Loans | 8. Loans Loans receivable consist of the following: March 31, 2019 December 31, 2018 (In Thousands) Real Estate: Secured by 1-4 family residential $ 321,644 $ 322,686 Secured by multi-family residential 279,175 278,358 Secured by commercial real estate 1,115,325 1,126,452 Construction 304,241 265,772 2,020,385 1,993,268 Other Loans: Commercial 509,627 509,577 Home equity and improvement 124,450 128,152 Consumer finance 34,262 34,405 668,339 672,134 Total loans 2,688,724 2,665,402 Deduct: Undisbursed loan funds (137,742 ) (123,293 ) Net deferred loan origination fees and costs (2,014 ) (2,070 ) Allowance for loan loss (28,164 ) (28,331 ) Totals $ 2,520,804 $ 2,511,708 Loan segments have been identified by evaluating the portfolio based on collateral and credit risk characteristics. The following table discloses allowance for loan loss activity for the quarters ended March 31, 2019 and 2018 by portfolio segment (In Thousands): Quarter Ended March 31, 2019 1-4 Family Residential Real Estate Multi- Family Residential Real Estate Commercial Real Estate Construction Commercial Home Equity and Improvement Consumer Finance Total Beginning Allowance $ 2,881 $ 3,101 $ 12,041 $ 682 $ 7,281 $ 2,026 $ 319 $ 28,331 Charge-Offs (172 ) 0 0 0 (187 ) (33 ) (142 ) (534 ) Recoveries 13 12 84 0 12 24 10 155 Provisions 89 (45 ) (124 ) 49 170 (89 ) 162 212 Ending Allowance $ 2,811 $ 3,068 $ 12,001 $ 731 $ 7,276 $ 1,928 $ 349 $ 28,164 Quarter Ended March 31, 2018 1-4 Family Residential Real Estate Multi- Family Residential Real Estate Commercial Real Estate Construction Commercial Home Equity and Improvement Consumer Finance Total Beginning Allowance $ 2,532 $ 2,702 $ 10,354 $ 647 $ 7,965 $ 2,255 $ 228 $ 26,683 Charge-Offs (16 ) 0 (55 ) 0 (97 ) (117 ) (31 ) (316 ) Recoveries 24 0 184 0 1,757 28 2 1,995 Provisions (6 ) 281 290 20 (1,787 ) 43 64 (1,095 ) Ending Allowance $ 2,534 $ 2,983 $ 10,773 $ 667 $ 7,838 $ 2,209 $ 263 $ 27,267 The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2019 (In Thousands): 1-4 Family Multi Family Residential Residential Commercial Home Equity Consumer Real Estate Real Estate Real Estate Construction Commercial & Improvement Finance Total Allowance for loan losses: Ending allowance balance attributable to loans: Individually evaluated for impairment $ 177 $ 2 $ 98 $ - $ 67 $ 236 $ - $ 580 Collectively evaluated for impairment 2,634 3,066 11,903 731 7,209 1,692 349 27,584 Acquired with deteriorated credit quality - - - - - - - - Total ending allowance balance $ 2,811 $ 3,068 $ 12,001 $ 731 $ 7,276 $ 1,928 $ 349 $ 28,164 Loans: Loans individually evaluated for impairment $ 6,640 $ 1,333 $ 23,297 $ - $ 10,052 $ 914 $ 33 $ 42,269 Loans collectively evaluated for impairment 314,510 278,011 1,095,031 166,137 501,403 124,443 34,362 2,513,897 Loans acquired with deteriorated credit quality 1,007 294 808 - 163 - - 2,272 Total ending loans balance $ 322,157 $ 279,638 $ 1,119,136 $ 166,137 $ 511,618 $ 125,357 $ 34,395 $ 2,558,438 The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2018 (In Thousands): 1-4 Family Multi Family Residential Residential Commercial Home Equity Consumer Real Estate Real Estate Real Estate Construction Commercial & Improvement Finance Total Allowance for loan losses: Ending allowance balance attributable to loans: Individually evaluated for impairment $ 175 $ 3 $ 95 $ - $ 79 $ 242 $ 1 $ 595 Collectively evaluated for impairment 2,706 3,098 11,946 682 7,202 1,784 318 27,736 Acquired with deteriorated credit quality - - - - - - - - Total ending allowance balance $ 2,881 $ 3,101 $ 12,041 $ 682 $ 7,281 $ 2,026 $ 319 $ 28,331 Loans: Loans individually evaluated for impairment $ 6,774 $ 1,347 $ 26,334 $ - $ 10,477 $ 963 $ 45 $ 45,940 Loans collectively evaluated for impairment 315,385 277,105 1,102,355 142,096 500,730 128,065 34,486 2,500,222 Loans acquired with deteriorated credit quality 1,012 296 846 - 177 - - 2,331 Total ending loans balance $ 323,171 $ 278,748 $ 1,129,535 $ 142,096 $ 511,384 $ 129,028 $ 34,531 $ 2,548,493 The following table presents the average balance, interest income recognized and cash basis income recognized on impaired loans by class of loans (In Thousands): Three Months Ended March 31, 2019 Average Balance Interest Income Recognized Cash Basis Income Recognized Residential Owner Occupied $ 4,552 $ 64 $ 60 Residential Non Owner Occupied 2,080 30 32 Total Residential Real Estate 6,632 94 92 Construction - - - Multi-Family 1,332 20 20 CRE Owner Occupied 7,365 166 132 CRE Non Owner Occupied 1,989 33 26 Agriculture Land 12,903 206 197 Other CRE 1,154 34 33 Total Commercial Real Estate 23,411 439 388 Commercial Working Capital 8,089 143 91 Commercial Other 1,870 27 24 Total Commercial 9,959 170 115 Home Equity and Improvement 921 14 13 Consumer Finance 36 1 1 Total Impaired Loans $ 42,291 $ 738 $ 629 The following table presents the average balance, interest income recognized and cash basis income recognized on impaired loans by class of loans (In Thousands): Three Months Ended March 31, 2018 Average Balance Interest Income Recognized Cash Basis Income Recognized Residential Owner Occupied $ 4,639 $ 32 $ 31 Residential Non Owner Occupied 2,509 44 41 Total Residential Real Estate 7,148 76 72 Construction - - - Multi-Family 2,049 27 26 CRE Owner Occupied 13,225 44 35 CRE Non Owner Occupied 3,482 34 34 Agriculture Land 11,516 95 42 Other CRE 1,486 25 20 Total Commercial Real Estate 29,709 198 131 Commercial Working Capital 5,208 24 24 Commercial Other 5,100 25 23 Total Commercial 10,308 49 47 Home Equity and Improvement 1,474 11 11 Consumer Finance 39 1 1 Total Impaired Loans $ 50,727 $ 362 $ 288 The following table presents loans individually evaluated for impairment by class of loans (In Thousands): March 31, 2019 December 31, 2018 Unpaid Principal Balance* Recorded Investment Allowance for Loan Losses Allocated Unpaid Principal Balance* Recorded Investment Allowance for Loan Losses Allocated With no allowance recorded: Residential Owner Occupied $ 468 $ 343 $ - $ 901 $ 775 $ - Residential Non Owner Occupied 906 911 - 950 955 - Total 1-4 Family Residential Real Estate 1,374 1,254 - 1,851 1,730 - Multi-Family Residential Real Estate 1,282 1,289 - 1,296 1,302 - CRE Owner Occupied 6,884 5,631 - 7,464 6,202 - CRE Non Owner Occupied 1,794 1,628 - 1,824 1,659 - Agriculture Land 12,664 12,809 - 14,915 14,994 - Other CRE 457 459 - 464 462 - Total Commercial Real Estate 21,799 20,527 - 24,667 23,317 - Construction - - - - - - Commercial Working Capital 7,715 7,725 - 7,569 7,498 - Commercial Other 1,688 1,686 - 2,095 2,100 - Total Commercial 9,403 9,411 - 9,664 9,598 - Home Equity and Home Improvement - - - - - - Consumer Finance - - - - - - Total loans with no allowance recorded $ 33,858 $ 32,481 $ - $ 37,478 $ 35,947 $ - With an allowance recorded: Residential Owner Occupied $ 4,291 $ 4,255 $ 151 $ 3,926 $ 3,884 $ 148 Residential Non Owner Occupied 1,126 1,131 26 1,152 1,160 27 Total 1-4 Family Residential Real Estate 5,417 5,386 177 5,078 5,044 175 Multi-Family Residential Real Estate 43 44 2 44 44 3 CRE Owner Occupied 2,141 1,657 40 2,419 1,935 38 CRE Non Owner Occupied 342 345 15 350 353 16 Agriculture Land 95 96 6 37 38 2 Other CRE 1,088 672 37 1,107 691 39 Total Commercial Real Estate 3,666 2,770 98 3,913 3,017 95 Construction - - - - - - Commercial Working Capital 507 510 54 525 528 55 Commercial Other 128 131 13 560 352 24 Total Commercial 635 641 67 1,085 880 79 Home Equity and Home Improvement 965 914 236 1,013 963 242 Consumer Finance 33 33 - 45 45 1 Total loans with an allowance recorded $ 10,759 $ 9,788 $ 580 $ 11,178 $ 9,993 $ 595 * Presented gross of charge-offs The following table presents the current balance of the aggregate amounts of non-performing assets, comprised of non-performing loans and real estate owned on the dates indicated: March 31, 2019 December 31, 2018 (In Thousands) Non-accrual loans $ 17,645 $ 19,016 Loans over 90 days past due and still accruing - - Total non-performing loans 17,645 19,016 Real estate and other assets held for sale 941 1,205 Total non-performing assets $ 18,586 $ 20,221 Troubled debt restructuring, still accruing $ 11,908 $ 11,573 The following table presents the aging of the recorded investment in past due and non- accrual loans as of March 31, 2019, by class of loans (In Thousands): Current 30-59 days 60-89 days 90+ days Total Past Due Total Non- Accrual Residential Owner Occupied $ 201,526 $ 84 $ 789 $ 1,535 $ 2,408 $ 2,933 Residential Non Owner Occupied 118,110 39 22 52 113 241 Total 1-4 Family Residential Real Estate 319,636 123 811 1,587 2,521 3,174 Multi-Family Residential Real Estate 279,638 - - - - - CRE Owner Occupied 416,888 616 320 331 1,267 4,122 CRE Non Owner Occupied 527,519 513 - - 513 672 Agriculture Land 129,563 - 171 3 174 4,618 Other Commercial Real Estate 43,057 110 - 45 155 45 Total Commercial Real Estate 1,117,027 1,239 491 379 2,109 9,457 Construction 166,137 - - - - - Commercial Working Capital 220,777 85 - 3,874 3,959 3,903 Commercial Other 286,182 469 - 231 700 456 Total Commercial 506,959 554 - 4,105 4,659 4,359 Home Equity/Home Improvement 125,080 89 64 124 277 606 Consumer Finance 34,247 108 9 31 148 38 Total Loans $ 2,548,724 $ 2,113 $ 1,375 $ 6,226 $ 9,714 $ 17,634 The following table presents the aging of the recorded investment in past due and non-accrual loans as of December 31, 2018, by class of loans (In Thousands): Current 30-59 days 60-89 days 90+ days Total Past Due Total Non Accrual Residential Owner Occupied $ 199,664 $ 887 $ 821 $ 1,402 $ 3,110 $ 3,266 Residential Non Owner Occupied 119,988 64 180 165 409 363 Total 1-4 Family Residential Real Estate 319,652 951 1,001 1,567 3,519 3,629 Multi-Family Residential Real Estate 278,748 - - - - 102 CRE Owner Occupied 416,879 52 300 138 490 4,377 CRE Non Owner Occupied 534,823 6 119 - 125 620 Agriculture Land 129,040 66 - 2,869 2,935 5,253 Other Commercial Real Estate 45,232 11 - - 11 - Total Commercial Real Estate 1,125,974 135 419 3,007 3,561 10,250 Construction 142,096 - - - - - Commercial Working Capital 217,832 268 - 3,838 4,106 4,021 Commercial Other 289,125 32 54 235 321 480 Total Commercial 506,957 300 54 4,073 4,427 4,501 Home Equity and Home Improvement 127,346 1,446 146 90 1,682 394 Consumer Finance 34,224 134 77 96 307 126 Total Loans $ 2,534,997 $ 2,966 $ 1,697 $ 8,833 $ 13,496 $ 19,002 Troubled Debt Restructurings As of March 31, 2019, and December 31, 2018, the Company had a recorded investment in troubled debt restructurings (“TDRs”) of $19.0 million and $19.2 million, respectively. The Company allocated $580,000 and $581,000 of specific reserves to those loans at March 31, 2019, and December 31, 2018, respectively, and had committed to lend additional amounts totaling up to $330,000 and $169,000 at March 31, 2019, and December 31, 2018, respectively. The Company offers various types of concessions when modifying a loan, however, forgiveness of principal is rarely granted. Each TDR is uniquely designed to meet the specific needs of the borrower. Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions and converting revolving credit lines to term loans. Additional collateral or an additional guarantor is often requested when granting a concession. Commercial mortgage loans modified in a TDR often involve temporary interest-only payments, re-amortization of remaining debt in order to lower payments and sometimes reducing the interest rate lower than the current market rate. Residential mortgage loans modified in a TDR are comprised of loans where monthly payments are lowered, either through interest rate reductions or principal only payments for a period of time, to accommodate the borrowers’ financial needs, interest is capitalized into principal, or the term and amortization are extended. Home equity modifications are made infrequently and usually involve providing an interest rate that is lower than the borrower would be able to obtain due to credit issues. All retail loans where the borrower is in bankruptcy are classified as TDRs regardless of whether or not a concession is made. Of the loans modified in a TDR as of March 31, 2019, $7.1 million were on non-accrual status and partial charge-offs have in some cases been taken against the outstanding balance. Loans modified as a TDR may have the financial effect of increasing the allowance associated with the loan. If the loan is determined to be collateral dependent, the estimated fair value of the collateral, less any selling costs is used to determine if there is a need for a specific allowance or charge-off. If the loan is determined to be cash flow dependent, the allowance is measured based on the present value of expected future cash flows discounted at the loan’s pre-modification effective interest rate. The following tables present loans by class modified as TDRs that occurred during the three month periods ending March 31, 2019, and March 31, 2018: Loans Modified as a TDR for the Three Months Ended March 31, 2019 ($ in thousands) Loans Modified as a TDR for the Three Months Ended March 31, 2018 ($ in thousands) Troubled Debt Restructurings Number of Loans Recorded Investment (as of period end) Number of Loans Recorded Investment (as of period end) 1-4 Family Owner Occupied 3 $ 473 3 $ 145 1-4 Family Non Owner Occupied 0 - 1 69 Multi Family 0 - 0 - CRE Owner Occupied 0 - 2 650 CRE Non Owner Occupied 0 - 0 - Agriculture Land 0 - 0 - Other CRE 0 - 0 - Commercial Working Capital 0 - 4 2,114 Commercial Other 1 14 0 - Home Equity and Improvement 1 20 0 - Consumer Finance 1 7 0 - Total 6 $ 514 10 $ 2,978 The loans described above decreased the allowance for loan and lease losses (“ALLL”) by $6,000 in the three month period ending March 31, 2019, and decreased the ALLL by $5,000 in the three month period ending March 31, 2018. Of the 2019 modifications, three were made a TDR due to bankruptcy and three were made a TDR because the current debt was refinanced due to maturity or for payment relief. The following tables present loans by class modified as TDRs for which there was a payment default within twelve months following the modification during the three month periods ended March 31, 2019, and March 31, 2018: Three Months Ended March 31, 2019 ($ in thousands) Three Months Ended March 31, 2018 ($ in thousands) Troubled Debt Restructurings That Subsequently Defaulted Number of Loans Recorded Investment (as of period end) Number of Loans Recorded Investment (as of period end) 1-4 Family Owner Occupied 1 $ 76 0 $ - 1-4 Family Non Owner Occupied 0 - 0 - CRE Owner Occupied 0 - 0 - CRE Non Owner Occupied 0 - 0 - Agriculture Land 0 - 0 - Other CRE 0 - 0 - Commercial Working Capital or Other 3 2,544 0 - Commercial Other 0 - 1 197 Home Equity and Improvement 1 61 0 - Consumer Finance 0 - 0 - Total 5 $ 2,681 1 $ 197 The TDRs that subsequently defaulted described above decreased the allowance for loan losses by $1,000 for the three month period ended March 31, 2019. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed on the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. Credit Quality Indicators Loans are categorized 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. Loans are analyzed individually by classifying the loans as to credit risk. This analysis includes all non-homogeneous loans, such as commercial and commercial real estate loans and certain homogenous mortgage, home equity and consumer loans. This analysis is performed on a quarterly basis. First Defiance uses the following definitions for risk ratings: Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date. Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, 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. Not Graded. Loans classified as not graded are generally smaller balance residential real estate, home equity and consumer installment loans which are originated primarily by using an automated underwriting system. These loans are monitored based on their delinquency status and are evaluated individually only if they are seriously delinquent. Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. As of March 31, 2019, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (In Thousands): Class Pass Special Mention Substandard Doubtful Not Graded Total 1-4 Family Owner Occupied $ 8,480 $ 89 $ 2,921 $ - $ 192,444 $ 203,934 1-4 Family Non Owner Occupied 107,979 768 2,862 - 6,614 118,223 Total 1-4 Family Real Estate 116,459 857 5,783 - 199,058 322,157 Multi-Family Residential Real Estate 277,614 - 1,918 - 106 279,638 CRE Owner Occupied 396,581 13,673 7,820 - 84 418,158 CRE Non Owner Occupied 520,779 5,057 2,194 - - 528,030 Agriculture Land 109,365 6,488 13,882 - - 129,735 Other CRE 40,238 718 1,227 - 1,030 43,213 Total Commercial Real Estate 1,066,963 25,936 25,123 - 1,114 1,119,136 Construction 146,556 219 - - 19,362 166,137 Commercial Working Capital 207,960 8,534 8,241 - - 224,735 Commercial Other 276,814 7,590 2,479 - - 286,883 Total Commercial 484,774 16,124 10,720 - - 511,618 Home Equity and Home Improvement - - 417 - 124,940 125,357 Consumer Finance - - 122 - 34,273 34,395 Total Loans $ 2,092,366 $ 43,136 $ 44,083 $ - $ 378,853 $ 2,558,438 As of December 31, 2018, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (In Thousands): Class Pass Special Mention Substandard Doubtful Not Graded Total Residential Owner Occupied $ 9,419 $ 91 $ 3,130 $ - $ 190,134 $ 202,774 Residential Non Owner Occupied 109,885 700 3,087 - 6,725 120,397 Total 1-4 Family Real Estate 119,304 791 6,217 - 196,859 323,171 Multi-Family Residential Real Estate 276,594 - 2,047 - 107 278,748 CRE Owner Occupied 402,008 5,724 9,547 - 89 417,368 CRE Non Owner Occupied 529,842 2,807 2,297 - - 534,946 Agriculture Land 111,595 4,023 16,358 - - 131,976 Other CRE 42,189 730 1,244 - 1,082 45,245 Total Commercial Real Estate 1,085,634 13,284 29,446 - 1,171 1,129,535 Construction 122,775 219 - - 19,102 142,096 Commercial Working Capital 205,903 6,546 9,489 - - 221,938 Commercial Other 279,234 7,011 3,201 - - 289,446 Total Commercial 485,137 13,557 12,690 - - 511,384 Home Equity and Home Improvement - - 434 - 128,594 129,028 Consumer Finance - - 206 - 34,325 34,531 Total Loans $ 2,089,444 $ 27,851 $ 51,040 $ - $ 380,158 $ 2,548,493 The Company has 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. The outstanding balance of those loans is as follows (In Thousands): March 31, 2019 December 31, 2018 1-4 Family Residential Real Estate $ 1,036 $ 1,045 Multi-Family Residential Real Estate 298 300 Commercial Real Estate Loans 871 899 Commercial 209 227 Consumer - - Total Outstanding Balance $ 2,414 $ 2,471 Recorded Investment, net of allowance of $0 $ 2,272 $ 2,331 Accretable yield, or income expected to be collected, is as follows: 2019 2018 Balance at January 1 $ 468 $ 804 New Loans Purchased - - Accretion of Income (12 ) (15 ) Reclassification from Non-accretable - - Charge-off of Accretable Yield - - Balance at March 31 $ 456 $ 789 For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during the three months ended March 31, 2019 or 2018. No allowances for loan losses were reversed during the same period. Foreclosure Proceedings Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $912,000 as of March 31, 2019 and $796,000 as of December 31, 2018. |