Loans and Allowances for Loan Losses | Note 4. Loans and Allowance for Loan Losses As of December 31, 2015 and 2014, loans consisted of: December 31, 2015 2014 (In thousands) Commercial $ 92,995 $ 108,309 Commercial real estate 371,599 366,199 Residential real estate 258,606 305,744 Construction real estate 89,341 100,178 Installment and other 28,730 31,768 Total loans 841,271 912,198 Unearned income (1,483 ) (1,651 ) Gross loans 839,788 910,547 Allowance for loan losses (17,392 ) (24,783 ) Net loans $ 822,396 $ 885,764 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 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 December 31, 2015 and 2014, 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 (In thousands) 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 December 31, 2014 Commercial $ 106,847 $ 380 $ 352 $ 730 $ 1,462 $ 108,309 Commercial real estate 356,062 389 - 9,748 10,137 366,199 Residential real estate 299,250 737 235 5,522 6,494 305,744 Construction real estate 87,989 5,882 - 6,307 12,189 100,178 Installment and other 31,628 132 4 4 140 31,768 Total loans $ 881,776 $ 7,520 $ 591 $ 22,311 $ 30,422 $ 912,198 Nonaccrual loan classification $ 24,124 $ 1,195 $ 587 $ 21,950 $ 23,732 $ 47,856 The following table presents the recorded investment in nonaccrual loans and loans past due ninety days or more and still accruing by class of loans as of December 31, 2015 and 2014: December 31, 2015 2014 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 $ 2,268 $ - $ 3,697 $ - Commercial real estate 10,737 - 22,296 - Residential real estate 7,821 - 11,046 361 Construction real estate 9,353 - 10,565 - Installment and other 146 - 252 - Total $ 30,325 $ - $ 47,856 $ 361 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 and the contractual aging as of December 31, 2015 and 2014: Pass Special Mention Substandard Doubtful Total (In thousands) 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 December 31, 2014 Commercial $ 66,050 $ 14,889 $ 27,128 $ 242 $ 108,309 Commercial real estate 282,279 22,222 61,698 - 366,199 Residential real estate 287,616 2,403 15,725 - 305,744 Construction real estate 71,678 12,683 15,817 - 100,178 Installment and other 30,762 116 890 - 31,768 Total $ 738,385 $ 52,313 $ 121,258 $ 242 $ 912,198 The following table shows all loans, including nonaccrual loans, by classification and aging, as of December 31, 2015 and 2014: Pass Special Mention Substandard Doubtful Total (In thousands) 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 December 31, 2014 Current $ 731,941 $ 52,313 $ 97,425 $ 97 $ 881,776 Past due 30-59 days 6,079 - 1,441 - 7,520 Past due 60-89 days 4 - 587 - 591 Past due 90 days or more 361 - 21,805 145 22,311 Total $ 738,385 $ 52,313 $ 121,258 $ 242 $ 912,198 As of December 31, 2015, nonaccrual loans totaling $27.5 million were classified as Substandard. As of December 31, 2014, nonaccrual loans totaling $47.6 million were classified as Substandard and $242 thousand were classified as Doubtful. The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2015 and 2014, 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): December 31, 2015 2014 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 $ 13,611 $ 10,137 $ - $ 16,401 $ 11,936 $ - Commercial real estate 15,872 14,198 - 25,737 22,554 - Residential real estate 9,473 7,450 - 10,132 8,707 - Construction real estate 9,816 8,137 - 12,219 9,685 - Installment and other 433 416 - 791 752 - With an allowance recorded: Commercial 14,958 14,956 399 15,924 15,918 877 Commercial real estate 11,050 11,050 1,295 18,298 17,081 2,111 Residential real estate 10,759 10,755 2,132 14,571 14,500 3,450 Construction real estate 3,688 3,688 252 6,953 6,953 1,416 Installment and other 636 636 138 743 743 107 Total $ 90,296 $ 81,423 $ 4,216 $ 121,769 $ 108,829 $ 7,961 The following table presents loans individually evaluated for impairment by class of loans for the years ended December 31, 2015, 2014 and 2013, showing the average recorded investment and the interest income recognized: 2015 2014 2013 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 $ 11,037 $ 553 $ 12,571 $ 533 $ 12,978 $ 548 Commercial real estate 18,376 592 29,459 369 32,835 626 Residential real estate 8,079 79 10,585 248 13,305 99 Construction real estate 8,911 196 10,685 162 14,610 126 Installment and other 584 65 947 81 1,150 32 With an allowance recorded: Commercial 15,437 804 15,921 832 18,293 854 Commercial real estate 14,066 468 19,791 591 24,031 881 Residential real estate 12,628 349 13,821 379 11,918 430 Construction real estate 5,321 157 6,296 210 5,692 261 Installment and other 690 20 835 27 953 35 Total $ 95,129 $ 3,283 $ 120,911 $ 3,432 $ 135,765 $ 3,892 If nonaccrual loans outstanding had been current in accordance with their original terms, approximately $1.7 million, $3.0 million and $2.6 million would have been recorded as loan interest income during the years ended December 31, 2015, 2014 and 2013, 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 years ended December 31, 2015, 2014 and 2013, 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) Year Ended December 31, 2015 Beginning balance $ 4,031 $ 8,339 $ 7,939 $ 3,323 $ 788 $ 363 $ 24,783 Provision (benefit) for loan losses (1,146 ) 2,635 (80 ) (1,081 ) 501 (329 ) 500 Charge-offs (1,919 ) (4,731 ) (2,297 ) (1,570 ) (642 ) - (11,159 ) Recoveries 1,476 508 520 471 293 - 3,268 Net charge-offs (443 ) (4,223 ) (1,777 ) (1,099 ) (349 ) - (7,891 ) Ending balance $ 2,442 $ 6,751 $ 6,082 $ 1,143 $ 940 $ 34 $ 17,392 Year Ended December 31, 2014 Beginning balance $ 3,958 $ 10,699 $ 8,162 $ 4,658 $ 1,199 $ (318 ) $ 28,358 Provision (benefit) for loan losses 1,516 (334 ) 1,571 (1,504 ) 70 681 2,000 Charge-offs (2,261 ) (2,772 ) (2,463 ) (285 ) (631 ) - (8,412 ) Recoveries 818 746 669 454 150 - 2,837 Net charge-offs (1,443 ) (2,026 ) (1,794 ) 169 (481 ) - (5,575 ) Ending balance $ 4,031 $ 8,339 $ 7,939 $ 3,323 $ 788 $ 363 $ 24,783 Year Ended December 31, 2013 Beginning balance $ 7,085 $ 12,587 $ 9,037 $ 5,575 $ 1,643 $ (294 ) $ 35,633 Provision (benefit) for loan losses (1,861 ) 1,118 1,136 (741 ) 372 (24 ) - Charge-offs (2,028 ) (3,296 ) (2,447 ) (471 ) (929 ) - (9,171 ) Recoveries 762 290 436 295 113 - 1,896 Net charge-offs (1,266 ) (3,006 ) (2,011 ) (176 ) (816 ) - (7,275 ) Ending balance $ 3,958 $ 10,699 $ 8,162 $ 4,658 $ 1,199 $ (318 ) $ 28,358 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 December 31, 2015 (In thousands) 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 December 31, 2014 Allowance for loan losses allocated to: Loans individually evaluated for impairment $ 877 $ 2,111 $ 3,450 $ 1,416 $ 107 $ - $ 7,961 Loans collectively evaluated for impairment 3,154 6,228 4,489 1,907 681 363 16,822 Ending balance $ 4,031 $ 8,339 $ 7,939 $ 3,323 $ 788 $ 363 $ 24,783 Loans: Individually evaluated for impairment $ 27,854 $ 39,635 $ 23,207 $ 16,638 $ 1,495 $ - $ 108,829 Collectively evaluated for impairment 80,455 326,564 282,537 83,540 30,273 - 803,369 Total ending loans balance $ 108,309 $ 366,199 $ 305,744 $ 100,178 $ 31,768 $ - $ 912,198 In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. The evaluation is performed under the Company’s internal underwriting policy. 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 that the Bank would not otherwise consider. The following loans were restructured during the years ended December 31, 2015, 2014, and 2013: Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Specific reserves allocated (Dollars in thousands) December 31, 2015 Residential real estate 1 $ 82 $ 82 $ - Construction real estate 2 831 831 11 Installment and other 4 82 82 3 Total 7 $ 995 $ 995 $ 14 December 31, 2014 Commercial 3 $ 221 $ 90 $ 1 Commercial real estate 2 1,408 1,408 56 Residential real estate 6 498 493 21 Construction real estate 2 410 410 1 Installment and other 4 76 49 9 Total 17 $ 2,613 $ 2,450 $ 88 December 31, 2013 Commercial 12 $ 1,654 $ 1,587 $ 11 Commercial real estate 10 15,531 15,006 265 Residential real estate 17 3,062 2,879 373 Construction real estate 3 524 514 10 Installment and other 12 216 216 10 Total 54 $ 20,987 $ 20,202 $ 669 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 years ended December 31, 2015, 2014, and 2013: Number of Contracts Recorded Investment Specific reserves allocated (Dollars in thousands) TDRs that subsequently defaulted: 2015 Construction real estate 2 $ 831 $ 11 Total 2 $ 831 $ 11 TDRs that subsequently defaulted: 2014 Residential real estate 1 $ 168 $ - Total 1 $ 168 $ - TDRs that subsequently defaulted: 2013 Commercial 4 $ 236 $ 4 Commercial real estate 7 10,319 - Residential real estate 7 1,421 28 Construction real estate 1 227 - Installment and other 1 22 4 Total 20 $ 12,225 $ 36 The following table presents total TDRs, both in accrual and nonaccrual status, as of December 31, 2015, 2014, and 2013: December 31, 2015 2014 2013 Number of Contracts Amount Number of Contracts Amount Number of Contracts Amount (Dollars in thousands) Accrual 165 $ 53,862 188 $ 60,973 214 $ 80,873 Nonaccrual 32 10,641 61 27,394 78 30,957 Total TDRs 197 $ 64,503 249 $ 88,367 292 $ 111,830 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 required a specific reserve of $14 thousand, $88 thousand, and $669 thousand which was included in the allowance for loan losses at the years ended December 31, 2015, 2014, and 2013, respectively. TDRs resulted in charge-offs of $2.8 million, $2.75 million, and $626 thousand during the years ended December 31, 2015, 2014, and 2013, respectively. The TDRs that subsequently defaulted required a provision of $11 thousand, $0, and $36 thousand to the allowance for loan losses for the years ended December 31, 2015, 2014, and 2013 respectively. Loan principal balances to executive officers and directors of the Company were $1.9 million and $1.3 million as of December 31, 2015 and 2014, respectively. Total credit available, including companies in which these individuals have management control or beneficial ownership, was $2.3 million and $2.2 million as of December 31, 2015 and 2014, respectively. An analysis of the activity related to these loans as of December 31, 2015 and 2014 is as follows: December 31, 2015 2014 (In thousands) Balance, beginning $ 1,322 $ 271 Additions 438 470 Changes in Board composition 800 643 Principal payments and other reductions (627 ) (62 ) Balance, ending $ 1,933 $ 1,322 |