Loans receivable | NOTE 4. Loans receivable: Loans receivable consisted of the following as of December 31: 2015 2014 (Dollars in thousands) Originated Acquired Total Originated Acquired Total Real estate: Conventional $ 600,763 $ 41,895 $ 642,658 $ 592,386 $ 53,304 $ 645,690 Home equity 66,708 5,547 72,255 63,176 6,027 69,203 Commercial 259,834 63,434 323,268 235,640 77,377 313,017 Construction 33,663 1,255 34,918 34,988 1,457 36,445 960,968 112,131 1,073,099 926,190 138,165 1,064,355 Commercial and municipal loans 133,596 8,925 142,521 125,161 13,414 138,575 Consumer loans 5,411 1,077 6,488 7,438 1,712 9,150 Total loans 1,099,975 122,133 1,222,108 1,058,789 153,291 1,212,080 Allowance for loan losses (8,607 ) (298 ) (8,905 ) (9,269 ) — (9,269 ) Deferred loan origination costs, net 4,258 — 4,258 4,034 — 4,034 Loans receivable, net $ 1,095,626 $ 121,835 $ 1,217,461 $ 1,053,554 $ 153,291 $ 1,206,845 Certain directors and executive officers of the Company and companies in which they have significant ownership interest were customers of the Bank during 2015. Total outstanding loan balances to such persons and their companies amounted to $848 thousand as of December 31, 2015. During 2015, principal advances of $339 thousand were made and principal payments totaled $270 thousand. The following tables set forth information regarding the allowance for loan and lease losses by portfolio segment as of and for the years ended December 31: Real Estate: Consumer Unallocated Total (Dollars in thousands) Conventional and Commercial Construction Commercial December 31, 2015: Allowance for loan losses: Originated: Beginning balance $ 4,763 $ 2,724 $ 991 $ 635 $ 86 $ 70 $ 9,269 Charge-offs (465 ) (769 ) — (29 ) (203 ) — (1,466 ) Recoveries 108 475 — 76 120 — 779 (Benefit) provision (209 ) 454 (794 ) 517 65 (8 ) 25 Ending balance $ 4,197 $ 2,884 $ 197 $ 1,199 $ 68 $ 62 $ 8,607 Acquired: Beginning balance $ — $ — $ — $ — $ — $ — $ — Charge-offs (301 ) (420 ) — (31 ) (20 ) — (772 ) Recoveries 9 1 — 20 9 — 39 Provision (benefit) 355 609 21 35 11 — 1,031 Ending balance $ 63 $ 190 $ 21 $ 24 $ — $ — $ 298 Originated: Individually evaluated for impairment $ 200 $ 133 $ 15 $ 7 $ — $ — $ 355 Collectively evaluated for impairment 3,997 2,751 182 1,192 68 62 8,252 Acquired loans: (discounts related to credit quality) 63 190 21 24 — — 298 Total allowance for loan losses ending balance $ 4,260 $ 3,074 $ 218 $ 1,223 $ 68 $ 62 $ 8,905 Loans: Originated: Individually evaluated for impairment $ 6,707 $ 5,078 $ 442 $ 732 $ — $ — $ 12,959 Collectively evaluated for impairment 660,764 254,756 33,221 132,864 5,411 — 1,087,016 Acquired loans: (discounts related to credit quality) 47,442 63,434 1,255 8,925 1,077 — 122,133 Total loans ending balance $ 714,913 $ 323,268 $ 34,918 $ 142,521 $ 6,488 $ — $ 1,222,108 Real Estate: Consumer Unallocated Total (Dollars in thousands) Conventional and Commercial Construction Commercial December 31, 2014: Allowance for loan losses: Originated: Beginning balance $ 5,385 $ 2,143 $ 353 $ 1,561 $ 75 $ 240 $ 9,757 Charge-offs (681 ) (533 ) — (445 ) (219 ) — (1,878 ) Recoveries 314 1 — 57 113 — 485 (Benefit) provision (255 ) 1,113 638 (538 ) 117 (170 ) 905 Ending balance $ 4,763 $ 2,724 $ 991 $ 635 $ 86 $ 70 $ 9,269 Acquired: Beginning balance $ — $ — $ — $ — $ — $ — $ — Charge-offs — — — — — — — Recoveries — — — — — — — Provision (benefit) — — — — — — — Ending balance $ — $ — $ — $ — $ — $ — $ — Originated: Individually evaluated for impairment $ 50 $ 17 $ — $ — $ — $ — $ 67 Collectively evaluated for impairment 4,713 2,707 991 635 86 70 9,202 Acquired loans: (discounts related to credit quality) — — — — — — — Total allowance for loan losses ending balance $ 4,763 $ 2,724 $ 991 $ 635 $ 86 $ 70 $ 9,269 Loans: Originated: Individually evaluated for impairment $ 5,965 $ 8,110 $ 1,163 $ 880 $ — $ — $ 16,118 Collectively evaluated for impairment 649,597 227,530 33,825 124,281 7,438 — 1,042,671 Acquired loans: (discounts related to credit quality) 59,331 77,377 1,457 13,414 1,712 — 153,291 Total loans ending balance $ 714,893 $ 313,017 $ 36,445 $ 138,575 $ 9,150 $ — $ 1,212,080 Real Estate: Commercial Consumer Unallocated Total (Dollars in thousands) Conventional and Commercial Construction December 31, 2013: Allowance for loan losses: Originated: Beginning balance $ 4,897 $ 3,616 $ 208 $ 918 $ 58 $ 226 $ 9,923 Charge-offs (851 ) (593 ) — (302 ) (230 ) — (1,976 ) Recoveries 267 284 — 154 142 — 847 Provision (benefit) 1,072 (1,164 ) 145 791 105 14 963 Ending balance $ 5,385 $ 2,143 $ 353 $ 1,561 $ 75 $ 240 $ 9,757 Acquired: Beginning balance $ — $ — $ — $ — $ — $ — $ — Charge-offs — — — — — — — Recoveries — — — — — — — Provision (benefit) — — — — — — — Ending balance $ — $ — $ — $ — $ — $ — $ — Originated: Individually evaluated for impairment $ 71 $ 116 $ — $ 10 $ — $ — $ 197 Collectively evaluated for impairment 5,314 2,027 353 1,551 75 240 9,560 Acquired loans: (discounts related to credit quality) — — — — — — — Total allowance for loan losses ending balance $ 5,385 $ 2,143 $ 353 $ 1,561 $ 75 $ 240 $ 9,757 Loans: Originated: Individually evaluated for impairment $ 6,716 $ 11,363 $ 1,494 $ 1,582 $ — $ — $ 21,155 Collectively evaluated for impairment 593,608 187,378 24,568 119,674 6,829 — 932,057 Acquired loans: (discounts related to credit quality) 72,510 89,072 3,660 18,815 2,988 — 187,045 Total loans ending balance $ 672,834 $ 287,813 $ 29,722 $ 140,071 $ 9,817 $ — $ 1,140,257 The following tables set forth information regarding nonaccrual and past due loans as of December 31, 2015 and December 31, 2014: (Dollars in thousands) 30-59 Days 60-89 Days 90 Days Total Total Total 90 Days Nonaccrual December 31, 2015: Originated: Real estate: Conventional $ 1,644 $ 1,309 $ 1,454 $ 4,407 $ 596,356 $ 600,763 $ — $ 2,310 Home equity 180 — 166 346 66,362 66,708 — 166 Commercial 1,028 482 309 1,819 258,015 259,834 — 1,565 Construction 24 — — 24 33,639 33,663 — — Commercial and municipal 89 50 584 723 132,873 133,596 — 584 Consumer (including credit card) 16 7 — 23 5,388 5,411 — — Total $ 2,981 $ 1,848 $ 2,513 $ 7,342 $ 1,092,633 $ 1,099,975 $ — $ 4,625 Acquired: Real estate: Conventional $ 514 $ 238 $ 654 $ 1,406 $ 40,489 $ 41,895 $ — $ 707 Home equity 12 — 17 29 5,518 5,547 — 17 Commercial 386 — 677 1,063 62,371 63,434 — 677 Construction — — — — 1,255 1,255 — — Commercial and municipal 5 — — 5 8,920 8,925 — — Consumer (including credit card) 6 12 — 18 1,059 1,077 — — Total $ 923 $ 250 $ 1,348 $ 2,521 $ 119,612 $ 122,133 $ — $ 1,401 Total Loans: Real estate: Conventional $ 2,158 $ 1,547 $ 2,108 $ 5,813 $ 636,845 $ 642,658 $ — $ 3,017 Home equity 192 — 183 375 71,880 72,255 — 183 Commercial 1,414 482 986 2,882 320,386 323,268 — 2,242 Construction 24 — — 24 34,894 34,918 — — Commercial and municipal 94 50 584 728 141,793 142,521 — 584 Consumer (including credit card) 22 19 1 42 6,446 6,488 — — Total $ 3,904 $ 2,098 $ 3,862 $ 9,864 $ 1,212,244 $ 1,222,108 $ — $ 6,026 (Dollars in thousands) 30-59 Days 60-89 Days 90 Days Total Total Total 90 Days Nonaccrual December 31, 2014: Originated: Real estate: Conventional $ 2,639 $ 810 $ 1,080 $ 4,529 $ 587,857 $ 592,386 $ — $ 1,577 Home equity 60 31 181 272 62,904 63,176 — 181 Commercial 1,683 365 672 2,720 232,920 235,640 — 2,290 Construction — 28 — 28 34,960 34,988 — — Commercial and municipal 304 48 330 682 124,479 125,161 — 659 Consumer (including credit card) 34 6 — 40 7,398 7,438 — — Total $ 4,720 $ 1,288 $ 2,263 $ 8,271 $ 1,050,518 $ 1,058,789 $ — $ 4,707 Acquired: Real estate: Conventional $ 907 $ 589 $ 352 $ 1,848 $ 51,456 $ 53,304 $ — $ 849 Home equity — — — — 6,027 6,027 — — Commercial 545 1,107 671 2,323 75,054 77,377 — 1,636 Construction — — 15 15 1,442 1,457 — 15 Commercial and municipal 1 415 — 416 12,998 13,414 — 120 Consumer (including credit card) 37 15 — 52 1,660 1,712 — — Total $ 1,490 $ 2,126 $ 1,038 $ 4,654 $ 148,637 $ 153,291 $ — $ 2,620 Total Loans: Real estate: Conventional $ 3,546 $ 1,399 $ 1,432 $ 6,377 $ 639,313 $ 645,690 $ — $ 2,426 Home equity 60 31 181 272 68,931 69,203 — 181 Commercial 2,228 1,472 1,343 5,043 307,974 313,017 — 3,926 Construction — 28 15 43 36,402 36,445 — 15 Commercial and municipal 305 463 330 1,098 137,477 138,575 — 779 Consumer (including credit card) 71 21 — 92 9,058 9,150 — — Total $ 6,210 $ 3,414 $ 3,301 $ 12,925 $ 1,199,155 $ 1,212,080 $ — $ 7,327 As of December 31, 2015, the Company’s impaired loans consist of certain loans, including all TDRs. The following tables summarizes, by class of loan, information related to impaired loans as of December 31, 2015 and December 31, 2014: (Dollars in thousands) Recorded Unpaid Related Average Interest December 31, 2015: With no related allowance recorded: Real estate: Conventional $ 3,175 $ 3,895 $ — $ 4,083 $ 128 Home equity 213 340 — 183 11 Commercial 2,589 3,028 — 3,273 144 Construction — — — 278 — Commercial and municipal 691 696 — 629 29 Total impaired with no related allowance $ 6,668 $ 7,959 $ — $ 8,446 $ 312 With an allowance recorded: Real estate: Conventional $ 3,319 $ 3,548 $ 231 $ 2,348 $ 159 Commercial 2,489 2,546 133 1,311 77 Construction 442 476 15 337 18 Commercial and municipal 41 42 7 34 3 Total impaired with an allowance recorded $ 6,291 $ 6,612 $ 386 $ 4,030 $ 257 Total Real estate: Conventional $ 6,494 $ 7,443 $ 231 $ 6,431 $ 287 Home equity 213 340 — 183 11 Commercial 5,078 5,574 133 4,584 221 Construction 442 476 15 615 18 Commercial and municipal 732 738 7 663 32 Total impaired loans $ 12,959 $ 14,571 $ 386 $ 12,476 $ 569 (Dollars in thousands) Recorded Unpaid Related Average Interest December 31, 2014: With no related allowance recorded: Real estate: Conventional $ 5,447 $ 6,028 $ — $ 5,735 $ 342 Home equity 181 264 — 232 5 Commercial 7,383 8,151 — 8,093 379 Construction 1,163 1,185 — 1,233 53 Commercial and municipal 880 1,204 — 1,118 77 Total impaired with no related allowance $ 15,054 $ 16,832 $ — $ 16,411 $ 856 With an allowance recorded: Real estate: Conventional $ 337 $ 370 $ 50 $ 546 $ 17 Commercial 727 727 17 1,539 32 Commercial and municipal — — — 350 — Total impaired with an allowance recorded $ 1,064 $ 1,097 $ 67 $ 2,435 $ 49 Total Real estate: Conventional $ 5,784 $ 6,398 $ 50 $ 6,281 $ 359 Home equity 181 264 — 232 5 Commercial 8,110 8,878 17 9,632 411 Construction 1,163 1,185 — 1,233 53 Commercial and municipal 880 1,204 — 1,468 77 Total impaired loans $ 16,118 $ 17,929 $ 67 $ 18,846 $ 905 The recorded investment of conventional real estate loans in the process of foreclosure was $1.2 million at December 31, 2015. OREO was $904 thousand, representing three residential properties and two commercial properties, at December 31, 2015, compared to $251 thousand, representing two residential OREO properties and property acquired in settlement of loans at December 31, 2014. The carrying amount of acquired loans at December 31, 2015 totaled $121.9 million. A subset of these loans was determined to have evidence of credit deterioration at acquisition date, which is accounted for in accordance with ASC 310-30. These purchased credit-impaired loans maintain a carrying value of $2.4 million and an outstanding principal balance of $3.1 million at December 31, 2015. These loans are evaluated for impairment through the periodic reforecasting of expected cash flows. The carrying amount of acquired loans at December 31, 2014 totaled $153.3 million. A subset of these loans was determined to have evidence of credit deterioration at acquisition date, which is accounted for in accordance with ASC 310-30. These purchased credit-impaired loans maintain a carrying value of $2.7 million and an outstanding principal balance of $3.1 million at December 31, 2014. These loans are evaluated for impairment through the periodic reforecasting of expected cash flows. The following table presents the Company’s activity in the accretable yield for the purchased credit impaired loans during the years ended December 31: (Dollars in thousands) December 31, December 31, Accretable yield at the beginning of the period $ 2,125 $ 2,723 Reclassification from nonaccretable difference for loans with improved cash flows 348 — Accretion (260 ) (598 ) Accretable yield at the end of the period $ 2,213 $ 2,125 The following table presents modified loans by class that were determined to be TDRs that occurred during the years ended December 31: (Dollars in thousands) Number of Pre-Modification Post-Modification December 31, 2015: Troubled Debt Restructurings: Real estate: Conventional 6 $ 979 $ 979 Home equity 1 30 30 Commercial 3 1,157 1,157 Commercial and municipal 1 7 7 11 $ 2,173 $ 2,173 (Dollars in thousands) Number of Pre-Modification Post-Modification December 31, 2014: Troubled Debt Restructurings: Real estate: Conventional 16 $ 1,257 $ 1,257 Commercial 4 991 991 Construction 1 95 95 Commercial and municipal 1 35 35 22 $ 2,378 $ 2,378 Troubled debt restructured loans and leases are considered impaired and are included in the previous impaired loan disclosures in this footnote. As of December 31, 2015 and 2014, the Company has not committed to lend additional amounts to customers with outstanding loans and leases that are classified as troubled debt restructurings. During the years ended December 31, 2015 and 2014, certain loans and lease modifications were executed which constituted troubled debt restructurings. Substantially all of these modifications included one or a combination of the following: an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; temporary reduction in the interest rate; or change in scheduled payment amount. The following tables present information on how loans were modified as TDRs during the years ended December 31: (Dollars in thousands) Extended Interest Interest Rate Combination of Combination of Total December 31, 2015: Real estate: Conventional $ 243 $ — $ 51 $ 287 $ 398 $ 979 Home equity 30 — — — — 30 Commercial — — 1,085 — 72 1,157 Commercial and municipal — 7 — — — 7 Total TDRs $ 273 $ 7 $ 1,136 $ 287 $ 470 $ 2,173 (Dollars in thousands) Extended Combination of Combination of Combination of Other (a) Total December 31, 2014: Real estate: Conventional $ — $ 516 $ 619 $ 122 $ — $ 1,257 Commercial 211 210 — — 570 991 Construction — — 95 — — 95 Commercial and municipal — — — — 35 35 Total TDRs $ 211 $ 726 $ 714 $ 122 $ 605 $ 2,378 There were four new TDRs that have subsequently defaulted during the year ended December 31, 2015 including one residential loan totaling $240 thousand which is on nonaccrual as of December 31, 2015. All TDRs are individually evaluated for impairment. There are 27 TDRs with an impairment measurement totaling $368 thousand, included in specific allowances as of December 31, 2015. There were no new TDRs that have subsequently defaulted during the year ended December 31, 2014. All TDRs are individually evaluated for impairment. There are three TDRs with an impairment measurement totaling $53 thousand, included in specific allowances as of December 31, 2014. The following tables present the Company’s loans by risk rating as of December 31: Real Estate: Commercial and Consumer Total (Dollars in thousands) Conventional and Commercial Construction December 31, 2015: Originated Grade: Pass $ — $ 222,466 $ 19,208 $ 111,653 $ — $ 353,327 Special mention — 4,278 18 112 — 4,408 Substandard 5,272 7,670 567 416 — 13,925 Loans not formally rated 662,199 25,420 13,870 21,415 5,411 728,315 Total $ 667,471 $ 259,834 $ 33,663 $ 133,596 $ 5,411 $ 1,099,975 Acquired Grade: Pass $ — $ 56,212 $ 1,047 $ 8,031 $ — $ 65,290 Special mention — 1,643 — — — 1,643 Substandard 1,038 4,097 92 509 — 5,736 Loans not formally rated 46,404 1,482 116 385 1,077 49,464 Total $ 47,442 $ 63,434 $ 1,255 $ 8,925 $ 1,077 $ 122,133 (Dollars in thousands) December 31, 2014: Originated Grade: Pass $ — $ 205,158 $ 19,798 $ 99,705 $ — $ 324,661 Special mention — 2,952 35 850 — 3,837 Substandard 4,790 11,944 2,384 359 — 19,477 Loans not formally rated 650,772 15,586 12,771 24,247 7,438 710,814 Total $ 655,562 $ 235,640 $ 34,988 $ 125,161 $ 7,438 $ 1,058,789 Acquired Grade: Pass $ — $ 64,441 $ 924 $ 10,676 $ — $ 76,041 Special mention — 5,600 — 401 — 6,001 Substandard 863 5,693 389 1,811 — 8,756 Loans not formally rated 58,468 1,643 144 526 1,712 62,493 Total $ 59,331 $ 77,377 $ 1,457 $ 13,414 $ 1,712 $ 153,291 Credit Quality Information The Company utilizes an eight-grade internal loan rating system for commercial real estate, construction and commercial and municipal loans as follows: Loans rated 10-37: Loans in these categories are considered “pass” rated loans with low to average risk. Loans rated 40: Loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management. Loans rated 50: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected. Loans rated 60: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable. Loans rated 70: Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted. On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, construction and commercial and municipal loans over $250 thousand. For residential real estate and consumer loans, the Company initially assesses credit quality based upon the borrower’s ability to pay and subsequently monitors these loans based on the borrower’s payment activity. Loan Servicing Rights In addition to total loans previously shown, the Company services loans for other financial institutions. Participation loans are loans originated by the Company for a group of banks. Sold loans are loans originated by the Company and sold to the secondary market. The Company services these loans and remits the payments received to the buyer. The Company specifically originates long-term, fixed-rate loans to sell. The amount of loans sold and participated out which are serviced by the Company are as follows as of December 31: (Dollars in thousands) 2015 2014 Sold loans $ 445,855 $ 411,583 Participation loans $ 28,280 $ 31,147 The balance of capitalized servicing rights, net of valuation allowances, included in other assets at December 31, 2015 and 2014 was $2.4 million and $2.4 million, respectively. Servicing rights of $1.1 million, $518 thousand and $1.6 million were capitalized in 2015, 2014 and 2013, respectively. Amortization of capitalized servicing rights was $1.0 million, $867 thousand, and $1.0 million in 2015, 2014, and 2013, respectively. The fair value of capitalized servicing rights was $4.0 million and $4.2 million as of December 31, 2015 and 2014, respectively. Following is an analysis of the aggregate changes in the valuation allowances for capitalized servicing rights: (Dollars in thousands) 2015 2014 Balance, beginning of year $ 19 $ 65 Additions 81 4 Reductions (27 ) (50 ) Balance, end of year $ 73 $ 19 |