Loans and Allowance for Loan Losses | Note 6. Loans and Allowance for Loan Losses As of September 30, 2016 and December 31, 2015, loans consisted of: September 30, 2016 December 31, 2015 (In thousands) Commercial $ 85,247 $ 92,995 Commercial real estate 383,203 371,599 Residential real estate 228,099 258,606 Construction real estate 79,629 89,341 Installment and other 24,387 28,730 Total loans 800,565 841,271 Unearned income (1,369 ) (1,483 ) Gross loans 799,196 839,788 Allowance for loan losses (17,801 ) (17,392 ) Net loans $ 781,395 $ 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 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 September 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 September 30, 2016 (In thousands) Commercial $ 82,801 $ 1,253 $ 77 $ 1,116 $ 2,446 $ 85,247 Commercial real estate 378,823 - 194 4,186 4,380 383,203 Residential real estate 222,469 229 939 4,462 5,630 228,099 Construction real estate 71,813 64 83 7,669 7,816 79,629 Installment and other 24,115 169 69 34 272 24,387 Total loans $ 780,021 $ 1,715 $ 1,362 $ 17,467 $ 20,544 $ 800,565 Nonaccrual loan classification $ 8,845 $ 705 $ 305 $ 17,091 $ 18,101 $ 26,946 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 September 30, 2016 and December 31, 2015: September 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 $ 1,905 $ - $ 2,268 $ - Commercial real estate 9,659 - 10,737 - Residential real estate 5,924 - 7,821 - Construction real estate 9,445 - 9,353 - Installment and other 13 21 146 - Total $ 26,946 $ 21 $ 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 as of September 30, 2016 and December 31, 2015: Pass Special Mention Substandard Doubtful Total September 30, 2016 (In thousands) Commercial $ 67,274 $ 2,104 $ 15,869 $ - $ 85,247 Commercial real estate 342,906 10,516 29,781 - 383,203 Residential real estate 217,918 1,278 8,903 - 228,099 Construction real estate 61,715 5,282 12,632 - 79,629 Installment and other 24,285 5 97 - 24,387 Total $ 714,098 $ 19,185 $ 67,282 $ - $ 800,565 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 September 30, 2016 and December 31, 2015: Pass Special Mention Substandard Doubtful Total September 30, 2016 (In thousands) Current $ 712,438 $ 19,168 $ 48,415 $ - $ 780,021 Past due 30-59 days 729 - 986 - 1,715 Past due 60-89 days 846 17 499 - 1,362 Past due 90 days or more 85 - 17,382 - 17,467 Total $ 714,098 $ 19,185 $ 67,282 $ - $ 800,565 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 September 30, 2016 and December 31, 2015, nonaccrual loans totaling $26.9 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 September 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): September 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 $ 11,812 $ 9,704 $ 13,611 $ 10,137 Commercial real estate 11,055 10,576 15,872 14,198 Residential real estate 7,942 6,508 9,473 7,450 Construction real estate 6,775 5,293 9,816 8,137 Installment and other 339 339 433 416 With an allowance recorded: Commercial 14,221 14,221 $ 295 14,958 14,956 $ 399 Commercial real estate 9,016 9,016 1,622 11,050 11,050 1,295 Residential real estate 8,965 8,965 1,978 10,759 10,755 2,132 Construction real estate 5,336 5,313 365 3,688 3,688 252 Installment and other 488 488 57 636 636 138 Total $ 75,949 $ 70,423 $ 4,317 $ 90,296 $ 81,423 $ 4,216 The following table presents loans individually evaluated for impairment by class of loans for the three and nine months ended September 30, 2016 and 2015, showing the average recorded investment and the interest income recognized: Three Months Ended Nine Months Ended September 30, 2016 September 30, 2015 September 30, 2016 September 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 $ 9,648 $ 103 $ 11,278 $ 112 $ 9,715 $ 307 $ 11,254 $ 332 Commercial real estate 10,279 18 15,553 52 10,668 53 17,819 155 Residential real estate 5,955 10 7,827 9 6,541 31 8,101 26 Construction real estate 6,213 5 9,568 28 6,587 16 9,652 82 Installment and other 341 4 560 4 339 12 589 12 With an allowance recorded: Commercial 14,338 196 14,777 203 14,451 584 14,927 604 Commercial real estate 9,003 92 11,917 120 9,056 273 12,543 357 Residential real estate 9,652 81 10,579 97 9,860 242 10,653 289 Construction real estate 4,443 45 3,319 44 4,178 134 3,344 131 Installment and other 529 4 558 5 554 13 541 15 Total $ 70,401 $ 558 $ 85,936 $ 674 $ 71,949 $ 1,665 $ 89,423 $ 2,003 If nonaccrual loans outstanding had been current in accordance with their original terms, approximately $517.3 thousand and $393.3 million would have been recorded as loan interest income during the three months ended September 30, 2016 and 2015, respectively, and $1.2 million and $1.2 million during the nine months ended September 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 nine months ended September 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 September 30, 2016: Beginning balance $ 2,220 $ 7,919 $ 5,629 $ 1,039 $ 758 $ 27 $ 17,592 Provision (benefit) for loan losses (193 ) 1 10 155 3 24 - Charge-offs (206 ) (46 ) (174 ) - (98 ) - (524 ) Recoveries 260 377 56 5 35 - 733 Net charge-offs 54 331 (118 ) 5 (63 ) - 209 Ending balance $ 2,081 $ 8,251 $ 5,521 $ 1,199 $ 698 $ 51 $ 17,801 Three Months Ended September 30, 2015: Beginning balance $ 3,219 $ 8,870 $ 7,696 $ 2,588 $ 876 $ 31 $ 23,280 Provision (benefit) for loan losses (522 ) 1,853 (1,094 ) (517 ) 54 226 - Charge-offs (568 ) (3,775 ) (627 ) (410 ) (264 ) - (5,644 ) Recoveries 192 124 334 93 163 - 906 Net charge-offs (376 ) (3,651 ) (293 ) (317 ) (101 ) - (4,738 ) Ending balance $ 2,321 $ 7,072 $ 6,309 $ 1,754 $ 829 $ 257 $ 18,542 Nine Months Ended September 30, 2016: Beginning balance $ 2,442 $ 6,751 $ 6,082 $ 1,143 $ 940 $ 34 $ 17,392 Provision (benefit) for loan losses (629 ) 1,039 (300 ) (44 ) (83 ) 17 - Charge-offs (481 ) (46 ) (576 ) (22 ) (333 ) - (1,458 ) Recoveries 749 507 315 122 174 - 1,867 Net charge-offs 268 461 (261 ) 100 (159 ) - 409 Ending balance $ 2,081 $ 8,251 $ 5,521 $ 1,199 $ 698 $ 51 $ 17,801 Nine Months Ended September 30, 2015: Beginning balance $ 4,031 $ 8,339 $ 7,939 $ 3,323 $ 788 $ 363 $ 24,783 Provision (benefit) for loan losses (1,708 ) 2,309 (287 ) (536 ) 328 (106 ) - Charge-offs (1,357 ) (4,039 ) (1,841 ) (1,442 ) (516 ) - (9,195 ) Recoveries 1,355 463 498 409 229 - 2,954 Net charge-offs (2 ) (3,576 ) (1,343 ) (1,033 ) (287 ) - (6,241 ) Ending balance $ 2,321 $ 7,072 $ 6,309 $ 1,754 $ 829 $ 257 $ 18,542 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 September 30, 2016 (In thousands) Allowance for loan losses allocated to: Loans individually evaluated for impairment $ 295 $ 1,622 $ 1,978 $ 365 $ 57 $ - $ 4,317 Loans collectively evaluated for impairment 1,786 6,629 3,543 834 641 51 13,484 Ending balance $ 2,081 $ 8,251 $ 5,521 $ 1,199 $ 698 $ 51 $ 17,801 Loans: Individually evaluated for impairment $ 23,925 $ 19,592 $ 15,473 $ 10,606 $ 827 $ - $ 70,423 Collectively evaluated for impairment 61,322 363,611 212,626 69,023 23,560 - 730,142 Total ending loans balance $ 85,247 $ 383,203 $ 228,099 $ 79,629 $ 24,387 $ - $ 800,565 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. There were no loans restructured during the three months ended September 30, 2016 or 2015. The following tables present the loans restructured during the nine months ended September 30, 2016 and 2015. Nine Months Ended September 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 $ - Nine Months Ended September 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 September 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 nine months ended September 30, 2016 and 2015: Nine Months Ended September 30, 2016 Number of Contracts Recorded Investment Specific reserves allocated (Dollars in thousands) Construction real estate 2 $ 807 $ 10 Total 2 $ 807 $ 10 Nine Months Ended September 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: September 30, 2016 December 31, 2015 Number of contracts Amount Number of contracts Amount (Dollars in thousands) Accrual 150 $ 45,971 $ 165 $ 53,862 Nonaccrual 26 9,158 32 10,641 Total 176 $ 55,129 $ 197 $ 64,503 As of September 30, 2016, the Bank had a total of $680 thousand in commitments to lend additional funds to debtors who also had TDRs. As of December 31, 2015, the Bank had a total of $194 thousand in commitments to lend additional funds on six commercial loans classified as 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 and nine months ended September 30, 2016 and 2015, respectively. TDRs resulted in charge-offs of $172.8 thousand and $2.1 million during the three months ended September 30, 2016 and 2015, respectively. For the nine months ended September 30, 2016 and 2015, TDRs resulted in charge-offs of $356.3 thousand and $3.9 million, respectively. The TDRs that subsequently defaulted required a provision of $10 thousand and $0 to the allowance for loan losses for the nine months ended September 30, 2016 and 2015, respectively. Loans to Executive Officers and Directors: Loan principal balances to executive officers and directors of the Company were $375 thousand and $1.9 million as of September 30, 2016 and December 31, 2015, respectively. Total credit available, including companies in which these individuals have management control or beneficial ownership, was $536 thousand and $2.3 million as of September 30, 2016 and December 31, 2015, respectively. An analysis of the activity related to these loans as of September 30, 2016 and December 31, 2015 is as follows: September 30, 2016 December 31, 2015 (In thousands) Balance, beginning $ 1,933 $ 1,322 Additions 158 438 Changes in composition (648 ) 800 Principal payments and other reductions (1,068 ) (627 ) Balance, ending $ 375 $ 1,933 |