Loans and Allowance for Loan Losses | Note 6. Loans and Allowance for Loan Losses As of June 30, 2017 and December 31, 2016, loans consisted of: June 30, 2017 December 31, 2016 (In thousands) Commercial $ 69,794 $ 69,161 Commercial real estate 387,152 405,900 Residential real estate 197,651 214,726 Construction real estate 76,751 75,972 Installment and other 19,926 21,053 Total loans 751,274 786,812 Unearned income (1,071 ) (1,322 ) Gross loans 750,203 785,490 Allowance for loan losses (13,167 ) (14,352 ) Net loans $ 737,036 $ 771,138 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 category of loans as of June 30, 2017 and December 31, 2016, 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, 2017 (In thousands) Commercial $ 69,349 $ 20 $ 237 $ 188 $ 445 $ 69,794 Commercial real estate 385,164 474 234 1,280 1,988 387,152 Residential real estate 194,412 1,764 65 1,410 3,239 197,651 Construction real estate 71,542 419 50 4,740 5,209 76,751 Installment and other 19,666 169 86 5 260 19,926 Total loans $ 740,133 $ 2,846 $ 672 $ 7,623 $ 11,141 $ 751,274 Nonaccrual loan classification, included above $ 4,701 $ 402 $ 302 $ 7,623 $ 8,327 $ 13,028 December 31, 2016 Commercial $ 67,562 $ 1,010 $ 221 $ 368 $ 1,599 $ 69,161 Commercial real estate 399,861 4,564 - 1,475 6,039 405,900 Residential real estate 208,200 3,089 1,355 2,082 6,526 214,726 Construction real estate 67,310 378 43 8,241 8,662 75,972 Installment and other 20,860 135 38 20 193 21,053 Total loans $ 763,793 $ 9,176 $ 1,657 $ 12,186 $ 23,019 $ 786,812 Nonaccrual loan classification, included above $ 8,331 $ 249 $ 712 $ 12,186 $ 13,147 $ 21,478 The following table presents the recorded investment in nonaccrual loans and loans past due 90 days or more and still accruing interest by category of loans as of June 30, 2017 and December 31, 2016: June 30, 2017 December 31, 2016 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 $ 368 $ - $ 1,192 $ - Commercial real estate 3,339 - 5,823 - Residential real estate 3,757 - 4,247 - Construction real estate 5,499 - 10,159 - Installment and other 65 - 57 - Total $ 13,028 $ - $ 21,478 $ - 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 category of loans based on the most recent analysis performed as of June 30, 2017 and December 31, 2016: Pass Special Mention Substandard Doubtful Total June 30, 2017 (In thousands) Commercial $ 66,462 $ 255 $ 3,077 $ - $ 69,794 Commercial real estate 368,031 6,363 12,758 - 387,152 Residential real estate 192,629 451 4,571 - 197,651 Construction real estate 66,400 934 9,417 - 76,751 Installment and other 19,839 3 84 - 19,926 Total $ 713,361 $ 8,006 $ 29,907 $ - $ 751,274 December 31, 2016 Commercial $ 56,611 $ 1,046 $ 11,504 $ - $ 69,161 Commercial real estate 380,777 11,573 13,550 - 405,900 Residential real estate 209,049 588 5,089 - 214,726 Construction real estate 60,848 5,378 9,746 - 75,972 Installment and other 20,983 4 66 - 21,053 Total $ 728,268 $ 18,589 $ 39,955 $ - $ 786,812 The following table shows all loans, including nonaccrual loans, by risk category and aging as of June 30, 2017 and December 31, 2016: Pass Special Mention Substandard Doubtful Total June 30, 2017 (In thousands) Current $ 711,287 $ 7,678 $ 21,168 $ - $ 740,133 Past due 30-59 days 1,705 328 813 - 2,846 Past due 60-89 days 369 - 303 - 672 Past due 90 days or more - - 7,623 - 7,623 Total $ 713,361 $ 8,006 $ 29,907 $ - $ 751,274 December 31, 2016 Current $ 724,075 $ 13,956 $ 25,762 $ - $ 763,793 Past due 30-59 days 3,383 4,633 1,160 - 9,176 Past due 60-89 days 810 - 847 - 1,657 Past due 90 days or more - - 12,186 - 12,186 Total $ 728,268 $ 18,589 $ 39,955 $ - $ 786,812 As of June 30, 2017 and December 31, 2016, nonaccrual loans totaling $13.0 million and $18.4 million were classified as Substandard, respectively. The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2017 and December 31, 2016, 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, 2017 December 31, 2016 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 $ 1,059 $ 1,044 $ 2,203 $ 2,166 Commercial real estate 3,896 3,812 6,368 6,136 Residential real estate 5,173 4,513 5,176 4,494 Construction real estate 9,200 7,702 7,522 6,031 Installment and other 394 393 313 313 With an allowance recorded: Commercial 13,521 13,520 $ 350 13,988 13,988 $ 350 Commercial real estate 6,374 6,374 900 6,376 6,376 911 Residential real estate 7,713 7,713 1,077 8,601 8,598 1,424 Construction real estate 3,322 3,322 206 5,288 5,251 237 Installment and other 306 306 53 433 433 88 Total $ 50,958 $ 48,699 $ 2,586 $ 56,268 $ 53,786 $ 3,010 The following table presents loans individually evaluated for impairment by class of loans for the three and six months ended June 30, 2017 and 2016, showing the average recorded investment and the interest income recognized: Three Months Ended Six Months Ended June 30, 2017 June 30, 2016 June 30, 2017 June 30, 2016 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 $ 1,428 $ 11 $ 9,679 $ 104 $ 1,674 $ 21 $ 9,820 $ 208 Commercial real estate 3,873 7 10,060 19 4,627 15 10,112 38 Residential real estate 4,469 9 5,452 9 4,477 18 5,497 18 Construction real estate 7,817 27 7,154 28 7,222 53 7,182 56 Installment and other 348 4 115 4 336 8 57 8 With an allowance recorded: Commercial 13,701 184 14,539 197 13,797 366 14,620 394 Commercial real estate 6,352 68 9,019 91 6,360 135 9,049 181 Residential real estate 7,900 78 10,385 85 8,133 155 10,425 170 Construction real estate 3,244 43 3,587 45 3,913 86 3,605 90 Installment and other 341 2 575 4 372 5 581 9 Total $ 49,473 $ 433 $ 70,565 $ 586 $ 50,911 $ 862 $ 70,948 $ 1,172 If nonaccrual loans outstanding had been current in accordance with their original terms, approximately $195.6 thousand and $382.7 thousand would have been recorded as loan interest income during the three months ended June 30, 2017 and 2016, respectively, and $389.0 thousand and $765.5 thousand during the six months ended June 30, 2017 and 2016, respectively. Interest income recognized on a cash basis was not material. 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, 2017 and 2016, 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, 2017: Beginning balance $ 1,756 $ 6,573 $ 4,126 $ 1,086 $ 644 $ 2 $ 14,187 Provision (benefit) for loan losses (379 ) (352 ) (299 ) 36 (32 ) 26 (1,000 ) Charge-offs (77 ) (27 ) (66 ) (8 ) (96 ) - (274 ) Recoveries 77 11 44 3 119 - 254 Net charge-offs - (16 ) (22 ) (5 ) 23 - (20 ) Ending balance $ 1,377 $ 6,205 $ 3,805 $ 1,117 $ 635 $ 28 $ 13,167 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 Six Months Ended June 30, 2017: Beginning balance $ 1,449 $ 6,472 $ 4,524 $ 1,119 $ 715 $ 73 $ 14,352 Provision (benefit) for loan losses (59 ) (339 ) (508 ) 9 (28 ) (45 ) (970 ) Charge-offs (263 ) (26 ) (310 ) (24 ) (234 ) - (857 ) Recoveries 250 98 99 13 182 - 642 Net charge-offs (13 ) 72 (211 ) (11 ) (52 ) - (215 ) Ending balance $ 1,377 $ 6,205 $ 3,805 $ 1,117 $ 635 $ 28 $ 13,167 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 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, 2017 (In thousands) Allowance for loan losses allocated to: Loans individually evaluated for impairment $ 350 $ 900 $ 1,077 $ 206 $ 53 $ - $ 2,586 Loans collectively evaluated for impairment 1,027 5,305 2,728 911 582 28 10,581 Ending balance $ 1,377 $ 6,205 $ 3,805 $ 1,117 $ 635 $ 28 $ 13,167 Loans: Individually evaluated for impairment $ 14,564 $ 10,186 $ 12,226 $ 11,024 $ 699 $ - $ 48,699 Collectively evaluated for impairment 55,230 376,966 185,425 65,727 19,227 - 702,575 Total ending loans balance $ 69,794 $ 387,152 $ 197,651 $ 76,751 $ 19,926 $ - $ 751,274 December 31, 2016 Allowance for loan losses allocated to: Loans individually evaluated for impairment $ 350 $ 911 $ 1,424 $ 237 $ 88 $ - $ 3,010 Loans collectively evaluated for impairment 1,099 5,561 3,100 882 627 73 11,342 Ending balance $ 1,449 $ 6,472 $ 4,524 $ 1,119 $ 715 $ 73 $ 14,352 Loans: Individually evaluated for impairment $ 16,154 $ 12,512 $ 13,092 $ 11,282 $ 746 $ - $ 53,786 Collectively evaluated for impairment 53,007 393,388 201,634 64,690 20,307 - 733,026 Total ending loans balance $ 69,161 $ 405,900 $ 214,726 $ 75,972 $ 21,053 $ - $ 786,812 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, 2017 and 2016. Three Months Ended June 30, 2017 Number of Contracts Pre- Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Specific reserves allocated (Dollars in thousands) Commercial 2 $ 30 $ 30 $ 1 Residential real estate 2 187 187 - Total 4 $ 217 $ 217 $ 1 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, 2017 Number of Contracts Pre- Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Specific reserves allocated (Dollars in thousands) Commercial 2 $ 30 $ 30 $ 1 Residential real estate 2 187 187 - Construction real estate 1 10 10 - Total 5 $ 227 $ 227 $ 1 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 $ - The following table presents loans by class modified as TDRs for which there was a payment default within 12 months following the modification during the three and six months ended June 30, 2017 and 2016: Three Months Ended June 30, 2017 Number of Contracts Recorded Investment Specific reserves allocated (Dollars in thousands) Construction real estate 1 $ 61 $ - Total 1 $ 61 $ - 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. Six Months Ended June 30, 2017 Number of Contracts Recorded Investment Specific reserves allocated (Dollars in thousands) Construction real estate 1 $ 61 $ - Total 1 $ 61 $ - 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 Impairment analyses are prepared on TDRs in conjunction with the normal allowance for loan loss process. TDRs required a specific reserve of $1.0 thousand for loans restructured during the three and six months ended June 30, 2017. TDRs did not require any specific reserves at the three and six months ended June 30, 2016. TDRs resulted in charge-offs of $45.7 thousand and $109.9 thousand during the three months ended June 30, 2017 and 2016, respectively. For the six months ended June 30, 2017 and 2016, TDRs resulted in charge-offs of $65.3 thousand and $146.7 thousand, respectively. The TDRs that subsequently defaulted required a provision of $0 and $10 thousand to the allowance for loan losses for the six months ended June 30, 2017 and 2016, respectively. The following table presents total TDRs, both in accrual and nonaccrual status: June 30, 2017 December 31, 2016 Number of contracts Amount Number of contracts Amount (Dollars in thousands) Accrual 118 $ 35,676 $ 127 $ 35,158 Nonaccrual 23 6,251 23 7,909 Total 141 $ 41,927 $ 150 $ 43,067 Specific reserves on TDRs at June 30, 2017 and December 31, 2016 were $2.4 million and $2.6 million, respectively. As of June 30, 2017, the Bank had a total of $73 thousand in commitments to lend additional funds on two commercial loans and one commercial real estate loan classified as TDRs. As of December 31, 2016, the Bank had a total of $1.6 million in commitments to lend additional funds on six commercial loans classified as TDRs. Loan principal balances to executive officers and directors of the Company were $315.0 thousand and $348.0 thousand as of June 30, 2017 and December 31, 2016, respectively. Total credit available, including companies in which these individuals have management control or beneficial ownership, was $480.9 thousand and $513.6 thousand as of June 30, 2017 and December 31, 2016, respectively. An analysis of the activity related to these loans as of June 30, 2017 and December 31, 2016 is as follows: June 30, 2017 December 31, 2016 (In thousands) Balance, beginning $ 348 $ 1,933 Additions 8 158 Changes in composition - (648 ) Principal payments and other reductions (41 ) (1,095 ) Balance, ending $ 315 $ 348 |