XML 44 R11.htm IDEA: XBRL DOCUMENT v2.4.0.8
5. Loans, Allowance for Loan Losses and Credit Quality
 9 Months Ended
Sep. 30, 2014
Accounts, Notes, Loans and Financing Receivable, Gross, Allowance, and Net [Abstract]  
Note 5. Loans, Allowance for Loan Losses and Credit Quality

Note 5.  Loans, Allowance for Loan Losses and Credit Quality

 

The composition of net loans as of the balance sheet dates was as follows:

 

    September 30,     December 31,     September 30,  
    2014     2013     2013  
                   
Commercial & industrial   $ 63,959,230     $ 55,619,285     $ 55,500,735  
Commercial real estate     162,275,498       156,935,803       147,280,787  
Residential real estate - 1st lien     165,662,426       172,847,074       174,508,009  
Residential real estate - Jr lien     44,147,861       45,687,405       45,279,400  
Consumer     7,943,615       8,819,359       9,412,856  
      443,988,630       439,908,926       431,981,787  
Deduct (add):                        
Allowance for loan losses     4,885,791       4,854,915       4,799,431  
Deferred net loan costs     (288,898 )     (300,429 )     (281,747 )
      4,596,893       4,554,486       4,517,684  
     Net Loans   $ 439,391,737     $ 435,354,440     $ 427,464,103  

 

The following is an age analysis of past due loans (including non-accrual), by portfolio segment:

 

                                        90 Days or  
          90 Days     Total                 Non-Accrual     More  
September 30, 2014   30-89 Days     or More     Past Due     Current     Total Loans     Loans     and Accruing  
                                           
Commercial & industrial   $ 450,811     $ 612,822     $ 1,063,633     $ 62,895,597     $ 63,959,230     $ 1,068,390     $ 0  
Commercial real estate     1,137,779       48,520       1,186,299       161,089,199       162,275,498       1,754,002       5,313  
Residential real estate - 1st lien     2,230,067       1,239,799       3,469,866       162,192,560       165,662,426       1,740,509       554,327  
Residential real estate - Jr lien     256,212       76,089       332,301       43,815,560       44,147,861       410,187       57,385  
Consumer     55,034       8,859       63,893       7,879,722       7,943,615       0       8,859  
     Total   $ 4,129,903     $ 1,986,089     $ 6,115,992     $ 437,872,638     $ 443,988,630     $ 4,973,088     $ 625,884  

 

                                        90 Days or  
          90 Days     Total                 Non-Accrual     More  
December 31, 2013   30-89 Days     or More     Past Due     Current     Total Loans     Loans     and Accruing  
                                           
Commercial & industrial   $ 1,060,971     $ 310,669     $ 1,371,640     $ 54,247,645     $ 55,619,285     $ 527,105     $ 21,902  
Commercial real estate     713,160       215,507       928,667       156,007,136       156,935,803       1,403,541       5,313  
Residential real estate - 1st lien     5,184,457       1,655,950       6,840,407       166,006,667       172,847,074       2,203,106       817,109  
Residential real estate - Jr lien     533,134       289,169       822,303       44,865,102       45,687,405       593,125       56,040  
Consumer     136,922       7,784       144,706       8,674,653       8,819,359       0       7,784  
     Total   $ 7,628,644     $ 2,479,079     $ 10,107,723     $ 429,801,203     $ 439,908,926     $ 4,726,877     $ 908,148  

 

                                        90 Days or  
          90 Days     Total                 Non-Accrual     More  
September 30, 2013   30-89 Days     or More     Past Due     Current     Total Loans     Loans     and Accruing  
                                           
Commercial & industrial   $ 75,101     $ 269,744     $ 344,845     $ 55,155,890     $ 55,500,735     $ 493,272     $ 0  
Commercial real estate     982,378       546,252       1,528,630       145,752,157       147,280,787       1,740,350       50,965  
Residential real estate - 1st lien     1,270,029       1,071,400       2,341,429       172,166,580       174,508,009       1,999,274       344,193  
Residential real estate - Jr lien     539,828       223,200       763,028       44,516,372       45,279,400       669,292       62,359  
Consumer     95,907       8,755       104,662       9,308,194       9,412,856       0       8,755  
     Total   $ 2,963,243     $ 2,119,351     $ 5,082,594     $ 426,899,193     $ 431,981,787     $ 4,902,188     $ 466,272  

 

For all loan segments, loans over 30 days past due are considered delinquent.

 

Allowance for loan losses

 

The allowance for loan losses is established through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is probable. Subsequent recoveries, if any, are credited to the allowance.  No changes in the Company’s policies or methodology pertaining to the allowance for loan losses were made during the first nine months of 2014.

 

Unsecured loans, primarily consumer loans, are charged off when they become uncollectible and no later than 120 days past due.  Unsecured loans to customers who subsequently file bankruptcy are charged off within 30 days of receipt of the notification of filing or by the end of the month in which the loans become 120 days past due, whichever occurs first.  For secured loans, both residential and commercial, the potential loss on impaired loans is carried as a loan loss reserve specific allocation; the loss portion is charged off when collection of the full loan appears unlikely.  The unsecured portion of a real estate loan is that portion of the loan exceeding the "fair value" of the collateral less the estimated cost to sell. Value of the collateral is determined in accordance with the Company’s appraisal policy.  The unsecured portion of an impaired real estate secured loan is charged off by the end of the month in which the loan becomes 180 days past due.

 

As described below, the allowance consists of general, specific and unallocated components.  However, the entire allowance is available to absorb losses in the loan portfolio, regardless of specific, general and unallocated components considered in determining the amount of the allowance.

 

General component

 

The general component of the allowance for loan losses is based on historical loss experience, adjusted for qualitative factors and stratified by the following loan segments: commercial and industrial, commercial real estate, residential real estate first (“1st”) lien, residential real estate junior (“Jr”) lien and consumer loans. The Company does not disaggregate its portfolio segments further into classes.  Loss ratios are calculated by loan segment for one year, two year and five year look back periods.  The highest loss ratio among these look-back periods is then applied against the respective segment.  Management uses an average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels of and trends in delinquencies and non-performing loans, levels of and trends in loan risk groups, trends in volumes and terms of loans, effects of any changes in loan related policies, experience, ability and the depth of management, documentation and credit data exception levels, national and local economic trends, external factors such as competition and regulation and lastly, concentrations of credit risk in a variety of areas, including portfolio product mix, the level of loans to individual borrowers and their related interests, loans to industry segments, and the geographic distribution of commercial real estate loans. This evaluation is inherently subjective as it requires estimates that are susceptible to revision as more information becomes available.

 

The qualitative factors are determined based on the various risk characteristics of each loan segment. The Company has policies, procedures and internal controls that management believes are commensurate with the risk profile of each of these segments.  Major risk characteristics relevant to each portfolio segment are as follows:

 

Commercial & Industrial – Loans in this segment include commercial and industrial loans and to a lesser extent loans to finance agricultural production. Commercial loans are made to businesses and are generally secured by assets of the business, including trade assets and equipment. While not the primary collateral, in many cases these loans may also be secured by the real estate of the business. Repayment is expected from the cash flows of the business. A weakened economy, soft consumer spending, unfavorable foreign trade conditions and the rising cost of labor or raw materials are examples of issues that can impact the credit quality in this segment.

 

Commercial Real Estate – Loans in this segment are principally made to businesses and are generally secured by either owner-occupied, or non-owner occupied commercial real estate. A relatively small portion of this segment includes farm loans secured by farm land and buildings.  As with commercial and industrial loans, repayment of owner-occupied commercial real estate loans is expected from the cash flows of the business and the segment would be impacted by the same risk factors as commercial and industrial loans. The non-owner occupied commercial real estate portion includes both residential and commercial construction loans, vacant land and real estate development loans, multi-family dwelling loans and commercial rental property loans. Repayment of construction loans is expected from permanent financing takeout; the Company generally requires a commitment or eligibility for the take-out financing prior to construction loan origination. Real estate development loans are generally repaid from the sale of the subject real property as the project progresses. Construction and development lending entail additional risks, including the project exceeding budget, not being constructed according to plans, not receiving permits, or the pre-leasing or occupancy rate not meeting expectations. Repayment of multi-family loans and commercial rental property loans is expected from the cash flow generated by rental payments received from the individuals or businesses occupying the real estate. Commercial real estate loans are impacted by factors such as competitive market forces, vacancy rates, cap rates, net operating incomes, lease renewals and overall economic demand. In addition, loans in the recreational and tourism sector can be affected by weather conditions, such as unseasonably low winter snowfalls. Commercial real estate lending also carries a higher degree of environmental risk than other real estate lending.

 

Residential Real Estate - 1st Lien – All loans in this segment are collateralized by first mortgages on 1 – 4 family owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, has an impact on the credit quality of this segment.

 

Residential Real Estate – Jr Lien – All loans in this segment are collateralized by junior lien mortgages on 1 – 4 family residential real estate and repayment is primarily dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, has an impact on the credit quality of this segment.

 

Consumer – Loans in this segment are made to individuals for consumer and household purposes.  This segment includes both loans secured by automobiles and other consumer goods, as well as loans that are unsecured.  This segment also includes overdrafts, which are extensions of credit made to both individuals and businesses to cover temporary shortages in their deposit accounts and are generally unsecured.  The Company maintains policies restricting the size and term of these extensions of credit.  The overall health of the economy, including unemployment rates, has an impact on the credit quality of this segment.

 

Specific component

 

The specific component of the allowance for loan losses relates to loans that are impaired.  Impaired loans are loan(s) to a borrower that in the aggregate are greater than $100,000 and that are in non-accrual status or are troubled debt restructurings (“TDR”) regardless of amount.  A specific allowance is established for an impaired loan when its estimated impaired basis is less than the carrying value of the loan.  For all loan segments, except consumer loans, a loan is considered impaired when, based on current information and events, in management’s estimation it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value and probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant or temporary payment delays and payment shortfalls generally are not classified as impaired. Management evaluates the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length and frequency of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis, by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

 

Impaired loans also include troubled loans that are restructured. A TDR occurs when the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that would otherwise not be granted. TDRs may include the transfer of assets to the Company in partial satisfaction of a troubled loan, a modification of a loan’s terms, or a combination of the two.

 

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer loans for impairment evaluation, unless such loans are subject to a restructuring agreement.

 

Unallocated component

 

An unallocated component of the allowance for loan losses is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component reflects management’s estimate of the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

 

The following summarizes changes in the allowance for loan losses and select loan information, by portfolio segment:

 

Three Months Ended September 30, 2014  
                Residential     Residential                    
    Commercial     Commercial     Real Estate     Real Estate                    
    & Industrial     Real Estate     1st Lien     Jr Lien     Consumer     Unallocated     Total  
Allowance for loan losses  
Beginning balance   $ 687,416     $ 2,155,738     $ 1,337,011     $ 294,614     $ 84,115     $ 317,922     $ 4,876,816  
  Charge-offs     (27,881 )     (24,100 )     (28,382 )     (33,875 )     (24,255 )     0       (138,493 )
  Recoveries     3,028       0       1,725       60       7,655       0       12,468  
  Provision (credit)     11,893       118,614       (22,894 )     23,329       23,252       (19,194 )     135,000  
Ending balance   $ 674,456     $ 2,250,252     $ 1,287,460     $ 284,128     $ 90,767     $ 298,728     $ 4,885,791  

 

Nine Months Ended September 30, 2014  
                Residential     Residential                    
    Commercial     Commercial     Real Estate     Real Estate                    
    & Industrial     Real Estate     1st Lien     Jr Lien     Consumer     Unallocated     Total  
Allowance for loan losses  
Beginning balance   $ 516,382     $ 2,143,398     $ 1,452,184     $ 366,471     $ 105,279     $ 271,201     $ 4,854,915  
  Charge-offs     (115,095 )     (154,919 )     (28,382 )     (33,875 )     (90,024 )     0       (422,295 )
  Recoveries     5,265       0       12,823       180       29,903       0       48,171  
  Provision (credit)     267,904       261,773       (149,165 )     (48,648 )     45,609       27,527       405,000  
Ending balance   $ 674,456     $ 2,250,252     $ 1,287,460     $ 284,128     $ 90,767     $ 298,728     $ 4,885,791  
                                                         
Allowance for loan losses  
Evaluated for impairment                                                        
  Individually   $ 21,200     $ 62,000     $ 45,400     $ 0     $ 0     $ 0     $ 128,600  
  Collectively     653,256       2,188,252       1,242,060       284,128       90,767       298,728       4,757,191  
     Total   $ 674,456     $ 2,250,252     $ 1,287,460     $ 284,128     $ 90,767     $ 298,728     $ 4,885,791  
   
Loans evaluated for impairment  
  Individually   $ 983,044     $ 1,728,772     $ 947,329     $ 334,926     $ 0             $ 3,994,071  
  Collectively     62,976,186       160,546,726       164,715,097       43,812,935       7,943,615               439,994,559  
     Total   $ 63,959,230     $ 162,275,498     $ 165,662,426     $ 44,147,861     $ 7,943,615             $ 443,988,630  

 

Twelve Months Ended December 31, 2013  
                Residential     Residential                    
    Commercial     Commercial     Real Estate     Real Estate                    
    & Industrial     Real Estate     1st Lien     Jr Lien     Consumer     Unallocated     Total  
Allowance for loan losses  
Beginning balance   $ 428,381     $ 1,536,440     $ 1,563,576     $ 332,556     $ 138,699     $ 312,428     $ 4,312,080  
  Charge-offs     (83,344 )     (124,849 )     (56,430 )     (56,797 )     (67,009 )     0       (388,429 )
  Recoveries     2,953       185,791       15,819       21,277       35,424       0       261,264  
  Provision (credit)     168,392       546,016       (70,781 )     69,435       (1,835 )     (41,227 )     670,000  
Ending balance   $ 516,382     $ 2,143,398     $ 1,452,184     $ 366,471     $ 105,279     $ 271,201     $ 4,854,915  
                                                         
Allowance for loan losses  
Evaluated for impairment                                                        
  Individually   $ 27,500     $ 147,700     $ 99,700     $ 76,500     $ 0     $ 0     $ 351,400  
  Collectively     488,882       1,995,698       1,352,484       289,971       105,279       271,201       4,503,515  
     Total   $ 516,382     $ 2,143,398     $ 1,452,184     $ 366,471     $ 105,279     $ 271,201     $ 4,854,915  
   
Loans evaluated for impairment  
  Individually   $ 373,696     $ 1,386,477     $ 1,788,793     $ 559,250     $ 0             $ 4,108,216  
  Collectively     55,245,589       155,549,326       171,058,281       45,128,155       8,819,359               435,800,710  
     Total   $ 55,619,285     $ 156,935,803     $ 172,847,074     $ 45,687,405     $ 8,819,359             $ 439,908,926  

 

Three Months Ended September 30, 2013                                      
                Residential     Residential                    
    Commercial     Commercial     Real Estate     Real Estate                    
    & Industrial     Real Estate     1st Lien     Jr Lien     Consumer     Unallocated     Total  
Allowance for loan losses  
   Beginning balance   $ 515,244     $ 1,698,040     $ 1,527,962     $ 414,161     $ 116,248     $ 250,524     $ 4,522,179  
      Charge-offs     (42,327 )     (16,913 )     (3,957 )     0       (10,647 )     0       (73,844 )
      Recoveries     1,126       185,791       3,128       21,110       2,441       0       213,596  
      Provision (credit)     4,891       72,698       (14,415 )     81,589       22,894       (30,157 )     137,500  
   Ending balance   $ 478,934     $ 1,939,616     $ 1,512,718     $ 516,860     $ 130,936     $ 220,367     $ 4,799,431  

 

Nine Months Ended September 30, 2013  
                Residential     Residential                    
    Commercial     Commercial     Real Estate     Real Estate                    
    & Industrial     Real Estate     1st Lien     Jr Lien     Consumer     Unallocated     Total  
Allowance for loan losses  
   Beginning balance   $ 428,381     $ 1,536,440     $ 1,563,576     $ 332,556     $ 138,699     $ 312,428     $ 4,312,080  
      Charge-offs     (61,614 )     (124,849 )     (7,009 )     0       (36,655 )     0       (230,127 )
      Recoveries     2,117       185,791       11,764       21,230       32,826       0       253,728  
      Provision (credit)     110,050       342,234       (55,613 )     163,074       (3,934 )     (92,061 )     463,750  
   Ending balance   $ 478,934     $ 1,939,616     $ 1,512,718     $ 516,860     $ 130,936     $ 220,367     $ 4,799,431  
                                                         
Allowance for loan losses  
Evaluated for impairment                                                        
   Individually   $ 0     $ 115,700     $ 110,500     $ 185,700     $ 0     $ 0     $ 411,900  
   Collectively     478,934       1,823,916       1,402,218       331,160       130,936       220,367       4,387,531  
          Total   $ 478,934     $ 1,939,616     $ 1,512,718     $ 516,860     $ 130,936     $ 220,367     $ 4,799,431  
   
Loans evaluated for impairment  
   Individually   $ 319,010     $ 1,716,870     $ 1,734,139     $ 669,292     $ 0             $ 4,439,311  
   Collectively     55,181,725       145,563,917       172,773,870       44,610,108       9,412,856               427,542,476  
          Total   $ 55,500,735     $ 147,280,787     $ 174,508,009     $ 45,279,400     $ 9,412,856             $ 431,981,787  

 

Impaired loans, by portfolio segment, were as follows:

 

    As of September 30, 2014              
          Unpaid           Average     Average  
    Recorded     Principal     Related     Recorded     Recorded  
    Investment     Balance     Allowance     Investment(1)     Investment(2)  
With no related allowance recorded  
   Commercial & industrial   $ 726,688     $ 772,605     $ 0     $ 772,852     $ 536,388  
   Commercial real estate     1,305,203       1,414,604       0       1,321,387       1,186,767  
   Residential real estate - 1st lien     812,609       903,309       0       822,309       1,062,894  
   Residential real estate - Jr lien     245,666       391,644       0       257,789       193,995  
                                         
With an allowance recorded                                        
   Commercial & industrial     256,356       294,950       21,200       335,613       198,362  
   Commercial real estate     423,569       439,630       62,000       322,093       299,003  
   Residential real estate - 1st lien     134,720       163,115       45,400       338,782       339,732  
   Residential real estate - Jr lien     89,260       0       0       95,062       209,531  
                                         
Total                                        
   Commercial & industrial   $ 983,044     $ 1,067,555     $ 21,200     $ 1,108,465     $ 734,750  
   Commercial real estate     1,728,772       1,854,234       62,000       1,643,480       1,485,770  
   Residential real estate - 1st lien     947,329       1,066,424       45,400       1,161,091       1,402,626  
   Residential real estate - Jr lien     334,926       391,644       0       352,851       403,526  
                                         
     Total   $ 3,994,071     $ 4,379,857     $ 128,600     $ 4,265,887     $ 4,026,672  

 

(1) For the Three Months Ended September 30, 2014

(2) For the Nine Months Ended September 30, 2014

    As of December 31, 2013     2013  
          Unpaid           Average  
    Recorded     Principal     Related     Recorded  
    Investment     Balance     Allowance     Investment  
With no related allowance recorded                        
   Commercial & industrial   $ 314,510     $ 363,618     $ 0     $ 339,519  
   Commercial real estate     944,845       1,021,143       0       1,325,504  
   Residential real estate - 1st lien     1,354,432       1,654,023       0       1,088,631  
   Residential real estate - Jr lien     164,137       228,134       0       64,606  
                                 
With an allowance recorded                                
   Commercial & industrial     59,186       59,186       27,500       11,837  
   Commercial real estate     441,632       446,963       147,700       272,174  
   Residential real estate - 1st lien     434,361       474,496       99,700       515,685  
   Residential real estate - Jr lien     395,113       429,167       76,500       380,855  
                                 
Total                                
   Commercial & industrial   $ 373,696     $ 422,804     $ 27,500     $ 351,356  
   Commercial real estate     1,386,477       1,468,106       147,700       1,597,678  
   Residential real estate - 1st lien     1,788,793       2,128,519       99,700       1,604,316  
   Residential real estate - Jr lien     559,250       657,301       76,500       445,461  
                                 
     Total   $ 4,108,216     $ 4,676,730     $ 351,400     $ 3,998,811  

 

 

   As of September 30, 2013              
          Unpaid           Average     Average  
    Recorded     Principal     Related     Recorded     Recorded  
    Investment     Balance     Allowance     Investment (1)     Investment (2)  
                               
With no related allowance recorded                              
   Commercial & industrial   $ 319,010     $ 366,022     $ 0     $ 312,218     $ 345,772  
   Commercial real estate     1,199,398       1,269,979       0       1,085,322       1,420,668  
   Residential real estate - 1st lien     1,156,159       1,390,485       0       1,026,675       1,022,181  
   Residential real estate - Jr lien     102,913       110,997       0       63,752       39,723  
                                         
With an allowance recorded                                        
   Commercial & industrial     0       0       0       0       0  
   Commercial real estate     517,472       517,472       115,700       307,194       229,809  
   Residential real estate - 1st lien     577,980       657,154       110,500       523,738       536,016  
   Residential real estate - Jr lien     566,379       595,494       185,700       445,302       377,291  
                                         
Total                                        
   Commercial & industrial   $ 319,010     $ 366,022     $ 0     $ 312,218     $ 345,772  
   Commercial real estate     1,716,870       1,787,451       115,700       1,392,516       1,650,477  
   Residential real estate - 1st lien     1,734,139       2,047,639       110,500       1,550,413       1,558,197  
   Residential real estate - Jr lien     669,292       706,491       185,700       509,054       417,014  
                                         
          Total   $ 4,439,311     $ 4,907,603     $ 411,900     $ 3,764,201     $ 3,971,460  

 

(1) For the Three Months Ended September 30, 2013

(2) For the Nine Months Ended September 30, 2013

 

Interest income recognized on impaired loans was immaterial for all periods presented.

 

For all loan segments, the accrual of interest is discontinued when a loan is specifically determined to be impaired or when the loan is delinquent 90 days and management believes, after considering collection efforts and other factors, that the borrower's financial condition is such that collection of interest is considered by management to be doubtful.  Any unpaid interest previously accrued on those loans is reversed from income.  Interest income is generally not recognized on specific impaired loans unless the likelihood of further loss is considered by management to be remote.  Interest payments received on impaired loans are generally applied as a reduction of the loan principal balance.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are considered by management to be reasonably assured.

 

As of the balance sheet dates, the Company was not contractually committed to lend additional funds to debtors with impaired, non-accrual or restructured loans.

 

Credit Quality Grouping

 

In developing the allowance for loan losses, management uses credit quality grouping to help evaluate trends in credit quality. The Company groups credit risk into Groups A, B and C. The manner the Company utilizes to assign risk grouping is driven by loan purpose. Commercial purpose loans are individually risk graded while the retail portion of the portfolio is generally grouped by delinquency pool.

 

Group A loans - Acceptable Risk – are loans that are expected to perform as agreed under their respective terms.  Such loans carry a normal level of risk that does not require management attention beyond that warranted by the loan or loan relationship characteristics, such as loan size or relationship size. Group A loans include commercial purpose loans that are individually risk rated and retail loans that are rated by pool. Group A retail loans include both performing consumer and residential real estate loans. Residential real estate loans are loans to individuals secured by 1-4 family homes, including first mortgages, home equity and home improvement loans. Loan balances fully secured by deposit accounts or that are fully guaranteed by the Federal Government are considered acceptable risk.

 

Group B loans – Management Involved - are loans that require greater attention than the acceptable loans in Group A. Characteristics of such loans may include, but are not limited to, borrowers that are experiencing negative operating trends such as reduced sales or margins, borrowers that have exposure to adverse market conditions such as increased competition or regulatory burden, or borrowers that have had unexpected or adverse changes in management. These loans have a greater likelihood of migrating to an unacceptable risk level if these characteristics are left unchecked. Group B is limited to commercial purpose loans that are individually risk rated.

 

Group C loans – Unacceptable Risk – are loans that have distinct shortcomings that require a greater degree of management attention.  Examples of these shortcomings include a borrower's inadequate capacity to service debt, poor operating performance, or insolvency.  These loans are more likely to result in repayment through collateral liquidation. Group C loans range from those that are likely to sustain some loss if the shortcomings are not corrected, to those for which loss is imminent and non-accrual treatment is warranted. Group C loans include individually rated commercial purpose loans, and retail loans adversely rated in accordance with the Federal Financial Institutions Examination Council’s Uniform Retail Credit Classification Policy. Group C retail loans include 1-4 family residential real estate loans and home equity loans past due 90 days or more with loan-to-value ratios greater than 60%, home equity loans 90 days or more past due where the bank does not hold first mortgage, irrespective of loan-to-value, loans in bankruptcy where repayment is likely but not yet established, and lastly consumer loans that are 90 days or more past due.

 

Commercial purpose loan ratings are assigned by the commercial account officer; for larger and more complex commercial loans, the credit rating is a collaborative assignment by the lender and the credit analyst. The credit risk rating is based on the borrower's expected performance, i.e., the likelihood that the borrower will be able to service its obligations in accordance with the loan terms. Credit risk ratings are meant to measure risk versus simply record history.  Assessment of expected future payment performance requires consideration of numerous factors.  While past performance is part of the overall evaluation, expected performance is based on an analysis of the borrower's financial strength, and historical and projected factors such as size and financing alternatives, capacity and cash flow, balance sheet and income statement trends, the quality and timeliness of financial reporting, and the quality of the borrower’s management.  Other factors influencing the credit risk rating to a lesser degree include collateral coverage and control, guarantor strength and commitment, documentation, structure and covenants and industry conditions.  There are uncertainties inherent in this process.

 

Credit risk ratings are dynamic and require updating whenever relevant information is received.  The risk ratings of larger or more complex loans, and Group B and C rated loans, are assessed at the time of their respective annual reviews, during quarterly updates, in action plans or at any other time that relevant information warrants update. Lenders are required to make immediate disclosure to the Chief Credit Officer of any known increase in loan risk, even if considered temporary in nature.

 

The risk ratings within the loan portfolio, by segment, as of the balance sheet dates were as follows:

 

As of September 30, 2014  
                Residential     Residential              
    Commercial     Commercial     Real Estate     Real Estate              
    & Industrial     Real Estate     1st Lien     Jr Lien     Consumer     Total  
                                     
Group A   $ 60,077,761     $ 153,398,713     $ 162,739,339     $ 43,546,848     $ 7,934,756     $ 427,697,417  
Group B     2,717,261       3,447,445       205,415       163,910       0       6,534,031  
Group C     1,164,208       5,429,340       2,717,672       437,103       8,859       9,757,182  
     Total   $ 63,959,230     $ 162,275,498     $ 165,662,426     $ 44,147,861     $ 7,943,615     $ 443,988,630  

 

As of December 31, 2013  
                Residential     Residential              
    Commercial     Commercial     Real Estate     Real Estate              
    & Industrial     Real Estate     1st Lien     Jr Lien     Consumer     Total  
                                     
Group A   $ 51,740,744     $ 148,516,895     $ 169,771,357     $ 44,739,736     $ 8,800,365     $ 423,569,097  
Group B     2,824,169       3,292,200       160,468       460,844       0       6,737,681  
Group C     1,054,372       5,126,708       2,915,249       486,825       18,994       9,602,148  
     Total   $ 55,619,285     $ 156,935,803     $ 172,847,074     $ 45,687,405     $ 8,819,359     $ 439,908,926  

 

As of September 30, 2013  
                Residential     Residential              
    Commercial     Commercial     Real Estate     Real Estate              
    & Industrial     Real Estate     1st Lien     Jr Lien     Consumer     Total  
                                     
Group A   $ 51,937,275     $ 139,168,914     $ 171,694,502     $ 44,144,667     $ 9,404,101     $ 416,349,459  
Group B     2,412,663       3,572,369       175,081       497,992       0       6,658,105  
Group C     1,150,797       4,539,504       2,638,426       636,741       8,755       8,974,223  
          Total   $ 55,500,735     $ 147,280,787     $ 174,508,009     $ 45,279,400     $ 9,412,856     $ 431,981,787  

 

Modifications of Loans and TDRs

 

A loan is classified as a TDR if, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider.

 

The Company is deemed to have granted such a concession if it has modified a troubled loan in any of the following ways:

 

●   Reduced accrued interest;
●   Reduced the original contractual interest rate to a rate that is below the current market rate for the borrower;

●   Converted a variable-rate loan to a fixed-rate loan;
●   Extended the term of the loan beyond an insignificant delay;

●   Deferred or forgiven principal in an amount greater than three months of payments; or
●   Performed a refinancing and deferred or forgiven principal on the original loan.

 

An insignificant delay or insignificant shortfall in the amount of payments typically would not require the loan to be accounted for as a TDR.  However, pursuant to regulatory guidance, any payment delay longer than three months is generally not considered insignificant. Management’s assessment of whether a concession has been granted also takes into account payments expected to be received from third parties, including third-party guarantors, provided that the third party has the ability to perform on the guarantee.

 

The Company’s TDRs are principally a result of extending loan repayment terms to relieve cash flow difficulties. The Company has only, on a limited basis, reduced interest rates for borrowers below the current market rate for the borrower.  The Company has not forgiven principal or reduced accrued interest within the terms of original restructurings, nor has it converted variable rate terms to fixed rate terms.  However, the Company evaluates each TDR situation on its own merits and does not foreclose the granting of any particular type of concession.

 

TDRs, by portfolio segment, for the periods presented were as follows:

 

    Three Months Ended September 30, 2014     Nine Months Ended September 30, 2014  
          Pre-     Post-           Pre-     Post-  
          Modification     Modification           Modification     Modification  
          Outstanding     Outstanding           Outstanding     Outstanding  
    Number of     Recorded     Recorded     Number of     Recorded     Recorded  
    Contracts     Investment     Investment     Contracts     Investment     Investment  
                                             
Residential real estate                                            
   1st lien   2     $ 432,573     $ 436,963     8     $ 913,471     $ 947,700  

 

    Twelve Months Ended December 31, 2013  
          Pre-     Post-  
          Modification     Modification  
          Outstanding     Outstanding  
    Number of     Recorded     Recorded  
    Contracts     Investment     Investment  
                   
Residential real estate - 1st lien   4     $ 321,406     $ 330,266  
Residential real estate - Jr lien   1       23,425       23,425  
     Total   5     $ 344,831     $ 353,691  

 

There were no TDR’s for the three months ended September 30, 2013.

 

    Nine Months Ended September 30, 2013  
          Pre-     Post-  
          Modification     Modification  
          Outstanding     Outstanding  
    Number of     Recorded     Recorded  
    Contracts     Investment     Investment  
                       
Residential real estate - Jr lien   1     $ 23,425     $ 23,425  

 

There were no TDRs for which there was a payment default under the restructured terms during the twelve month period ended September 30, 2013.  The TDR’s for which there was a payment default during the twelve month period ended September 30, 2014 were as follows:

 

    Number of     Recorded  
    Contracts     Investment  
Residential real estate - 1st lien   5     $ 438,428  
               

 

TDRs are treated as other impaired loans and carry individual specific reserves with respect to the calculation of the allowance for loan losses.  These loans are categorized as non-performing, may be past due, and are generally adversely risk rated. The TDRs that have defaulted under their restructured terms are generally in collection status and their reserve is typically calculated using the fair value of collateral method. The allowance related to TDRs was $6,600 at September 30, 2014, $5,800 at December 31, 2013, and $0 at September 30, 2013.

 

At September 30, 2014, the Company did not have any commitments to lend additional funds to borrowers with loans classified as TDRs.