Loans and Allowance for Loan Losses | Note 6. Loans and Allowance for Loan Losses As of June 30, 2018 and December 31, 2017, loans consisted of: June 30, 2018 December 31, 2017 (In thousands) Commercial $ 68,137 $ 61,388 Commercial real estate 404,663 378,802 Residential real estate 161,664 178,296 Construction real estate 68,136 63,569 Installment and other 12,099 18,952 Total loans 714,699 701,007 Unearned income (1,097 ) (863 ) Gross loans 713,602 700,144 Allowance for loan losses (10,444 ) (13,803 ) Net loans $ 703,158 $ 686,341 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, 2018 and December 31, 2017, 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, 2018 (In thousands) Commercial $ 68,100 $ 37 $ - $ - $ 37 $ 68,137 Commercial real estate 403,689 165 - 809 974 404,663 Residential real estate 158,993 1,134 503 1,034 2,671 161,664 Construction real estate 64,970 226 - 2,940 3,166 68,136 Installment and other 11,982 26 - 91 117 12,099 Total loans $ 707,734 $ 1,588 $ 503 $ 4,874 $ 6,965 $ 714,699 Nonaccrual loan classification, included above $ 4,104 $ 911 $ 503 $ 4,874 $ 6,288 $ 10,392 December 31, 2017 Commercial $ 59,703 $ 173 $ 1,475 $ 37 $ 1,685 $ 61,388 Commercial real estate 371,640 5,490 - 1,672 7,162 378,802 Residential real estate 174,388 1,899 - 2,009 3,908 178,296 Construction real estate 59,291 423 74 3,781 4,278 63,569 Installment and other 18,705 80 81 86 247 18,952 Total loans $ 683,727 $ 8,065 $ 1,630 $ 7,585 $ 17,280 $ 701,007 Nonaccrual loan classification, included above $ 3,858 $ 5,859 $ 38 $ 7,585 $ 13,482 $ 17,340 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, 2018 and December 31, 2017: June 30, 2018 December 31, 2017 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 $ 48 $ - $ 102 $ - Commercial real estate 2,965 - 8,617 - Residential real estate 4,257 - 4,599 - Construction real estate 3,031 - 3,911 - Installment and other 91 - 111 - Total $ 10,392 $ - $ 17,340 $ - 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.” 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. 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. 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, 2018 and December 31, 2017: Pass Special Mention Substandard Doubtful Total June 30, 2018 (In thousands) Commercial $ 64,607 $ 1,796 $ 1,734 $ - $ 68,137 Commercial real estate 392,740 3,190 8,733 - 404,663 Residential real estate 155,914 - 5,750 - 161,664 Construction real estate 64,315 790 3,031 - 68,136 Installment and other 11,999 - 100 - 12,099 Total $ 689,575 $ 5,776 $ 19,348 $ - $ 714,699 December 31, 2017 Commercial $ 58,769 $ 2 $ 2,617 $ - $ 61,388 Commercial real estate 359,768 4,762 14,272 - 378,802 Residential real estate 172,101 - 6,195 - 178,296 Construction real estate 56,661 917 5,991 - 63,569 Installment and other 18,523 - 429 - 18,952 Total $ 665,822 $ 5,681 $ 29,504 $ - $ 701,007 The following table shows all loans, including nonaccrual loans, by risk category and aging as of June 30, 2018 and December 31, 2017: Pass Special Mention Substandard Doubtful Total June 30, 2018 (In thousands) Current $ 688,938 $ 5,776 $ 13,020 $ - $ 707,734 Past due 30-59 days 637 - 951 - 1,588 Past due 60-89 days - - 503 - 503 Past due 90 days or more - - 4,874 - 4,874 Total $ 689,575 $ 5,776 $ 19,348 $ - $ 714,699 December 31, 2017 Current $ 662,445 $ 5,681 $ 15,601 $ - $ 683,727 Past due 30-59 days 1,785 - 6,280 - 8,065 Past due 60-89 days 1,592 - 38 - 1,630 Past due 90 days or more - - 7,585 - 7,585 Total $ 665,822 $ 5,681 $ 29,504 $ - $ 701,007 As of June 30, 2018 and December 31, 2017, nonaccrual loans totaling $10.4 million and $17.3 million were classified as Substandard, respectively. The following table presents loans individually evaluated for impairment by category of loans as of June 30, 2018 and December 31, 2017, 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, 2018 December 31, 2017 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 $ 118 $ 114 $ 184 $ 182 Commercial real estate 5,903 2,965 4,294 4,154 Residential real estate 5,882 5,035 6,585 5,808 Construction real estate 6,254 4,796 7,471 6,049 Installment and other 300 299 349 348 With an allowance recorded: Commercial 13,306 13,305 $ 248 13,361 13,359 $ 211 Commercial real estate 6,417 6,417 941 10,987 10,987 3,735 Residential real estate 5,526 5,525 830 6,774 6,774 943 Construction real estate 1,350 1,350 37 3,244 3,244 231 Installment and other 238 238 27 236 236 32 Total $ 45,294 $ 40,044 $ 2,083 $ 53,485 $ 51,141 $ 5,152 The table above includes $36.3 million of troubled debt restructurings, or restructured loans, at June 30, 2018 and $38.9 million of restructured loans at December 31, 2017. The following table presents loans individually evaluated for impairment by class of loans for the three and six months ended June 30, 2018 and 2017, showing the average recorded investment and the interest income recognized: Three Months Ended Six Months Ended June 30, 2018 June 30, 2017 June 30, 2018 June 30, 2017 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 $ 105 $ 1 $ 1,428 $ 11 $ 131 $ 2 $ 1,674 $ 21 Commercial real estate 4,010 - 3,873 7 4,058 - 4,627 15 Residential real estate 5,023 16 4,469 9 5,285 31 4,477 18 Construction real estate 5,113 22 7,817 27 5,425 44 7,222 53 Installment and other 304 2 348 4 319 5 336 8 With an allowance recorded: Commercial 13,285 189 13,701 184 13,310 376 13,797 366 Commercial real estate 6,446 73 6,352 68 7,959 145 6,360 135 Residential real estate 6,083 57 7,900 78 6,313 113 8,133 155 Construction real estate 2,278 16 3,244 43 2,600 31 3,913 86 Installment and other 240 2 341 2 239 4 372 5 Total $ 42,887 $ 378 $ 49,473 $ 433 $ 45,639 $ 751 $ 50,911 $ 862 If nonaccrual loans outstanding had been current in accordance with their original terms, approximately $140 thousand and $196 thousand would have been recorded as loan interest income during the three months ended June 30, 2018 and 2017, respectively, and $277 thousand and $389 thousand during the six months ended June 30, 2018 and 2017, 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, 2018 and 2017, 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, 2018: Beginning balance $ 597 $ 6,905 $ 2,462 $ 914 $ 255 $ 105 $ 11,238 Provision (benefit) for loan losses 46 (341 ) (390 ) (82 ) (132 ) 199 (700 ) Charge-offs (124 ) - (14 ) (100 ) (27 ) - (265 ) Recoveries 24 19 93 - 35 - 171 Net recoveries (charge-offs) (100 ) 19 79 (100 ) 8 - (94 ) Ending balance $ 543 $ 6,583 $ 2,151 $ 732 $ 131 $ 304 $ 10,444 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 recoveries (charge-offs) - (16 ) (22 ) (5 ) 23 - (20 ) Ending balance $ 1,377 $ 6,205 $ 3,805 $ 1,117 $ 635 $ 28 $ 13,167 Six Months Ended June 30, 2018: Beginning balance $ 536 $ 8,573 $ 2,843 $ 1,030 $ 315 $ 506 $ 13,803 Provision (benefit) for loan losses 92 706 (713 ) (135 ) (228 ) (202 ) (480 ) Charge-offs (134 ) (2,736 ) (119 ) (212 ) (54 ) - (3,255 ) Recoveries 49 40 140 49 98 - 376 Net recoveries (charge-offs) (85 ) (2,696 ) 21 (163 ) 44 - (2,879 ) Ending balance $ 543 $ 6,583 $ 2,151 $ 732 $ 131 $ 304 $ 10,444 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 recoveries (charge-offs) (13 ) 72 (211 ) (11 ) (52 ) - (215 ) Ending balance $ 1,377 $ 6,205 $ 3,805 $ 1,117 $ 635 $ 28 $ 13,167 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, 2018 (In thousands) Allowance for loan losses allocated to: Loans individually evaluated for impairment $ 248 $ 941 $ 830 $ 37 $ 27 $ - $ 2,083 Loans collectively evaluated for impairment 295 5,642 1,321 695 104 304 8,361 Ending balance $ 543 $ 6,583 $ 2,151 $ 732 $ 131 $ 304 $ 10,444 Loans: Individually evaluated for impairment $ 13,419 $ 9,382 $ 10,560 $ 6,146 $ 537 $ - $ 40,044 Collectively evaluated for impairment 54,718 395,281 151,104 61,990 11,562 - 674,655 Total ending loans balance $ 68,137 $ 404,663 $ 161,664 $ 68,136 $ 12,099 $ - $ 714,699 December 31, 2017 Allowance for loan losses allocated to: Loans individually evaluated for impairment $ 211 $ 3,735 $ 943 $ 231 $ 32 $ - $ 5,152 Loans collectively evaluated for impairment 325 4,838 1,900 799 283 506 8,651 Ending balance $ 536 $ 8,573 $ 2,843 $ 1,030 $ 315 $ 506 $ 13,803 Loans: Individually evaluated for impairment $ 13,541 $ 15,141 $ 12,582 $ 9,293 $ 584 $ - $ 51,141 Collectively evaluated for impairment 47,847 363,661 165,714 54,276 18,368 - 649,866 Total ending loans balance $ 61,388 $ 378,802 $ 178,296 $ 63,569 $ 18,952 $ - $ 701,007 Troubled Debt Restructurings: 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 June 30, 2018 and the six months ended June 30, 2018 and 2017. Three Months Ended June 30, 2018 Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Specific Reserves Allocated (Dollars in thousands) Commercial 1 $ 164 $ 164 $ 25 Residential real estate 2 237 237 - Total 3 $ 401 $ 401 $ 25 Six Months Ended June 30, 2018 Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Specific Reserves Allocated (Dollars in thousands) Commercial 3 $ 335 $ 335 $ 26 Commercial real estate 2 2,356 2,356 - Residential real estate 2 237 237 - Total 7 $ 2,928 $ 2,928 $ 26 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 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 The following tables present loans by category 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, 2018 and 2017: Three Months Ended June 30, 2018 Number of Contracts Pre-Modification Outstanding Recorded Investment Specific Reserves Allocated (Dollars in thousands) Residential real estate 1 $ 145 $ - Total 1 $ 145 $ - Six Months Ended June 30, 2018 Number of Contracts Pre-Modification Outstanding Recorded Investment Specific Reserves Allocated (Dollars in thousands) Residential real estate 1 $ 145 $ - Total 1 $ 145 $ - Three Months Ended June 30, 2017 Number of Contracts Pre-Modification Outstanding Recorded Investment Specific Reserves Allocated (Dollars in thousands) Construction real estate 1 $ 61 $ - Total 1 $ 61 $ - Six Months Ended June 30, 2017 Number of Contracts Pre-Modification Outstanding Recorded Investment Specific Reserves Allocated (Dollars in thousands) Construction real estate 1 $ 61 $ - Total 1 $ 61 $ - Impairment analyses are prepared on TDRs in conjunction with the normal allowance for loan loss process. TDRs restructured during the three months ended June 30, 2018 and 2017 required a specific reserve of $25 thousand and $1 thousand, respectively. TDRs restructured during the six months ended June 30, 2018 and 2017 required a specific reserve of $26 thousand and $1 thousand, respectively. TDRs resulted in charge-offs of during the three months ended June 30, 2018 and 2017, respectively. For the six months ended June 30, 2018 and 2017, TDRs resulted in charge-offs of $2.9 million and $65 thousand, respectively. The TDRs that subsequently defaulted required no provision to the allowance for loan losses for the three and six months ended June 30, 2018 and 2017, respectively. The following table presents total TDRs, both in accrual and nonaccrual status: June 30, 2018 December 31, 2017 Number of Contracts Amount Number of Contracts Amount (Dollars in thousands) Accrual 102 $ 29,652 $ 108 $ 33,801 Nonaccrual 17 6,668 19 5,146 Total 119 $ 36,320 $ 127 $ 38,947 Specific reserves on TDRs at June 30, 2018 and December 31, 2017 were $2.0 million and $2.4 million, respectively. As of June 30, 2018, the Bank had a total of $200 thousand in commitments to lend additional funds on one commercial loan classified as a TDR. As of December 31, 2017, the Bank had a total of $51.8 thousand in commitments to lend additional funds on two loans classified as TDRs. Loans to Executive Officers and Directors Loan principal balances to executive officers and directors of the Company were $160.6 thousand and $198.4 thousand as of June 30, 2018 and December 31, 2017, respectively. Total credit available, including companies in which these individuals have management control or beneficial ownership, was $276.6 thousand and $324.4 thousand as of June 30, 2018 and December 31, 2017, respectively. An analysis of the activity related to these loans as of June 30, 2018 and December 31, 2017 is as follows: June 30, 2018 December 31, 2017 (In thousands) Balance, beginning $ 198 $ 348 Additions - 13 Changes in composition - (76 ) Principal payments and other reductions (37 ) (87 ) Balance, ending $ 161 $ 198 |