Loans and Allowance for Loan Losses | Note 6. Loans and Allowance for Loan Losses As of June 30, 2016 and December 31, 2015, loans consisted of: June 30, 2016 December 31, 2015 (In thousands) Commercial $ 87,482 $ 92,995 Commercial real estate 380,958 371,599 Residential real estate 235,404 258,606 Construction real estate 81,739 89,341 Installment and other 23,799 28,730 Total loans 809,382 841,271 Unearned income (1,420 ) (1,483 ) Gross loans 807,962 839,788 Allowance for loan losses (17,592 ) (17,392 ) Net loans $ 790,370 $ 822,396 Loan Origination/Risk Management. Commercial loans: Commercial real estate loans: With respect to loans to developers and builders that are secured by non-owner occupied properties that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction real estate loans: Residential real estate loans: Installment loans: The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company's policies and procedures, which include periodic internal reviews and reports to identify and address risk factors developing within the loan portfolio. The Company engages external independent loan reviews that assess and validate the credit risk program on a periodic basis. Results of these reviews are presented to and reviewed by management and the Board of Directors. The following table presents the contractual aging of the recorded investment in current and past due loans by class of loans as of June 30, 2016 and December 31, 2015, including nonaccrual loans: Current 30-59 Days Past Due 60-89 Days Past Due Loans past due 90 days or more Total Past Due Total June 30, 2016 (In thousands) Commercial $ 84,732 $ 984 $ 71 $ 1,695 $ 2,750 $ 87,482 Commercial real estate 375,065 1,294 444 4,155 5,893 380,958 Residential real estate 230,694 1,337 88 3,285 4,710 235,404 Construction real estate 73,389 733 18 7,599 8,350 81,739 Installment and other 23,698 71 27 3 101 23,799 Total loans $ 787,578 $ 4,419 $ 648 $ 16,737 $ 21,804 $ 809,382 Nonaccrual loan classification $ 5,285 $ 1,855 $ 550 $ 16,737 $ 19,142 $ 24,427 December 31, 2015 Commercial $ 90,839 $ 167 $ 131 $ 1,858 $ 2,156 $ 92,995 Commercial real estate 363,495 1,526 704 5,874 8,104 371,599 Residential real estate 252,568 1,215 606 4,217 6,038 258,606 Construction real estate 80,629 291 85 8,336 8,712 89,341 Installment and other 28,534 110 12 74 196 28,730 Total loans $ 816,065 $ 3,309 $ 1,538 $ 20,359 $ 25,206 $ 841,271 Nonaccrual loan classification $ 6,202 $ 2,702 $ 1,418 $ 20,003 $ 24,123 $ 30,325 The following table presents the recorded investment in nonaccrual loans and loans past due 90 days or more and still accruing interest by class of loans as of June 30, 2016 and December 31, 2015: June 30, 2016 December 31, 2015 Nonaccrual Loans past due 90 days or more and still accruing interest Nonaccrual Loans past due 90 days or more and still accruing interest (In thousands) Commercial $ 1,766 $ - $ 2,268 $ - Commercial real estate 8,945 - 10,737 - Residential real estate 5,962 - 7,821 - Construction real estate 7,680 - 9,353 - Installment and other 74 - 146 - Total $ 24,427 $ - $ 30,325 $ - The Company utilizes an internal asset classification system as a means of reporting problem and potential problem loans. Under the Company's risk rating system, problem and potential problem loans are classified as "Special Mention," "Substandard," and "Doubtful." Substandard loans include those characterized by the likelihood that the Company will sustain some loss if the deficiencies are not corrected. Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans that do not currently expose the Company to sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses that deserve management's close attention are deemed to be Special Mention. Any time a situation warrants, the risk rating may be reviewed. Loans not meeting the criteria above that are analyzed individually are considered to be pass-rated loans. The following table presents the risk category by class of loans based on the most recent analysis performed aging as of June 30, 2016 and December 31, 2015: Pass Special Mention Substandard Doubtful Total June 30, 2016 (In thousands) Commercial $ 66,885 $ 2,265 $ 18,332 $ - $ 87,482 Commercial real estate 339,554 10,596 30,808 - 380,958 Residential real estate 225,639 1,474 8,291 - 235,404 Construction real estate 67,408 5,640 8,691 - 81,739 Installment and other 23,601 - 198 - 23,799 Total $ 723,087 $ 19,975 $ 66,320 $ - $ 809,382 December 31, 2015 Commercial $ 69,221 $ 3,129 $ 20,645 $ - $ 92,995 Commercial real estate 307,700 19,512 44,387 - 371,599 Residential real estate 245,897 1,622 11,087 - 258,606 Construction real estate 71,864 6,667 10,810 - 89,341 Installment and other 28,378 2 350 - 28,730 Total $ 723,060 $ 30,932 $ 87,279 $ - $ 841,271 The following table shows all loans, including nonaccrual loans, by risk category and aging as of June 30, 2016 and December 31, 2015: Pass Special Mention Substandard Doubtful Total June 30, 2016 (In thousands) Current $ 718,723 $ 19,198 $ 49,657 $ - $ 787,578 Past due 30-59 days 1,416 777 2,226 - 4,419 Past due 60-89 days 98 - 550 - 648 Past due 90 days or more 2,850 - 13,887 - 16,737 Total $ 723,087 $ 19,975 $ 66,320 $ - $ 809,382 December 31, 2015 Current $ 719,752 $ 30,674 $ 65,639 $ - $ 816,065 Past due 30-59 days 349 258 2,702 - 3,309 Past due 60-89 days 109 - 1,429 - 1,538 Past due 90 days or more 2,850 - 17,509 - 20,359 Total $ 723,060 $ 30,932 $ 87,279 $ - $ 841,271 As of June 30, 2016 and December 31, 2015, nonaccrual loans totaling $21.6 million and $27.5 million, respectively, were classified as Substandard. The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2016 and December 31, 2015, showing the unpaid principal balance, the recorded investment of the loan (reflecting any loans with partial charge-offs), and the amount of allowance for loan losses specifically allocated for these impaired loans (if any): June 30, 2016 December 31, 2015 Unpaid Principal Balance Recorded Investment Allowance for Loan Losses Allocated Unpaid Principal Balance Recorded Investment Allowance for Loan Losses Allocated (In thousands) With no related allowance recorded: Commercial $ 13,251 $ 9,593 $ 13,611 $ 10,137 Commercial real estate 10,641 9,981 15,872 14,198 Residential real estate 6,667 5,403 9,473 7,450 Construction real estate 8,606 7,133 9,816 8,137 Installment and other 415 344 433 416 With an allowance recorded: Commercial 14,455 14,455 $ 387 14,958 14,956 $ 399 Commercial real estate 8,989 8,989 1,632 11,050 11,050 1,295 Residential real estate 10,366 10,339 2,166 10,759 10,755 2,132 Construction real estate 3,574 3,574 246 3,688 3,688 252 Installment and other 569 569 130 636 636 138 Total $ 77,533 $ 70,380 $ 4,561 $ 90,296 $ 81,423 $ 4,216 The following table presents loans individually evaluated for impairment by class of loans for the three and six months ended June 30, 2016 and 2015, showing the average recorded investment and the interest income recognized: Three Months Ended Six Months Ended June 30, 2016 June 30, 2015 June 30, 2016 June 30, 2015 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized (In thousands) With no related allowance recorded: Commercial $ 9,679 $ 157 $ 11,178 $ 152 $ 9,820 $ 314 $ 11,356 $ 303 Commercial real estate 10,060 198 20,474 436 10,112 397 20,590 867 Residential real estate 5,452 80 8,508 109 5,497 161 8,797 217 Construction real estate 7,154 87 10,221 113 7,182 173 10,464 225 Installment and other 115 4 543 6 57 8 558 13 With an allowance recorded: Commercial 14,539 197 15,113 206 14,620 395 15,191 410 Commercial real estate 9,019 98 16,561 186 9,049 195 16,621 370 Residential real estate 10,385 97 11,621 111 10,425 193 11,662 221 Construction real estate 3,587 45 4,413 57 3,605 90 4,433 113 Installment and other 575 4 371 7 581 9 247 14 Total $ 70,565 $ 967 $ 99,003 $ 1,383 $ 70,948 $ 1,935 $ 99,919 $ 2,753 If nonaccrual loans outstanding had been current in accordance with their original terms, approximately $382.7 thousand and $1.4 million would have been recorded as loan interest income during the three months ended June 30, 2016 and 2015, respectively, and $765.5 thousand and $2.8 million during the six months ended June 30, 2016 and 2015, respectively. Interest income recognized in the above table was primarily recognized on a cash basis. Recorded investment balances in the above tables exclude accrued interest income and unearned income as such amounts were immaterial. Allowance for Loan Losses: For the three and six months ended June 30, 2016 and 2015, activity in the allowance for loan losses was as follows: Commercial Commercial real estate Residential real estate Construction real estate Installment and other Unallocated Total (In thousands) Three Months Ended June 30, 2016: Beginning balance $ 2,385 $ 6,720 $ 6,154 $ 1,224 $ 797 $ 25 $ 17,305 Provision (benefit) for loan losses (210 ) 1,080 (669 ) (201 ) (2 ) 2 - Charge-offs (93 ) 4 (79 ) (4 ) (64 ) - (236 ) Recoveries 138 115 223 20 27 - 523 Net charge-offs 45 119 144 16 (37 ) - 287 Ending balance $ 2,220 $ 7,919 $ 5,629 $ 1,039 $ 758 $ 27 $ 17,592 Three Months Ended June 30, 2015: Beginning balance $ 3,639 $ 8,183 $ 7,193 $ 2,424 $ 790 $ 110 $ 22,339 Provision (benefit) for loan losses (1,111 ) 451 609 (61 ) 191 (79 ) - Charge-offs (261 ) (88 ) (227 ) (69 ) (141 ) - (786 ) Recoveries 952 324 121 294 36 - 1,727 Net charge-offs 691 236 (106 ) 225 (105 ) - 941 Ending balance $ 3,219 $ 8,870 $ 7,696 $ 2,588 $ 876 $ 31 $ 23,280 Six Months Ended June 30, 2016: Beginning balance $ 2,442 $ 6,751 $ 6,082 $ 1,143 $ 940 $ 34 $ 17,392 Provision (benefit) for loan losses (437 ) 1,039 (310 ) (199 ) (86 ) (7 ) - Charge-offs (275 ) - (402 ) (22 ) (235 ) - (934 ) Recoveries 490 129 259 117 139 - 1,134 Net charge-offs 215 129 (143 ) 95 (96 ) - 200 Ending balance $ 2,220 $ 7,919 $ 5,629 $ 1,039 $ 758 $ 27 $ 17,592 Six Months Ended June 30, 2015: Beginning balance $ 4,031 $ 8,339 $ 7,939 $ 3,323 $ 788 $ 363 $ 24,783 Provision (benefit) for loan losses (1,184 ) 456 808 (21 ) 273 (332 ) - Charge-offs (790 ) (264 ) (1,215 ) (1,031 ) (251 ) - (3,551 ) Recoveries 1,162 339 164 317 66 - 2,048 Net charge-offs 372 75 (1,051 ) (714 ) (185 ) - (1,503 ) Ending balance $ 3,219 $ 8,870 $ 7,696 $ 2,588 $ 876 $ 31 $ 23,280 Allocation of the allowance for loan losses (as well as the total loans in each allocation method), disaggregated on the basis of the Company's impairment methodology, is as follows: Commercial Commercial real estate Residential real estate Construction real estate Installment and other Unallocated Total June 30, 2016 (In thousands) Allowance for loan losses allocated to: Loans individually evaluated for impairment $ 387 $ 1,632 $ 2,166 $ 246 $ 130 $ - $ 4,561 Loans collectively evaluated for impairment 1,833 6,287 3,463 793 628 27 13,031 Ending balance $ 2,220 $ 7,919 $ 5,629 $ 1,039 $ 758 $ 27 $ 17,592 Loans: Individually evaluated for impairment $ 24,048 $ 18,970 $ 15,742 $ 10,707 $ 913 $ - $ 70,380 Collectively evaluated for impairment 63,434 361,988 219,662 71,032 22,886 - 739,002 Total ending loans balance $ 87,482 $ 380,958 $ 235,404 $ 81,739 $ 23,799 $ - $ 809,382 December 31, 2015 Allowance for loan losses allocated to: Loans individually evaluated for impairment $ 399 $ 1,295 $ 2,132 $ 252 $ 138 $ - $ 4,216 Loans collectively evaluated for impairment 2,043 5,456 3,950 891 802 34 13,176 Ending balance $ 2,442 $ 6,751 $ 6,082 $ 1,143 $ 940 $ 34 $ 17,392 Loans: Individually evaluated for impairment $ 25,093 $ 25,248 $ 18,205 $ 11,825 $ 1,052 $ - $ 81,423 Collectively evaluated for impairment 67,902 346,351 240,401 77,516 27,678 - 759,848 Total ending loans balance $ 92,995 $ 371,599 $ 258,606 $ 89,341 $ 28,730 $ - $ 841,271 Troubled Debt Restructurings ("TDRs"): TDRs are defined as those loans where: (1) the borrower is experiencing financial difficulties and (2) the restructuring includes a concession by the Bank to the borrower. The following tables present the loans restructured during the three and six months ended June 30, 2016 and 2015. Three Months Ended June 30, 2016 Number of Contracts Pre- Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Specific reserves allocated (Dollars in thousands) Installment and other 1 $ 43 $ 43 $ - Total 1 $ 43 $ 43 $ - Six Months Ended June 30, 2016 Number of Contracts Pre- Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Specific reserves allocated (Dollars in thousands) Installment and other 1 $ 43 $ 43 $ - Total 1 $ 43 $ 43 $ - Three Months Ended June 30, 2015 Number of Contracts Pre- Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Specific reserves allocated (Dollars in thousands) Installment and other 2 $ 45 $ 45 $ - Total 2 $ 45 $ 45 $ - Six Months Ended June 30, 2015 Number of Contracts Pre- Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Specific reserves allocated (Dollars in thousands) Installment and other 2 $ 45 $ 45 $ - Total 2 $ 45 $ 45 $ - There were no loans modified as TDRs for which there was a payment default within 12 months following the modification during the three months ended June 30, 2016 and 2015. The following table presents loans by class modified as TDRs for which there was a payment default within twelve months following the modification during the six months ended June 30, 2016 and 2015: Six Months Ended June 30, 2016 Number of Contracts Recorded Investment Specific reserves allocated (Dollars in thousands) Construction real estate 2 $ 807 $ 10 Total 2 $ 807 $ 10 Six Months Ended June 30, 2015 Number of Contracts Recorded Investment Specific reserves allocated (Dollars in thousands) Residential real estate 1 $ 167 $ - Construction real estate 2 407 - Total 3 $ 574 $ - The following table presents total TDRs, both in accrual and nonaccrual status: June 30, 2016 December 31, 2015 Number of contracts Amount Number of contracts Amount (Dollars in thousands) Accrual 155 $ 48,804 $ 165 $ 53,862 Nonaccrual 25 7,699 32 10,641 Total 180 $ 56,503 $ 197 $ 64,503 As of June 30, 2016, the Bank had a total of $249 thousand in commitments to lend additional funds to debtors who also had TDRs. Impairment analyses are prepared on TDRs in conjunction with the normal allowance for loan loss process. TDRs did not require any specific reserves at the three months ended June 30, 2016 and 2015, respectively. TDRs resulted in charge-offs of $146.7 thousand and $1.8 million during the three months ended June 30, 2016 and 2015, respectively. Loans to Executive Officers and Directors: Loan principal balances to executive officers and directors of the Company were $414 thousand and $1.9 million as of June 30, 2016 and December 31, 2015, respectively. Total credit available, including companies in which these individuals have management control or beneficial ownership, was $1.6 million and $1.9 million as of June 30, 2016 and December 31, 2015, respectively. An analysis of the activity related to these loans as of June 30, 2016 and December 31, 2015 is as follows: June 30, 2016 December 31, 2015 (In thousands) Balance, beginning $ 1,933 $ 1,322 Additions - 438 Changes in Board composition - 800 Principal payments and other reductions (1,519 ) (627 ) Balance, ending $ 414 $ 1,933 |