Loans and Allowance for Loan Losses | Note 6. Loans and Allowance for Loan Losses As of March 31, 2016 and December 31, 2015, loans consisted of: March 31, 2016 December 31, 2015 (In thousands) Commercial $ 91,189 $ 92,995 Commercial real estate 371,476 371,599 Residential real estate 249,480 258,606 Construction real estate 88,238 89,341 Installment and other 24,203 28,730 Total loans 824,586 841,271 Unearned income (1,388 ) (1,483 ) Gross loans 823,198 839,788 Allowance for loan losses (17,305 ) (17,392 ) Net loans $ 805,893 $ 822,396 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 class of loans as of March 31, 2016 and December 31, 2015, 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 March 31, 2016 (In thousands) Commercial $ 88,952 $ 372 $ 160 $ 1,705 $ 2,237 $ 91,189 Commercial real estate 362,652 813 1,975 6,036 8,824 371,476 Residential real estate 242,917 924 728 4,911 6,563 249,480 Construction real estate 79,504 932 177 7,625 8,734 88,238 Installment and other 24,097 56 44 6 106 24,203 Total loans $ 798,122 $ 3,097 $ 3,084 $ 20,283 $ 26,464 $ 824,586 Nonaccrual loan classification $ 8,314 $ 1,751 $ 1,390 $ 17,919 $ 21,060 $ 29,374 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 The following table presents the recorded investment in nonaccrual loans and loans past due 90 days or more and still accruing interest by class of loans as of March 31, 2016 and December 31, 2015: March 31, 2016 December 31, 2015 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 $ 1,903 $ - $ 2,268 $ - Commercial real estate 10,727 2,364 10,737 - Residential real estate 8,056 - 7,821 - Construction real estate 8,612 - 9,353 - Installment and other 76 - 146 - Total $ 29,374 $ 2,364 $ 30,325 $ - 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 March 31, 2016 and December 31, 2015: Pass Special Mention Substandard Doubtful Total March 31, 2016 (In thousands) Commercial $ 69,209 $ 2,891 $ 19,089 $ - $ 91,189 Commercial real estate 314,292 13,113 44,071 - 371,476 Residential real estate 237,656 1,485 10,339 - 249,480 Construction real estate 72,465 5,797 9,976 - 88,238 Installment and other 24,005 10 188 - 24,203 Total $ 717,627 $ 23,296 $ 83,663 $ - $ 824,586 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 The following table shows all loans, including nonaccrual loans, by risk category and aging as of March 31, 2016 and December 31, 2015: Pass Special Mention Substandard Doubtful Total March 31, 2016 (In thousands) Current $ 709,364 $ 23,256 $ 65,502 $ - $ 798,122 Past due 30-59 days 119 40 2,938 - 3,097 Past due 60-89 days 2,931 - 153 - 3,084 Past due 90 days or more 5,213 - 15,070 - 20,283 Total $ 717,627 $ 23,296 $ 83,663 $ - $ 824,586 December 31, 2015 (In thousands) 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 As of March 31, 2016 and December 31, 2015, nonaccrual loans totaling $26.5 million were classified as Substandard. The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2016 and December 31, 2015, 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): March 31, 2016 December 31, 2015 Unpaid Principal Balance Recorded Investment Allowance for Loan Losses Allocated Unpaid Principal Balance Recorded Investment Allowance for Loan Losses Allocated (In thousands) (In thousands) With no related allowance recorded: Commercial $ 13,610 $ 9,850 $ 13,611 $ 10,137 Commercial real estate 12,074 11,446 15,872 14,198 Residential real estate 9,722 7,711 9,473 7,450 Construction real estate 9,042 7,335 9,816 8,137 Installment and other 422 335 433 416 With an allowance recorded: Commercial 14,676 14,676 $ 332 14,958 14,956 $ 399 Commercial real estate 9,167 9,162 1,081 11,050 11,050 1,295 Residential real estate 10,286 10,276 2,006 10,759 10,755 2,132 Construction real estate 3,655 3,648 255 3,688 3,688 252 Installment and other 606 606 133 636 636 138 Total $ 83,260 $ 75,045 $ 3,807 $ 90,296 $ 81,423 $ 4,216 The following table presents loans individually evaluated for impairment by class of loans for the three months ended March 31, 2016 and 2015, showing the average recorded investment and the interest income recognized: Three Months Ended March 31, 2016 March 31, 2015 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized (In thousands) With no related allowance recorded: Commercial $ 8,091 $ 106 $ 11,815 $ 162 Commercial real estate 1,317 16 21,894 440 Residential real estate 846 9 10,338 122 Construction real estate 2,423 29 10,828 118 Installment and other 335 4 727 9 With an allowance recorded: Commercial 16,681 257 15,269 206 Commercial real estate 19,364 285 16,686 185 Residential real estate 17,248 209 11,931 114 Construction real estate 8,696 110 4,451 57 Installment and other 685 5 735 7 Total $ 75,686 $ 1,030 $ 104,674 $ 1,420 If nonaccrual loans outstanding had been current in accordance with their original terms, approximately $502.2 thousand and $707.7 thousand would have been recorded as loan interest income during the three months ended March 31, 2016 and 2015, 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 three months ended March 31, 2016 and 2015, 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 March 31, 2016: Beginning balance $ 2,442 $ 6,751 $ 6,082 $ 1,143 $ 940 $ 34 $ 17,392 Provision (benefit) for loan losses (227 ) (41 ) 359 2 (84 ) (9 ) - Charge-offs (181 ) (4 ) (324 ) (18 ) (170 ) - (697 ) Recoveries 351 14 37 97 111 - 610 Net charge-offs 170 10 (287 ) 79 (59 ) - (87 ) Ending balance $ 2,385 $ 6,720 $ 6,154 $ 1,224 $ 797 $ 25 $ 17,305 Three Months Ended March 31, 2015: Beginning balance $ 4,031 $ 8,339 $ 7,939 $ 3,323 $ 788 $ 363 $ 24,783 Provision (benefit) for loan losses (75 ) 6 199 40 83 (253 ) - Charge-offs (528 ) (176 ) (988 ) (962 ) (110 ) - (2,764 ) Recoveries 211 14 43 23 29 - 320 Net charge-offs (317 ) (162 ) (945 ) (939 ) (81 ) - (2,444 ) Ending balance $ 3,639 $ 8,183 $ 7,193 $ 2,424 $ 790 $ 110 $ 22,339 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 March 31, 2016 (In thousands) Allowance for loan losses allocated to: Loans individually evaluated for impairment $ 332 $ 1,081 $ 2,006 $ 255 $ 133 $ - $ 3,807 Loans collectively evaluated for impairment 2,053 5,639 4,148 969 664 25 13,498 Ending balance $ 2,385 $ 6,720 $ 6,154 $ 1,224 $ 797 $ 25 $ 17,305 Loans: Individually evaluated for impairment $ 24,526 $ 20,608 $ 17,987 $ 10,983 $ 941 $ - $ 75,045 Collectively evaluated for impairment 66,663 350,868 231,493 77,255 23,262 - 749,541 Total ending loans balance $ 91,189 $ 371,476 $ 249,480 $ 88,238 $ 24,203 $ - $ 824,586 December 31, 2015 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 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. There were no loans restructured during the three months ended March 31, 2016 and 2015. 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 three months ended March 31, 2016 and 2015: Three Months Ended March 31, 2016 Number of Contracts Pre- Modification Outstanding Recorded Investment Specific reserves allocated (In thousands) Construction real estate 2 $ 807 $ 10 Total 2 $ 807 $ 10 Three Months Ended March 31, 2015 Number of Contracts Pre- Modification Outstanding Recorded Investment Specific reserves allocated (In thousands) Residential real estate 1 167 - Construction real estate 2 $ 407 $ - Total 3 $ 574 $ - The following table presents total TDRs, both in accrual and nonaccrual status: March 31, 2016 December 31, 2015 Nunmber of contracts Amount Number of contracts Amount (Dollars in thousands) Accrual $ 156 $ 48,521 $ 165 $ 53,862 Nonaccrual 30 10,331 32 10,641 Total $ 186 $ 58,852 $ 197 $ 64,503 As of March 31, 2016, the Bank had a total of $221 thousand in commitments to lend additional funds to debtors who also had restructured loans. Impairment analyses are prepared on TDRs in conjunction with the normal allowance for loan loss process. TDRs did not require any specific reserves for the three months ended March 31, 2016 and 2015, respectively. TDRs resulted in charge-offs of $36.8 thousand and $1.48 million during the three months ended March 31, 2016 and 2015, respectively. The TDRs that subsequently defaulted required a provision of $10 thousand and $0 to the allowance for loan losses for the three months ended March 31, 2016 and 2015, respectively. Loans to Executive Officers and Directors: Loan principal balances to executive officers and directors of the Company were $1.9 million and $1.9 million as of March 31, 2016 and December 31, 2015, respectively. Total credit available, including companies in which these individuals have management control or beneficial ownership, was $2.3 million and $2.3 million as of March 31, 2016 and December 31, 2015, respectively. An analysis of the activity related to these loans as of March 31, 2016 and December 31, 2015 is as follows: March 31, 2016 December 31, 2015 (In thousands) Balance, beginning $ 1,933 $ 1,322 Additions - 438 Changes in Board composition - 800 Principal payments and other reductions (40 ) (627 ) Balance, ending $ 1,893 $ 1,933 |