Loans and Allowance for Loan Losses | Note 6. Loans and Allowance for Loan Losses As of September 30, 2017 and December 31, 2016, loans consisted of: September 30, 2017 December 31, 2016 (In thousands) Commercial $ 65,157 $ 69,161 Commercial real estate 389,831 405,900 Residential real estate 186,934 214,726 Construction real estate 76,399 75,972 Installment and other 17,676 21,053 Total loans 735,997 786,812 Unearned income (980 ) (1,322 ) Gross loans 735,017 785,490 Allowance for loan losses (13,200 ) (14,352 ) Net loans $ 721,817 $ 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 September 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 September 30, 2017 (In thousands) Commercial $ 64,256 $ 89 $ 381 $ 431 $ 901 $ 65,157 Commercial real estate 387,717 420 323 1,371 2,114 389,831 Residential real estate 183,740 1,403 45 1,746 3,194 186,934 Construction real estate 71,194 424 75 4,706 5,205 76,399 Installment and other 17,460 99 31 86 216 17,676 Total loans $ 724,367 $ 2,435 $ 855 $ 8,340 $ 11,630 $ 735,997 Nonaccrual loan classification, included above $ 7,073 $ 344 $ 368 $ 7,946 $ 8,658 $ 15,731 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 September 30, 2017 and December 31, 2016: September 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 $ 108 $ 394 $ 1,192 $ - Commercial real estate 6,202 - 5,823 - Residential real estate 4,364 - 4,247 - Construction real estate 4,921 - 10,159 - Installment and other 136 - 57 - Total $ 15,731 $ 394 $ 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 September 30, 2017 and December 31, 2016: Pass Special Mention Substandard Doubtful Total September 30, 2017 (In thousands) Commercial $ 62,631 $ 157 $ 2,369 $ - $ 65,157 Commercial real estate 373,901 5,472 10,458 - 389,831 Residential real estate 180,522 152 6,260 - 186,934 Construction real estate 68,413 936 7,050 - 76,399 Installment and other 17,528 - 148 - 17,676 Total $ 702,995 $ 6,717 $ 26,285 $ - $ 735,997 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 September 30, 2017 and December 31, 2016: Pass Special Mention Substandard Doubtful Total September 30, 2017 (In thousands) Current $ 700,893 $ 6,297 $ 17,177 $ - $ 724,367 Past due 30-59 days 1,517 420 498 - 2,435 Past due 60-89 days 191 - 664 - 855 Past due 90 days or more 394 - 7,946 - 8,340 Total $ 702,995 $ 6,717 $ 26,285 $ - $ 735,997 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 September 30, 2017 and December 31, 2016, nonaccrual loans totaling $15.7 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 September 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): September 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 $ 12,626 $ 12,624 $ 2,203 $ 2,166 Commercial real estate 6,962 6,455 6,368 6,136 Residential real estate 5,485 4,911 5,176 4,494 Construction real estate 8,934 7,091 7,522 6,031 Installment and other 405 404 313 313 With an allowance recorded: Commercial 1,575 1,574 $ 223 13,988 13,988 $ 350 Commercial real estate 6,326 6,326 865 6,376 6,376 911 Residential real estate 7,682 7,678 1,381 8,601 8,598 1,424 Construction real estate 3,282 3,282 202 5,288 5,251 237 Installment and other 272 272 34 433 433 88 Total $ 53,549 $ 50,617 $ 2,705 $ 56,268 $ 53,786 $ 3,010 The table above includes $39.8 million in trouble debt restructurings ("TDRs") at September 30, 2017, and $43.1 million at December 31, 2016. The following table presents loans individually evaluated for impairment by class of loans for the three and nine months ended September 30, 2017 and 2016, showing the average recorded investment and the interest income recognized: Three Months Ended Nine Months Ended September 30, 2017 September 30, 2016 September 30, 2017 September 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 $ 6,834 $ 184 $ 9,648 $ 103 $ 4,411 $ 543 $ 9,715 $ 307 Commercial real estate 5,133 99 10,279 18 5,084 295 10,668 53 Residential real estate 4,712 54 5,955 10 4,586 162 6,541 31 Construction real estate 7,397 104 6,213 5 7,189 308 6,587 16 Installment and other 399 5 341 4 353 14 339 12 With an allowance recorded: Commercial 7,547 22 14,338 196 10,741 66 14,451 584 Commercial real estate 6,350 69 9,003 92 6,352 205 9,056 273 Residential real estate 7,695 81 9,652 81 8,019 240 9,860 242 Construction real estate 3,302 43 4,443 45 3,755 129 4,178 134 Installment and other 289 2 529 4 347 7 554 13 Total $ 49,658 $ 663 $ 70,401 $ 558 $ 50,837 $ 1,969 $ 71,949 $ 1,665 If nonaccrual loans outstanding had been current in accordance with their original terms, approximately $197.1 thousand and $517.3 thousand would have been recorded as loan interest income during the three months ended September 30, 2017 and 2016, respectively, and $584.8 thousand and $1.2 million during the nine months ended September 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 nine months ended September 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 September 30, 2017: Beginning balance $ 1,377 $ 6,205 $ 3,805 $ 1,117 $ 635 $ 28 $ 13,167 Provision (benefit) for loan losses (297 ) 461 (117 ) 1,731 (2,073 ) 45 (250 ) Charge-offs (7 ) (612 ) - (1,385 ) (19 ) - (2,023 ) Recoveries 56 88 125 37 2,000 - 2,306 Net recoveries (charge-offs) 49 (524 ) 125 (1,348 ) 1,981 - 283 Ending balance $ 1,129 $ 6,142 $ 3,813 $ 1,500 $ 543 $ 73 $ 13,200 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 recoveries (charge-offs) 54 331 (118 ) 5 (63 ) - 209 Ending balance $ 2,081 $ 8,251 $ 5,521 $ 1,199 $ 698 $ 51 $ 17,801 Nine Months Ended September 30, 2017: Beginning balance $ 1,449 $ 6,472 $ 4,524 $ 1,119 $ 715 $ 73 $ 14,352 Provision (benefit) for loan losses (356 ) 123 (626 ) 1,739 (2,100 ) - (1,220 ) Charge-offs (270 ) (639 ) (309 ) (1,409 ) (253 ) - (2,880 ) Recoveries 306 186 224 51 2,181 - 2,948 Net recoveries (charge-offs) 36 (453 ) (85 ) (1,358 ) 1,928 - 68 Ending balance $ 1,129 $ 6,142 $ 3,813 $ 1,500 $ 543 $ 73 $ 13,200 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 recoveries (charge-offs) 268 461 (261 ) 100 (159 ) - 409 Ending balance $ 2,081 $ 8,251 $ 5,521 $ 1,199 $ 698 $ 51 $ 17,801 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, 2017 (In thousands) Allowance for loan losses allocated to: Loans individually evaluated for impairment $ 223 $ 865 $ 1,381 $ 202 $ 34 $ - $ 2,705 Loans collectively evaluated for impairment 906 5,277 2,432 1,298 509 73 10,495 Ending balance $ 1,129 $ 6,142 $ 3,813 $ 1,500 $ 543 $ 73 $ 13,200 Loans: Individually evaluated for impairment $ 14,198 $ 12,781 $ 12,589 $ 10,373 $ 676 $ - $ 50,617 Collectively evaluated for impairment 50,959 377,050 174,345 66,026 17,000 - 685,380 Total ending loans balance $ 65,157 $ 389,831 $ 186,934 $ 76,399 $ 17,676 $ - $ 735,997 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 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 as TDRs during the three months ended September 30, 2017 and the nine months ended September 30, 2017 and 2016. There were no loans restructured during the three months ended September 30, 2016. Three Months Ended September 30, 2017 Number of Contracts Pre- Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Specific reserves allocated (Dollars in thousands) Commercial 2 $ 105 $ 105 $ 29 Total 2 $ 105 $ 105 $ 29 Nine Months Ended September 30, 2017 Number of Contracts Pre- Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Specific reserves allocated (Dollars in thousands) Commercial 4 $ 135 $ 135 $ 30 Residential real estate 2 187 187 - Construction real estate 1 10 10 - Total 7 $ 332 $ 332 $ 30 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 $ - 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 nine months ended September 30, 2017 and 2016: Nine Months Ended September 30, 2017 Number of Contracts Recorded Investment Specific reserves allocated (Dollars in thousands) Construction real estate 1 $ 61 $ - Total 1 $ 61 $ - 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 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, 2017 and 2016. Impairment analyses are prepared on TDRs in conjunction with the normal allowance for loan loss process. TDRs required a specific reserve of $29 thousand for loans restructured during the three months ended September 30, 2017. TDRs required a specific reserve of $30 thousand for loans restructured during the nine months ended September 30, 2017. TDRs did not require any specific reserves at the three and nine months ended September 30, 2016. TDRs resulted in charge-offs of $402.7 thousand and $172.8 thousand during the three months ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, TDRs resulted in charge-offs of $457.8 thousand and $356.3 thousand, respectively. The TDRs that subsequently defaulted required a provision of $0 and $10 thousand to the allowance for loan losses for the nine months ended September 30, 2017 and 2016, respectively. The following table presents total TDRs, both in accrual and nonaccrual status: September 30, 2017 December 31, 2016 Number of contracts Amount Number of contracts Amount (Dollars in thousands) Accrual 117 $ 34,886 $ 127 $ 35,158 Nonaccrual 20 4,924 23 7,909 Total 137 $ 39,810 $ 150 $ 43,067 Specific reserves on TDRs at September 30, 2017 and December 31, 2016 were $2.1 million and $2.6 million, respectively. As of September 30, 2017, the Bank had a total of $23 thousand in commitments to lend additional funds on one commercial loan 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 $210.1 thousand and $347.8 thousand as of September 30, 2017 and December 31, 2016, respectively. Total credit available, including companies in which these individuals have management control or beneficial ownership, was $335.1 thousand and $513.6 thousand as of September 30, 2017 and December 31, 2016, respectively. An analysis of the activity related to these loans as of September 30, 2017 and December 31, 2016 is as follows: September 30, 2017 December 31, 2016 (In thousands) Balance, beginning $ 348 $ 1,933 Additions 8 158 Changes in composition (87 ) (648 ) Principal payments and other reductions (59 ) (1,095 ) Balance, ending $ 210 $ 348 |