Allowance for Loan Losses | 6. Allowance for Loan Losses The Company maintains an allowance for loan losses in an amount determined by management on the basis of the character of the loans, loan performance, financial condition of borrowers, the value of collateral securing loans and other relevant factors. The following table summarizes the changes in the Company’s allowance for loan losses for the years indicated. An analysis of the allowance for loan losses for each of the three years ending December 31, 2017, 2016 and 2015 is as follows: 2017 2016 2015 (dollars in thousands) Allowance for loan losses, beginning of year $ 24,406 $ 23,075 $ 22,318 Loans charged-off (390 ) (389 ) (781 ) Recoveries on loans previously charged-off 449 434 1,338 Net recoveries (charge-offs) 59 45 557 Provision charged to expense 1,790 1,375 200 Reclassification to other liabilities* — (89 ) — Allowance for loan losses, end of year $ 26,255 $ 24,406 $ 23,075 * The reclassification relates to allowance for loan losses allocations on unused commitments that have been reclassified to other liabilities. Further information pertaining to the allowance for loan losses at December 31, 2017 follows: Construction Commercial and Industrial Municipal Commercial Residential Estate Consumer Home Unallocated Total (dollars in thousands) Allowance for Loan Losses: Balance at December 31, 2016 $ 1,012 $ 6,972 $ 1,612 $ 11,135 $ 1,698 $ 582 $ 1,102 $ 293 $ 24,406 Charge-offs — (49 ) — — — (341 ) — — (390 ) Recoveries — 110 — — 2 255 82 — 449 Provision 633 2,618 108 (1,407 ) 173 (123 ) (195 ) (17 ) 1,790 Ending balance at December 31, 2017 $ 1,645 $ 9,651 $ 1,720 $ 9,728 $ 1,873 $ 373 $ 989 $ 276 $ 26,255 Amount of allowance for loan losses for loans deemed to be impaired $ — $ 7 $ — $ 99 $ 58 $ — $ — $ — $ 164 Amount of allowance for loan losses for loans not deemed to be impaired $ 1,645 $ 9,644 $ 1,720 $ 9,629 $ 1,815 $ 373 $ 989 $ 276 $ 26,091 Loans: Ending balance $ 18,931 $ 763,807 $ 106,599 $ 732,491 $ 287,731 $ 19,040 $ 247,345 $ — $ 2,175,944 Loans deemed to be impaired $ — $ 348 $ — $ 2,554 $ 4,212 $ — $ — $ — $ 7,114 Loans not deemed to be impaired $ 18,931 $ 763,459 $ 106,599 $ 729,937 $ 283,519 $ 19,040 $ 247,345 $ — $ 2,168,830 Further information pertaining to the allowance for loan losses at December 31, 2016 follows: Construction Commercial Municipal Commercial Residential Consumer Home Unallocated Total (dollars in thousands) Allowance for Loan Losses: Balance at December 31, 2015 $ 2,041 $ 5,899 $ 994 $ 10,589 $ 1,320 $ 644 $ 1,077 $ 511 $ 23,075 Charge-offs — — — — — (362 ) (27 ) — (389 ) Recoveries — 132 — — 6 296 — — 434 Reclassification to other liabilities (5 ) (25 ) — (9 ) (3 ) (3 ) (44 ) — (89 ) Provision (1,024 ) 966 618 555 375 7 96 (218 ) 1,375 Ending balance at December 31, 2016 $ 1,012 $ 6,972 $ 1,612 $ 11,135 $ 1,698 $ 582 $ 1,102 $ 293 $ 24,406 Amount of allowance for loan losses for loans deemed to be impaired $ 3 $ 23 $ — $ 140 $ 7 $ — $ — $ — $ 173 Amount of allowance for loan losses for loans not deemed to be impaired $ 1,009 $ 6,949 $ 1,612 $ 10,995 $ 1,691 $ 582 $ 1,102 $ 293 $ 24,233 Loans: Ending balance $ 14,928 $ 612,503 $ 135,418 $ 696,173 $ 241,357 $ 11,697 $ 211,857 $ — $ 1,923,933 Loans deemed to be impaired $ 94 $ 389 $ — $ 3,149 $ 198 $ — $ — $ — $ 3,830 Loans not deemed to be impaired $ 14,834 $ 612,114 $ 135,418 $ 693,024 $ 241,159 $ 11,697 $ 211,857 $ — $ 1,920,103 CREDIT QUALITY INFORMATION The Company utilizes a six-grade Loans rated 1-3 Loans rated 4 (Monitor) — These loans represent classified loans that management is closely monitoring for credit quality. These loans have had or may have minor credit quality deterioration as of December 31, 2017. Loans rated 5 (Substandard) — Substandard loans represent classified loans that management is closely monitoring for credit quality. These loans have had more significant credit quality deterioration as of December 31, 2017. Loans rated 6 (Doubtful) — Doubtful loans represent classified loans that management is closely monitoring for credit quality. These loans had more significant credit quality deterioration as of December 31, 2017, and are doubtful for full collection. Impaired — Impaired loans represent classified loans that management is closely monitoring for credit quality. A loan is classified as impaired when it is probable that the Company will be unable to collect all amounts due. The following table presents the Company’s loans by risk rating at December 31, 2017. Construction Commercial Municipal Commercial (dollars in thousands) Grade: 1-3 $ 18,931 $ 758,093 $ 106,599 $ 705,235 4 (Monitor) — 5,366 — 24,702 5 (Substandard) — — — — 6 (Doubtful) — — — — Impaired — 348 — 2,554 Total $ 18,931 $ 763,807 $ 106,599 $ 732,491 The Company has increased its exposure to larger loans to large institutions with publicly available credit ratings. These ratings are tracked as a credit quality indicator for these loans. The following table presents the Company’s loans by credit rating at December 31, 2017. Commercial Municipal Commercial Total (dollars in thousands) Credit Rating: Aaa-Aa3 $ 478,905 $ 62,029 $ 45,066 $ 586,000 A1-A3 195,599 7,635 128,554 331,788 Baa1-Baa3 — 26,970 122,000 148,970 Ba2 — 8,165 — 8,165 Total $ 674,504 $ 104,799 $ 295,620 $ 1,074,923 The following table presents the Company’s loans by risk rating at December 31, 2016. Construction Commercial Municipal Commercial (dollars in thousands) Grade: 1-3 $ 14,834 $ 612,114 $ 135,418 $ 661,271 4 (Monitor) — — — 31,753 5 (Substandard) — — — — 6 (Doubtful) — — — — Impaired 94 389 — 3,149 Total $ 14,928 $ 612,503 $ 135,418 $ 696,173 The following table presents the Company’s loans by credit rating at December 31, 2016. Commercial Municipal Commercial Total (dollars in thousands) Credit Rating: Aaa-Aa3 $ 334,674 $ 66,245 $ 6,596 $ 407,515 A1-A3 188,777 33,365 129,423 351,565 Baa1-Baa3 — 26,970 127,366 154,336 Ba2 — 3,610 — 3,610 Total $ 523,451 $ 130,190 $ 263,385 $ 917,026 The Company utilized payment performance as credit quality indicators for residential real estate, consumer and overdrafts, and the home equity portfolio. The indicators are depicted in the table “aging of past-due AGING OF PAST-DUE At December 31, 2017 the aging of past due loans are as follows: Accruing 30-89 Days Non Accruing 90 Days Total Current Total (dollars in thousands) Construction and land development $ — $ — $ — $ — $ 18,931 $ 18,931 Commercial and industrial 65 44 — 109 763,698 763,807 Municipal — — — — 106,599 106,599 Commercial real estate 672 215 — 887 731,604 732,491 Residential real estate 4,282 724 — 5,006 282,725 287,731 Consumer and overdrafts 5 6 — 11 19,029 19,040 Home equity 618 695 — 1,313 246,032 247,345 Total $ 5,642 $ 1,684 $ — $ 7,326 $ 2,168,618 $ 2,175,944 At December 31, 2016 the aging of past due loans are as follows: Accruing 30-89 Days Non Accruing 90 Days Total Current Total (dollars in thousands) Construction and land development $ — $ 94 $ — $ 94 $ 14,834 $ 14,928 Commercial and industrial 37 65 — 102 612,401 612,503 Municipal — — — — 135,418 135,418 Commercial real estate 597 150 — 747 695,426 696,173 Residential real estate 245 656 — 901 240,456 241,357 Consumer and overdrafts — 11 — 11 11,686 11,697 Home equity 735 108 — 843 211,014 211,857 Total $ 1,614 $ 1,084 $ — $ 2,698 $ 1,921,235 $ 1,923,933 IMPAIRED LOANS A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, the Company measures impairment based on a loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. Loans are charged-off charged-off The following is information pertaining to impaired loans at December 31, 2017: Carrying Unpaid Required Average Interest (dollars in thousands) With no required reserve recorded: Construction and land development $ — $ — $ — $ — $ — Commercial and industrial 113 325 — 54 4 Municipal — — — — — Commercial real estate 420 548 — 286 21 Residential real estate — — — 73 — Consumer — — — — — Home equity — — — — — Total $ 533 $ 873 $ — $ 413 $ 25 With required reserve recorded: Construction and land development $ — $ — $ — $ 43 $ — Commercial and industrial 235 235 7 318 12 Municipal — — — — — Commercial real estate 2,134 2,135 99 2,501 72 Residential real estate 4,212 4,212 58 2,333 73 Consumer — — — — — Home equity — — — — — Total $ 6,581 $ 6,582 $ 164 $ 5,195 $ 157 Total Construction and land development $ — $ — $ — $ 43 $ — Commercial and industrial 348 560 7 372 16 Municipal — — — — — Commercial real estate 2,554 2,683 99 2,787 93 Residential real estate 4,212 4,212 58 2,406 73 Consumer — — — — — Home equity — — — — — Total $ 7,114 $ 7,455 $ 164 $ 5,608 $ 182 The following is information pertaining to impaired loans at December 31, 2016: Carrying Unpaid Required Average Interest (dollars in thousands) With no required reserve recorded: Construction and land development $ — $ — $ — $ — $ — Commercial and industrial 45 232 — 53 — Municipal — — — — — Commercial real estate 590 590 — 375 39 Residential real estate 90 179 — 102 7 Consumer — — — — — Home equity — — — — — Total $ 725 $ 1,001 $ — $ 530 $ 46 With required reserve recorded: Construction and land development $ 94 $ 108 $ 3 $ 96 $ — Commercial and industrial 344 360 23 360 18 Municipal — — — — — Commercial real estate 2,559 2,665 140 2,324 71 Residential real estate 108 108 7 323 5 Consumer — — — — — Home equity — — — 28 — Total $ 3,105 $ 3,241 $ 173 $ 3,131 $ 94 Total Construction and land development $ 94 $ 108 $ 3 $ 96 $ — Commercial and industrial 389 592 23 413 18 Municipal — — — — — Commercial real estate 3,149 3,255 140 2,699 110 Residential real estate 198 287 7 425 12 Consumer — — — — — Home equity — — — 28 — Total $ 3,830 $ 4,242 $ 173 $ 3,661 $ 140 Troubled Debt Restructurings are identified as a modification in which a concession was granted to a customer who was having financial difficulties. This concession may be below market rate, longer amortization/term, or a lower payment amount. The present value calculation of the modification did not result in an increase in the allowance for these loans beyond any previously established allocations. There were no troubled debt restructurings occurring during the year ended December 31, 2017. There was one commercial real estate troubled debt restructuring during the year ended December 31, 2016. The pre-modification There were no commitments to lend additional funds to troubled debt restructuring borrowers. There were no troubled debt restructurings that subsequently defaulted during 2017 and 2016. |