engages an independent third-party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process. Risk ratings on purchased loans, with and without evidence of credit deterioration at acquisition, are determined relative to the Company’s recorded investment in that loan, which may be significantly lower than the loan’s unpaid principal balance. |
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The following tables present the Company’s loans by risk rating. |
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| | December 31, 2013 | | | | | | | |
| | Originated Portfolio | | | | | | | | | | | |
| | Commercial | | | | Commercial | | | | Purchased | | | | | | | | | |
| | Real Estate | | Construction | | Business | | Residential(1) | | Portfolio | | Total | | | | | | | |
| | (Dollars in thousands) | | | | | | | | | |
Loans rated 1- 6 | | $ | 107,455 | | $ | — | | $ | 43,374 | | $ | 12,147 | | $ | 164,588 | | $ | 327,564 | | | | | | | |
Loans rated 7 | | 8,151 | | — | | 41 | | 641 | | 6,630 | | 15,463 | | | | | | | |
Loans rated 8 | | 2,380 | | — | | 272 | | 664 | | 6,217 | | 9,533 | | | | | | | |
Loans rated 9 | | — | | — | | — | | — | | — | | — | | | | | | | |
Loans rated 10 | | — | | — | | — | | — | | — | | — | | | | | | | |
| | $ | 117,986 | | $ | — | | $ | 43,687 | | $ | 13,452 | | $ | 177,435 | | $ | 352,560 | | | | | | | |
|
| | June 30, 2013 | | | | | | | |
| | Originated Portfolio | | | | | | | | | | | |
| | Commercial | | | | Commercial | | | | Purchased | | | | | | | | | |
| | Real Estate | | Construction | | Business | | Residential(1) | | Portfolio | | Total | | | | | | | |
| | (Dollars in thousands) | | | | | | | | | |
Loans rated 1- 6 | | $ | 95,834 | | $ | 42 | | $ | 29,340 | | $ | 13,110 | | $ | 161,965 | | $ | 300,291 | | | | | | | |
Loans rated 7 | | 3,537 | | — | | 82 | | 638 | | 3,226 | | 7,483 | | | | | | | |
Loans rated 8 | | 1,031 | | — | | 264 | | 527 | | 1,595 | | 3,417 | | | | | | | |
Loans rated 9 | | — | | — | | — | | — | | — | | — | | | | | | | |
Loans rated 10 | | — | | — | | — | | — | | — | | — | | | | | | | |
| | $ | 100,402 | | $ | 42 | | $ | 29,686 | | $ | 14,275 | | $ | 166,786 | | $ | 311,191 | | | | | | | |
|
(1) Certain of the Company’s loans originated for commercial purposes, but secured by residential collateral, are rated under the Company’s risk-rating system. |
|
Past Due and Nonaccrual Loans |
|
The following is a summary of past due and non-accrual loans: |
|
| | December 31, 2013 | |
| | | | | | Past Due | | Past Due | | | | | | | | | |
| | | | | | 90 Days or | | 90 Days or | | Total | | | | | | Non- | |
| | 30-59 | | 60-89 | | More-Still | | More- | | Past | | Total | | Total | | Accrual | |
| | Days | | Days | | Accruing | | Nonaccrual | | Due | | Current | | Loans | | Loans | |
| | (Dollars in thousands) | |
Originated portfolio: | | | | | | | | | | | | | | | | | |
Residential real estate | | $ | 786 | | $ | 403 | | $ | — | | $ | 1,684 | | $ | 2,873 | | $ | 117,941 | | $ | 120,814 | | $ | 1,895 | |
Home equity | | 97 | | 212 | | — | | 186 | | 495 | | 29,570 | | 30,065 | | 204 | |
Commercial real estate | | 411 | | 258 | | — | | 26 | | 695 | | 117,291 | | 117,986 | | 487 | |
Construction | | — | | — | | — | | — | | — | | — | | — | | — | |
Commercial business | | — | | — | | — | | 43 | | 43 | | 43,644 | | 43,687 | | 61 | |
Consumer | | 277 | | 133 | | — | | 139 | | 549 | | 11,173 | | 11,722 | | 259 | |
Total originated portfolio | | 1,571 | | 1,006 | | — | | 2,078 | | 4,655 | | 319,619 | | 324,274 | | 2,906 | |
Purchased portfolio: | | | | | | | | | | | | | | | | | |
Residential real estate | | 15 | | — | | — | | — | | 15 | | 2,591 | | 2,606 | | — | |
Commercial business | | — | | — | | — | | — | | — | | 13 | | 13 | | — | |
Commercial real estate | | 4 | | — | | — | | 3,224 | | 3,228 | | 171,588 | | 174,816 | | 3,245 | |
Total purchased portfolio | | 19 | | — | | — | | 3,224 | | 3,243 | | 174,192 | | 177,435 | | 3,245 | |
Total loans | | $ | 1,590 | | $ | 1,006 | | $ | — | | $ | 5,302 | | $ | 7,898 | | $ | 493,811 | | $ | 501,709 | | $ | 6,151 | |
|
| | June 30, 2013 | |
| | | | | | Past Due | | Past Due | | | | | | | | | |
| | | | | | 90 Days or | | 90 Days or | | Total | | | | | | Non- | |
| | 30-59 | | 60-89 | | More-Still | | More- | | Past | | Total | | Total | | Accrual | |
| | Days | | Days | | Accruing | | Nonaccrual | | Due | | Current | | Loans | | Loans | |
| | (Dollars in thousands) | |
Originated portfolio: | | | | | | | | | | | | | | | | | |
Residential real estate | | $ | 278 | | $ | 408 | | $ | — | | $ | 1,965 | | $ | 2,651 | | $ | 87,083 | | $ | 89,734 | | $ | 2,346 | |
Home equity | | 53 | | 47 | | — | | 253 | | 353 | | 35,036 | | 35,389 | | 334 | |
Commercial real estate | | 91 | | 326 | | — | | 98 | | 515 | | 99,887 | | 100,402 | | 473 | |
Construction | | — | | — | | — | | — | | — | | 42 | | 42 | | — | |
Commercial business | | — | | — | | — | | 44 | | 44 | | 29,642 | | 29,686 | | 110 | |
Consumer | | 193 | | 77 | | — | | 117 | | 387 | | 12,950 | | 13,337 | | 136 | |
Total originated portfolio | | 615 | | 858 | | — | | 2,477 | | 3,950 | | 264,640 | | 268,590 | | 3,399 | |
| | | | | | | | | | | | | | | | | |
Purchased portfolio: | | | | | | | | | | | | | | | | | |
Residential real estate | | — | | — | | — | | — | | — | | 2,706 | | 2,706 | | — | |
Commercial business | | — | | — | | — | | — | | — | | 34 | | 34 | | — | |
Commercial real estate | | — | | 2,210 | | — | | 1,135 | | 3,345 | | 160,701 | | 164,046 | | 1,457 | |
Total purchased portfolio | | — | | 2,210 | | — | | 1,135 | | 3,345 | | 163,441 | | 166,786 | | 1,457 | |
Total loans | | $ | 615 | | $ | 3,068 | | $ | — | | $ | 3,612 | | $ | 7,295 | | $ | 428,081 | | $ | 435,376 | | $ | 4,856 | |
|
Troubled Debt Restructurings |
|
The following table shows the Company’s post-modification balance of TDRs by type of modification. |
|
| | Three Months Ended December 31, | | Six Months Ended December 31, | | | | | |
| | 2013 | | 2012 | | 2013 | | 2012 | | | | | |
| | Number of | | Recorded | | Number of | | Recorded | | Number of | | Recorded | | Number of | | Recorded | | | | | |
| | Contracts | | Investment | | Contracts | | Investment | | Contracts | | Investment | | Contracts | | Investment | | | | | |
| | (Dollars in thousands) | | | | | |
Extended maturity | | 3 | | $ | 1,763 | | 1 | | $ | 242 | | 4 | | $ | 1,777 | | 1 | | $ | 242 | | | | | |
Adjusted interest rate | | — | | — | | — | | — | | 1 | | 82 | | — | | — | | | | | |
Rate and maturity | | — | | — | | 6 | | 461 | | — | | — | | 7 | | 683 | | | | | |
Principal deferment | | — | | — | | — | | — | | 2 | | 341 | | — | | — | | | | | |
Court ordered concession | | — | | — | | 1 | | 36 | | — | | — | | 1 | | 36 | | | | | |
| | 3 | | $ | 1,763 | | 8 | | $ | 739 | | 7 | | $ | 2,200 | | 9 | | $ | 961 | | | | | |
|
The following table shows loans modified in a TDR and the change in the recorded investment subsequent to the modifications occurring. |
|
| | Three Months Ended December 31, | | | | | | | | | |
| | 2013 | | 2012 | | | | | | | | | |
| | | | Recorded | | Recorded | | | | Recorded | | Recorded | | | | | | | | | |
| | Number of | | Investment | | Investment | | Number of | | Investment | | Investment | | | | | | | | | |
| | Contracts | | Pre-Modification | | Post-Modification | | Contracts | | Pre-Modification | | Post-Modification | | | | | | | | | |
| | (Dollars in thousands) | | | | | | | | | |
Originated portfolio: | | | | | | | | | | | | | | | | | | | | | |
Residential real estate | | — | | $ | — | | $ | — | | 3 | | $ | 453 | | $ | 453 | | | | | | | | | |
Home equity | | — | | — | | — | | 2 | | 278 | | 278 | | | | | | | | | |
Commercial real estate | | — | | — | | — | | — | | — | | — | | | | | | | | | |
Commercial business | | — | | — | | — | | — | | — | | — | | | | | | | | | |
Consumer | | 1 | | 39 | | 39 | | 3 | | 8 | | 8 | | | | | | | | | |
Total originated portfolio | | 1 | | 39 | | 39 | | 8 | | 739 | | 739 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Purchased portfolio: | | | | | | | | | | | | | | | | | | | | | |
Residential real estate | | — | | — | | — | | — | | — | | — | | | | | | | | | |
Commercial real estate | | 2 | | 1,685 | | 1,724 | | — | | — | | — | | | | | | | | | |
Total purchased portfolio | | 2 | | 1,685 | | 1,724 | | — | | — | | — | | | | | | | | | |
Total | | 3 | | $ | 1,724 | | $ | 1,763 | | 8 | | $ | 739 | | $ | 739 | | | | | | | | | |
|
| | Six Months Ended December 31, | | | | | | | | | |
| | 2013 | | 2012 | | | | | | | | | |
| | | | Recorded | | Recorded | | | | Recorded | | Recorded | | | | | | | | | |
| | Number of | | Investment | | Investment | | Number of | | Investment | | Investment | | | | | | | | | |
| | Contracts | | Pre-Modification | | Post-Modification | | Contracts | | Pre-Modification | | Post-Modification | | | | | | | | | |
| | (Dollars in thousands) | | | | | | | | | |
Originated portfolio: | | | | | | | | | | | | | | | | | | | | | |
Residential real estate | | — | | $ | — | | $ | — | | 4 | | $ | 675 | | $ | 675 | | | | | | | | | |
Home equity | | 1 | | 14 | | 14 | | 2 | | 278 | | 278 | | | | | | | | | |
Commercial real estate | | 1 | | 323 | | 323 | | — | | — | | — | | | | | | | | | |
Commercial business | | 1 | | 18 | | 18 | | — | | — | | — | | | | | | | | | |
Consumer | | 2 | | 121 | | 121 | | 3 | | 8 | | 8 | | | | | | | | | |
Total originated portfolio | | 5 | | 476 | | 476 | | 9 | | 961 | | 961 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Purchased portfolio: | | | | | | | | | | | | | | | | | | | | | |
Residential real estate | | — | | — | | — | | — | | — | | — | | | | | | | | | |
Commercial real estate | | 2 | | 1,685 | | 1,724 | | — | | — | | — | | | | | | | | | |
Total purchased portfolio | | 2 | | 1,685 | | 1,724 | | — | | — | | — | | | | | | | | | |
Total | | 7 | | $ | 2,161 | | $ | 2,200 | | 9 | | $ | 961 | | $ | 961 | | | | | | | | | |
|
The following table shows the loans that have been modified during the past twelve months which have subsequently defaulted during the periods indicated. The Company considers a loan to have defaulted when it reaches 90 days past due. |
|
| | Three Months Ended December 31, | | Six Months Ended December 31, | | | | | |
| | 2013 | | 2012 | | 2013 | | 2012 | | | | | |
| | Number of | | Recorded | | Number of | | Recorded | | Number of | | Recorded | | Number of | | Recorded | | | | | |
| | Contracts | | Investment | | Contracts | | Investment | | Contracts | | Investment | | Contracts | | Investment | | | | | |
| | (Dollars in thousands) | | | | | |
Residential | | — | | $ | — | | — | | $ | — | | 1 | | $ | 69 | | — | | $ | — | | | | | |
Home equity | | — | | — | | 1 | | 36 | | — | | — | | 1 | | 36 | | | | | |
Consumer | | — | | — | | — | | — | | 1 | | 10 | | — | | — | | | | | |
| | — | | $ | — | | 1 | | $ | 36 | | 2 | | $ | 79 | | 1 | | $ | 36 | | | | | |
|
As of December 31, 2013, there were no further commitments to lend associated with loans modified in a TDR. |
|
ASC 310-30 Loans |
|
The following table presents a summary of loans accounted for under ASC 310-30 that were acquired by the Company. |
|
| | Three Months Ended | | Six Months Ended | | | | | | | | | | | | | | | | | | | |
December 31, 2013 | December 31, 2013 | | | | | | | | | | | | | | | | | | |
| | (Dollars in thousands) | | | | | | | | | | | | | | | | | | | |
Contractually required payments receivable | | $ | 20,865 | | $ | 43,082 | | | | | | | | | | | | | | | | | | | |
Nonaccretable difference | | (420 | ) | (593 | ) | | | | | | | | | | | | | | | | | | |
Cash flows expected to be collected | | 20,445 | | 42,489 | | | | | | | | | | | | | | | | | | | |
Accretable yield | | (6,826 | ) | (12,522 | ) | | | | | | | | | | | | | | | | | | |
Fair value of loans acquired | | $ | 13,619 | | $ | 29,967 | | | | | | | | | | | | | | | | | | | |
|
The following table summarizes the activity in the accretable yield for loans accounted for under ASC 310-30. |
|
| | Three Months Ended | | Six Months Ended | | | | | | | | | | | | | | | | | | | |
December 31, 2013 | December 31, 2013 | | | | | | | | | | | | | | | | | | |
| | (Dollars in thousands) | | | | | | | | | | | | | | | | | | | |
Beginning balance | | $ | 106,805 | | $ | 108,251 | | | | | | | | | | | | | | | | | | | |
Acquisitions | | 6,826 | | 12,522 | | | | | | | | | | | | | | | | | | | |
Accretion | | (3,898 | ) | (7,636 | ) | | | | | | | | | | | | | | | | | | |
Reclassifications to accretable yield | | 676 | | 763 | | | | | | | | | | | | | | | | | | | |
Disposals and other | | (6,292 | ) | (9,783 | ) | | | | | | | | | | | | | | | | | | |
End balance | | $ | 104,117 | | $ | 104,117 | | | | | | | | | | | | | | | | | | | |
|
The following table provides information related to the unpaid principal balance and carrying amounts of ASC 310-30 loans. |
|
| | December 31, 2013 | | June 30, 2013 | | | | | | | | | | | | | | | | | | | |
| | (Dollars in thousands) | | | | | | | | | | | | | | | | | | | |
Unpaid principal balance | | $ | 210,297 | | $ | 203,755 | | | | | | | | | | | | | | | | | | | |
Carrying amount | | $ | 175,416 | | $ | 166,506 | | | | | | | | | | | | | | | | | | | |
|