Loans and Allowance for Loan Losses | Note 6. Loans and Allowance for Loan Losses As of September 30, 2018 and December 31, 2017, loans consisted of: September 30, 2018 December 31, 2017 (In thousands) Commercial $ 63,539 $ 61,388 Commercial real estate 404,790 378,802 Residential real estate 155,118 178,296 Construction real estate 72,550 63,569 Installment and other 9,998 18,952 Total loans 705,995 701,007 Unearned income (1,171 ) (863 ) Gross loans 704,824 700,144 Allowance for loan losses (9,528 ) (13,803 ) Net loans $ 695,296 $ 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 September 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 September 30, 2018 (In thousands) Commercial $ 63,512 $ 27 $ - $ - $ 27 $ 63,539 Commercial real estate 403,507 920 - 363 1,283 404,790 Residential real estate 151,872 1,811 266 1,169 3,246 155,118 Construction real estate 72,178 334 - 38 372 72,550 Installment and other 9,860 47 - 91 138 9,998 Total loans $ 700,929 $ 3,139 $ 266 $ 1,661 $ 5,066 $ 705,995 Nonaccrual loan classification, included above $ 4,888 $ 1,895 $ 266 $ 1,661 $ 3,822 $ 8,710 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 September 30, 2018 and December 31, 2017: September 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 $ 603 $ - $ 102 $ - Commercial real estate 3,717 - 8,617 - Residential real estate 4,125 - 4,599 - Construction real estate 165 - 3,911 - Installment and other 100 - 111 - Total $ 8,710 $ - $ 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 September 30, 2018 and December 31, 2017: Pass Special Mention Substandard Doubtful Total September 30, 2018 (In thousands) Commercial $ 58,035 $ 3,779 $ 1,725 $ - $ 63,539 Commercial real estate 384,653 3,592 16,545 - 404,790 Residential real estate 149,033 663 5,422 - 155,118 Construction real estate 71,549 876 125 - 72,550 Installment and other 9,900 - 98 - 9,998 Total $ 673,170 $ 8,910 $ 23,915 $ - $ 705,995 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 September 30, 2018 and December 31, 2017: Pass Special Mention Substandard Doubtful Total September 30, 2018 (In thousands) Current $ 671,996 $ 8,910 $ 20,023 $ - $ 700,929 Past due 30-59 days 1,174 - 1,965 - 3,139 Past due 60-89 days - - 266 - 266 Past due 90 days or more - - 1,661 - 1,661 Total $ 673,170 $ 8,910 $ 23,915 $ - $ 705,995 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 September 30, 2018 and December 31, 2017, nonaccrual loans totaling $7.2 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 September 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): September 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 $ 110 $ 110 $ 184 $ 182 Commercial real estate 6,494 3,517 4,294 4,154 Residential real estate 5,948 5,032 6,585 5,808 Construction real estate 1,889 1,863 7,471 6,049 Installment and other 293 292 349 348 With an allowance recorded: Commercial 13,671 13,669 $ 321 13,361 13,359 $ 211 Commercial real estate 5,870 5,870 851 10,987 10,987 3,735 Residential real estate 5,344 5,343 943 6,774 6,774 943 Construction real estate 1,161 1,161 42 3,244 3,244 231 Installment and other 240 240 34 236 236 32 Total $ 41,020 $ 37,097 $ 2,191 $ 53,485 $ 51,141 $ 5,152 The table above includes $31.6 million of troubled debt restructurings at September 30, 2018 and $38.9 million of troubled debt restructurings at December 31, 2017. The following table presents loans individually evaluated for impairment by class of loans for the three and nine months ended September 30, 2018 and 2017, showing the average recorded investment and the interest income recognized: Three Months Ended Nine Months Ended September 30, 2018 September 30, 2017 September 30, 2018 September 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 $ 112 $ 2 $ 6,834 $ 184 $ 167 $ 4 $ 4,411 $ 543 Commercial real estate 3,241 27 5,133 99 5,231 80 5,084 295 Residential real estate 5,033 32 4,712 54 6,962 94 4,586 162 Construction real estate 3,330 22 7,397 104 6,046 66 7,189 308 Installment and other 296 3 399 5 416 10 353 14 With an allowance recorded: Commercial 13,487 210 7,547 22 17,866 622 10,741 66 Commercial real estate 6,144 64 6,350 69 9,916 189 6,352 205 Residential real estate 5,434 58 7,695 81 8,094 173 8,019 240 Construction real estate 1,255 13 3,302 43 2,987 40 3,755 129 Installment and other 239 2 289 2 319 6 347 7 Total $ 38,571 $ 433 $ 49,658 $ 663 $ 58,004 $ 1,284 $ 50,837 $ 1,969 If nonaccrual loans outstanding had been current in accordance with their original terms, approximately $118 thousand and $197 thousand would have been recorded as loan interest income during the three months ended September 30, 2018 and 2017, respectively, and $222 thousand and $585 thousand during the nine months ended September 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 nine months ended September 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 September 30, 2018: Beginning balance $ 543 $ 6,583 $ 2,151 $ 732 $ 131 $ 304 $ 10,444 Provision (benefit) for loan losses 6 (768 ) (86 ) 15 (30 ) (137 ) (1,000 ) Charge-offs (1 ) - (65 ) - (21 ) - (87 ) Recoveries 25 12 102 4 28 - 171 Net recoveries (charge-offs) 24 12 37 4 7 - 84 Ending balance $ 573 $ 5,827 $ 2,102 $ 751 $ 108 $ 167 $ 9,528 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 Nine Months Ended September 30, 2018: Beginning balance $ 536 $ 8,573 $ 2,843 $ 1,030 $ 315 $ 506 $ 13,803 Provision (benefit) for loan losses 98 (62 ) (799 ) (120 ) (258 ) (339 ) (1,480 ) Charge-offs (134 ) (2,736 ) (184 ) (212 ) (76 ) - (3,342 ) Recoveries 73 52 242 53 127 - 547 Net recoveries (charge-offs) (61 ) (2,684 ) 58 (159 ) 51 - (2,795 ) Ending balance $ 573 $ 5,827 $ 2,102 $ 751 $ 108 $ 167 $ 9,528 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 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, 2018 (In thousands) Allowance for loan losses allocated to: Loans individually evaluated for impairment $ 321 $ 851 $ 943 $ 42 $ 34 $ - $ 2,191 Loans collectively evaluated for impairment 252 4,976 1,159 709 74 167 7,337 Ending balance $ 573 $ 5,827 $ 2,102 $ 751 $ 108 $ 167 $ 9,528 Loans: Individually evaluated for impairment $ 13,779 $ 9,387 $ 10,375 $ 3,024 $ 532 $ - $ 37,097 Collectively evaluated for impairment 49,760 395,403 144,743 69,526 9,466 - 668,898 Total ending loans balance $ 63,539 $ 404,790 $ 155,118 $ 72,550 $ 9,998 $ - $ 705,995 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 nine months ended September 30, 2018 and the three and nine months ended September 30, 2018 and 2017. There were no new TDRs for the three months ended September 30, 2018. Nine Months Ended September 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 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 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 nine months ended September 30, 2018 and 2017. There were no TDRs with a payment default within 12 months following modification for the three months ended September 30, 2018. Nine Months Ended September 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 September 30, 2017 Number of Contracts Pre-Modification Outstanding Recorded Investment Specific Reserves Allocated (Dollars in thousands) Construction real estate 1 $ 61 $ - Total 1 $ 61 $ - Nine Months Ended September 30, 2017 Number of Contracts Pre-Modification Outstanding 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 restructured during the three months ended September 30, 2018 and 2017 required a specific reserve of $0 and $29 thousand, respectively. TDRs restructured during the nine months ended September 30, 2018 and 2017 required a specific reserve of $26 thousand and $30 thousand, respectively. TDRs resulted in charge-offs of during the three months ended September 30, 2018 and 2017, respectively. For the nine months ended September 30, 2018 and 2017, TDRs resulted in charge-offs of $2.8 million and $458 thousand, respectively. The TDRs that subsequently defaulted required $0 and $10 thousand provision to the allowance for loan losses for the three and nine months ended September 30, 2018 and 2017, respectively. The following table presents total TDRs, both in accrual and nonaccrual status: September 30, 2018 December 31, 2017 Number of Contracts Amount Number of Contracts Amount (Dollars in thousands) Accrual 98 $ 28,387 $ 108 $ 33,801 Nonaccrual 16 3,250 19 5,146 Total 114 $ 31,637 $ 127 $ 38,947 Specific reserves on TDRs at September 30, 2018 and December 31, 2017 were $1.9 million and $2.4 million, respectively. As of September 30, 2018, the Bank had a total of $185 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 $23 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 $142.4 thousand and $198.4 thousand as of September 30, 2018 and December 31, 2017, respectively. Total extensions of credit, including companies in which these individuals have management control or beneficial ownership, were $258.4 thousand and $324.4 thousand as of September 30, 2018 and December 31, 2017, respectively. An analysis of the activity related to these loans as of September 30, 2018 and December 31, 2017 is as follows: September 30, 2018 December 31, 2017 (In thousands) Balance, beginning $ 198 $ 348 Additions - 13 Changes in composition - (76 ) Principal payments and other reductions (56 ) (87 ) Balance, ending $ 142 $ 198 |