Loans And The Allowance For Credit Losses

3 Months Ended

Mar. 31, 2015

Loans And The Allowance For Credit Losses [Abstract]

Loans And The Allowance For Credit Losses

NOTE 4: LOANS AND THE ALLOWANCE FOR CREDIT LOSSES

The composition of our loan portfolio at March 31, 2015 and December 31, 2014 was as follows:

(In thousands)		March 31, 2015		December 31, 2014
Commercial, financial and agricultural	$	195,782	$	177,597
Municipal loans		91,410		94,366
Real estate loans – residential		461,459		469,529
Real estate loans – commercial		419,500		412,447
Real estate loans – construction		28,512		23,858
Installment loans		3,454		4,504
All other loans		53		33
Total loans	$	1,200,170	$	1,182,334

We primarily originate residential real estate, commercial, commercial real estate, municipal obligations and installment loans to customers throughout the state of Vermont. There are no significant industry concentrations in the loan portfolio. Total loans in the table above included $702 thousand and $734 thousand of net deferred loan origination costs at March 31, 2015 and December 31, 2014, respectively. The aggregate amount of overdrawn deposit balances classified as loan balances was $219thousand and $235 thousand at March 31, 2015 and December 31, 2014, respectively.

The following table reflects our loan loss experience and activity in the allowance for credit losses by portfolio segment for the three months ended March 31, 2015:

		Commercial,
		financial and				Real estate-		Real estate-		Real estate-
(In thousands)		agricultural		Municipal		residential		commercial		construction		Installment		All Other		Total
Allowance for credit losses:
Beginning balance	$	3,331	$	636	$	3,127	$	5,251	$	415	$	13	$	42	$	12,815
Charge-offs		(29)		-		(55)		-		-		(74)		-		(158)
Recoveries		25		-		3		1		-		53		-		82
Provision (credit)		41		(93)		35		(35)		23		71		(42)		-
Ending balance	$	3,368	$	543	$	3,110	$	5,217	$	438	$	63	$	-	$	12,739

The following table reflects our loan loss experience and activity in the allowance for credit losses by portfolio segment for the three months ended March 31, 2014:

		Commercial,
		financial and				Real estate-		Real estate-		Real estate-
(In thousands)		agricultural		Municipal		residential		commercial		construction		Installment		All Other		Total
Allowance for credit losses:
Beginning balance	$	3,354	$	768	$	3,081	$	5,085	$	512	$	18	$	10	$	12,828
Charge-offs		-		-		(2)		-		-		-		(20)		(22)
Recoveries		2		-		18		-		-		-		3		23
Provision (credit)		22		(75)		255		34		(152)		-		16		100
Ending balance	$	3,378	$	693	$	3,352	$	5,119	$	360	$	18	$	9	$	12,929

The allowance for credit losses consists of the allowance for loan losses and the reserve for undisbursed lines and letters of credit. The reserve for undisbursed lines and letters of credit is included in other liabilities on the balance sheet. The following presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based upon impairment method at March 31, 2015:

		Commercial,
		financial and				Real estate-		Real estate-		Real estate-
(In thousands)		agricultural		Municipal		residential		commercial		construction		Installment		All Other		Total
Allowance for credit losses:
Ending balance individually evaluated for impairment	$	68	$	-	$	110	$	-	$	-	$	-	$	-	$	178
Ending balance collectively evaluated for impairment		3,300		543		3,000		5,217		438		63		-		12,561
Totals	$	3,368	$	543	$	3,110	$	5,217	$	438	$	63	$	-	$	12,739
Financing receivables:
Ending balance individually evaluated for impairment	$	590	$	-	$	708	$	-	$	-	$	-	$	-	$	1,298
Ending balance collectively evaluated for impairment		195,192		91,410		460,751		419,500		28,512		3,454		53		1,198,872
Totals	$	195,782	$	91,410	$	461,459	$	419,500	$	28,512	$	3,454	$	53	$	1,200,170
Components:
Allowance for loan losses	$	2,859	$	530	$	3,024	$	5,149	$	364	$	63	$	-	$	11,989
Reserve for undisbursed lines of credit		509		13		86		68		74		-		-		750
Total allowance for credit losses	$	3,368	$	543	$	3,110	$	5,217	$	438	$	63	$	-	$	12,739

The following presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based upon impairment method at December 31, 2014:

		Commercial,
		financial and				Real estate-		Real estate-		Real estate-
(In thousands)		agricultural		Municipal		residential		commercial		construction		Installment		All Other		Total
Allowance for credit losses:
Ending balance individually evaluated for impairment	$	-	$	-	$	63	$	-	$	-	$	-	$	-	$	63
Ending balance collectively evaluated for impairment		3,331		636		3,064		5,251		415		13		42		12,752
Totals	$	3,331	$	636	$	3,127	$	5,251	$	415	$	13	$	42	$	12,815
Financing receivables:
Ending balance individually evaluated for impairment	$	134	$	-	$	657	$	-	$	-	$	-	$	-	$	791
Ending balance collectively evaluated for impairment		177,463		94,366		468,872		412,447		23,858		4,504		33		1,181,543
Totals	$	177,597	$	94,366	$	469,529	$	412,447	$	23,858	$	4,504	$	33	$	1,182,334
Components:
Allowance for loan losses	$	2,583	$	623	$	3,038	$	5,209	$	325	$	13	$	42	$	11,833
Reserve for undisbursed lines of credit		748		13		89		42		90		-		-		982
Total allowance for credit losses	$	3,331	$	636	$	3,127	$	5,251	$	415	$	13	$	42	$	12,815

The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors.  The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by us over the most recent 5 years.  This actual loss experience is supplemented with other factors based on the risks present for each portfolio segment.  These factors include consideration of the following:  levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. Due to the added risks associated with loans which are graded as pass-watch, special mention, and substandard that are not classified as impaired, an additional analysis is performed to determine whether an allowance is needed that is not fully captured by the historical loss experience. While historical loss experience by loan segment and migration of loans into higher risk classifications are considered, the following factors are also considered in determining the level of needed allowance on such loans: the historical loss rates of loans specifically classified as pass-watch, special mention, or substandard; and the trends in the collateral on the loans included within these classifications. This analysis created an additional $702 thousand at March 31, 2015 compared to $1.23 million at December 31, 2014 in needed allowance for loan loss.

The table below presents the recorded investment of loans, including nonaccrual and restructured loans, segregated by class, with delinquency aging as of March 31, 2015:

														91 Days or
		31-60		61-90		91 Days		Total						more past
		Days		Days		or More		Past						due and
(In thousands)		Past Due		Past Due		Past Due		Due		Current		Total		Accruing
Commercial, financial and agricultural	$	497	$	-	$	-	$	497	$	195,285	$	195,782	$	-
Municipal		-		-		-		-		91,410		91,410		-
Real estate-residential:
First mortgage		68		-		471		539		424,182		424,721		-
Second mortgage		16		17		79		112		36,626		36,738		-
Real estate-commercial:
Owner occupied		-		-		-		-		178,060		178,060		-
Non-owner occupied		143		-		-		143		241,297		241,440		-
Real estate-construction:
Residential		-		-		-		-		2,739		2,739		-
Commercial		-		-		-		-		25,773		25,773		-
Installment		2		-		-		2		3,452		3,454		-
Other		-		-		-		-		53		53		-
Total	$	726	$	17	$	550	$	1,293	$	1,198,877	$	1,200,170	$	-

Of the total past due loans in the aging table above,  $1.07 million are non-performingof which $0 are restructured loans and $0 were greater than 91 days past due and accruing.  There were $228 thousand past due performing loans at March 31, 2015.

The table below presents the recorded investment of loans, including nonaccrual and restructured loans, segregated by class, with delinquency aging as of December 31, 2014:

														91 Days or
		31-60		61-90		91 Days		Total						more past
		Days		Days		or More		Past						due and
(In thousands)		Past Due		Past Due		Past Due		Due		Current		Total		Accruing
Commercial, financial and agricultural	$	49	$	-	$	-	$	49	$	177,548	$	177,597	$	-
Municipal		-		-		-		-		94,366		94,366		-
Real estate-residential:
First mortgage		157		-		391		548		431,191		431,739		-
Second mortgage		33		-		79		112		37,678		37,790		-
Real estate-commercial:
Owner occupied		-		22		-		22		260,075		260,097		-
Non-owner occupied		202		-		-		202		152,148		152,350		-
Real estate-construction:
Residential		-		-		-		-		4,131		4,131		-
Commercial		-		-		-		-		19,727		19,727		-
Installment		-		-		-		-		4,504		4,504		-
Other		-		-		-		-		33		33		-
Total	$	441	$	22	$	470	$	933	$	1,181,401	$	1,182,334	$	-

Of the total past due loans in the aging table above, $519 thousand are non-performing, of which $0 are restructured loans and $0 are greater than 91 days past due and accruing.  There were $414 thousand past due performing loans at December 31, 2014.

Impaired loans by class at March 31, 2015 and for the three months ended March 31, 2015 are as follows:

				Three Months Ended
				March 31, 2015
		Unpaid		Average
	Recorded	Principal	Related	Recorded
(In thousands)	Investment	Balance	Allowance	Investment
With no related allowance recorded
Commercial, financial and agricultural	$                     93	$                     96	$                        -	$                      109
Real estate – residential:
First mortgage	154	283	-	147
Second mortgage	79	79	-	79
With related allowance recorded
Commercial, financial and agricultural	497	497	68	166
Real estate – residential:
First mortgage	458	458	93	439
Second mortgage	17	17	17	6
Real estate – commercial:
Owner occupied	-	-	-	-
Total
Commercial, financial and agricultural	590	593	68	275
Real estate – residential	708	837	110	671
Real estate – commercial	-	-	-	-
Total	$                1,298	$                1,430	$                   178	$                      946

Impaired loans by class at December 31, 2014 and for the three months ended March 31, 2014 are as follows:

				Three Months Ended
				March 31, 2014
		Unpaid		Average
	Recorded	Principal	Related	Recorded
(In thousands)	Investment	Balance	Allowance	Investment
With no related allowance recorded
Commercial, financial and agricultural	$                   134	$                   136	$                        -	$                        34
Real estate – residential:
First mortgage	147	257	-	264
Second mortgage	79	79	-	174
Real estate – commercial:
Owner occupied	-	-	-	-
Installment	-	-	-	-
With related allowance recorded
Commercial, financial and agricultural	-	-	-	19
Real estate – residential:
First mortgage	431	432	63	164
Second mortgage	-	-	-	-
Real estate – commercial:
Owner occupied	-	-	-	162
Installment	-	-	-	-
Total
Commercial, financial and agricultural	134	136	-	53
Real estate – residential	657	768	63	602
Real estate – commercial	-	-	-	162
Total	$                   791	$                   904	$                     63	$                      817

Residential and commercial loans serviced for others at March 31, 2015 and December 31, 2014 amounted to approximately $13.66 million and$13.53 million, respectively. 

Nonperforming loans at March 31, 2015 and December 31, 2014 are as follows:

(In thousands)		March 31, 2015		December 31, 2014
Nonaccrual  loans	$	1,118	$	598
Loans greater than 90 days and accruing		-		-
Troubled debt restructurings ("TDRs")		180	$	193
Total nonperforming loans	$	1,298	$	791

Of the total TDRs in the table above, $58 thousand at March 31, 2015 and $63 thousand at December 31, 2014 are nonaccruing. We have reviewed all restructurings that occurred on or after January 1, 2015 for identification as TDRs. There were zero TDRs that were restructured during the three months ended March 31, 2015. We did not identify as a TDR any loan for which the allowance for credit losses had been measured under a general allowance for credit losses methodology.

TDRs represent balances where the existing loan was modified involving a concession in rate, term or payment amount due to the distressed financial condition of the borrower. All TDRs at March 31, 2015 continue to pay as agreed according to the modified terms and all but one of these loans is considered well-secured.  At March  31, 2015, there were no commitments to lend additional funds to borrowers whose loans have been modified in a TDR. We had no commitments to lend additional funds to borrowers whose loans were in nonaccrual status or to borrowers whose loans were 91 days past due and still accruing at March 31, 2015. Interest income on restructured loans during the three months ended March 31, 2015 and 2014 was insignificant.

Nonaccrual loans by class as of March 31, 2015 and December 31, 2014 are as follows:

(In thousands)		March 31, 2015		December 31, 2014
Commercial, financial and agricultural	$	551	$	88
Real estate - residential:
First mortgage		471		431
Second mortgage		96		79
Total nonaccruing non-TDR loans		1,118		598
Nonaccruing TDR’s
Commercial, financial and agricultural		4		5
Real estate – residential:
First mortgage		54		58
Real estate - commercial:
Owner occupied		-		-
Total nonaccrual loans including TDRs	$	1,176	$	661

Commercial Grading System

We use risk rating definitions for our commercial loan portfolios and certain residential loans which are generally consistent with regulatory and banking industry norms. Loans are assigned a credit quality grade which is based upon Management’s on going assessment of risk based upon an evaluation of the quantitative and qualitative aspects of each credit. This assessment is a dynamic process and risk ratings are adjusted as each borrower’s financial situation changes. This process is designed to provide timely recognition of a borrower’s financial condition and appropriately focus Management resources.

Pass rated loans exhibit acceptable risk to the bank in terms of financial capacity to repay the loan as well as possessing acceptable fallback repayment sources, typically collateral and personal guarantees. Pass rated commercial loan relationships with a total exposure of $1 million or greater are subject to a formal annual review process; additionally, Management reviews the risk rating at the time of any late payments, overdrafts or other sign of deterioration in the interim.

Loans rated Pass-Watch require more than usual attention and monitoring by the account officer, though not to the extent that a formal remediation plan is warranted. Borrowers can be rated Pass-Watch based upon a weakened capital structure, marginally adequate cash flow and/or collateral coverage or early-stage declining trends in operations or financial condition.

Loans rated Special Mention possess potential weakness that may expose the bank to some risk of loss in the future. These loans require more frequent monitoring and formal reporting to Management.

Substandard loans reflect well-defined weaknesses in the current repayment capacity, collateral or net worth of the borrower with the possibility of some loss to the bank if these weaknesses are not corrected. Action plans are required for these loans to address the inherent weakness in the credit and are formally reviewed.

Residential Real Estate and Consumer Loans

We do not use a grading system for our performing residential real estate and consumer loans. Credit quality for these loans is based on performance and payment status.

Below is a summary of loans by credit quality indicator as of March 31, 2015:

						Pass-		Special		Sub-
(In thousands)		Unrated		Pass		Watch		Mention		Standard		Total
Commercial, financial and agricultural	$	300	$	161,028	$	18,509	$	3,712	$	12,233	$	195,782
Municipal		32		81,858		7,631		1,889		-		91,410
Real estate – residential:
First mortgage		420,488		3,537		169		-		527		424,721
Second mortgage		36,721		-		-		-		17		36,738
Real estate – commercial:
Owner occupied		133		144,666		14,826		3,366		15,069		178,060
Non-owner occupied		199		216,536		22,299		660		1,746		241,440
Real estate – construction:
Residential		350		2,389				-		-		2,739
Commercial		150		23,690		37		-		1,896		25,773
Installment		3,454		-		-		-		-		3,454
All other loans		53		-		-		-		-		53
Total	$	461,880	$	633,704	$	63,471	$	9,627	$	31,488	$	1,200,170

Below is a summary of loans by credit quality indicator as of December 31, 2014:

						Pass-		Special		Sub-
(In thousands)		Unrated Residential and		Pass		Watch		Mention		Standard		Total
Commercial, financial and agricultural	$	352	$	143,813	$	21,563	$	3,942	$	7,927	$	177,597
Municipal		40		75,337		17,101		1,888		-		94,366
Real estate – residential:
First mortgage		428,073		3,046		170		-		450		431,739
Second mortgage		37,790		-		-		-		-		37,790
Real estate – commercial:
Owner occupied		187		220,651		18,708		1,378		19,173		260,097
Non-owner occupied		189		130,218		20,773		-		1,170		152,350
Real estate – construction:
Residential		288		3,843		-		-		-		4,131
Commercial		170		17,588		40		-		1,929		19,727
Installment		4,504		-		-		-		-		4,504
All other loans		33		-		-		-		-		33
Total	$	471,626	$	594,496	$	78,355	$	7,208	$	30,649	$	1,182,334