Loans And The Allowance For Credit Losses

9 Months Ended

Sep. 30, 2015

Loans And The Allowance For Credit Losses [Abstract]

Loans And The Allowance For Credit Losses

NOTE 5: LOANS AND THE ALLOWANCE FOR CREDIT LOSSES

The composition of our loan portfolio at September 30, 2015 and December 31, 2014 was as follows:

(In thousands)	September 30, 2015		December 31, 2014
Commercial, financial and agricultural	$	207,067	$	177,597
Municipal loans		108,423		94,366
Real estate loans – residential		448,632		469,529
Real estate loans – commercial		450,673		412,447
Real estate loans – construction		40,748		23,858
Installment loans		2,370		4,504
All other loans		19		33
Total loans	$	1,257,932	$	1,182,334

We primarily originate residential real estate, commercial, commercial real estate, and municipal obligations to customers throughout the state of Vermont. There are no significant industry concentrations in the loan portfolio. Total loans in the table above included $802 thousand and $734 thousand of net deferred loan origination costs at September 30, 2015 and December 31, 2014, respectively. The aggregate amount of overdrawn deposit balances classified as loan balances was $323 thousand and $235 thousand at September 30, 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 September 30, 2015:

	Commercial,
	financial
	and				Real estate-		Real estate-		Real estate-
(In thousands)	agricultural		Municipal		residential		commercial		construction		Installment		All other		Totals
Allowance for credit losses:
Beginning balance	$	3,450		369		3,126		5,354		533		59		—	$	12,891
Charge-offs		(11)		—		(29)		—		—		(22)		—		(62)
Recoveries		3		—		7		1		—		8		—		19
Provision (credit)		(51)		291		(65)		(47)		11		11		—		150
Ending balance	$	3,391	$	660	$	3,039	$	5,308	$	544	$	56	$	—	$	12,998

The following table reflects our loan loss experience and activity in the allowance for credit losses by portfolio segment for the three months ended September 30, 2014:

	Commercial,
	financial
	and				Real estate-		Real estate-		Real estate-
(In thousands)	agricultural		Municipal		residential		commercial		construction		Installment		All other		Totals
Allowance for credit losses:
Beginning balance	$	3,656	$	386	$	3,246	$	5,089	$	494	$	18	$	17	$	12,906
Charge-offs		—		—		(7)		—		—		—		(48)		(55)
Recoveries		—		—		—		—		—		—		7		7
Provision (credit)		(253)		316		42		(45)		(94)		(2)		36		—
Ending balance	$	3,403	$	702	$	3,281	$	5,044	$	400	$	16	$	12	$	12,858

The following table reflects our loan loss experience and activity in the allowance for credit losses by portfolio segment for the nine months ended September 30, 2015:

	Commercial,
	financial				Real
	and				estate-		Real estate-		Real estate
(In thousands)	agricultural		Municipal		residential		commercial		construction		Installment		All other		Totals
Allowance for credit losses:
Beginning balance	$	3,331	$	636	$	3,127	$	5,251	$	415	$	13	$	42	$	12,815
Charge-offs		(28)		—		(84)		—		—		(65)		—		(177)
Recoveries		31		—		36		2		—		41		—		110
Provision (credit)		57		24		(40)		55		129		67		(42)		250
Ending balance	$	3,391	$	660	$	3,039	$	5,308	$	544	$	56	$	—	$	12,998

The following table reflects our loan loss experience and activity in the allowance for credit losses by portfolio segment for the nine months ended September 30, 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		(34)		—		(25)		—		—		—		(99)		(158)
Recoveries		3		—		20		—		—		1		14		38
Provision (credit)		80		(66)		205		(41)		(112)		(3)		87		150
Ending balance	$	3,403	$	702	$	3,281	$	5,044	$	400	$	16	$	12	$	12,858

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 September 30, 2015:

	Commercial,
	financial and				Real estate-		Real estate-		Real estate-
(In thousands)	agricultural		Municipal		residential		commercial		construction		Installment		All other		Totals
Allowance for credit losses:
Ending balance individually evaluated for impairment	$	—	$	—	$	139	$	—	$	—	$	—	$	—	$	139
Ending balance collectively evaluated for impairment		3,391		660		2,900		5,308		544		56		—		12,859
Totals	$	3,391	$	660	$	3,039	$	5,308	$	544	$	56	$	—	$	12,998
Financing receivables:
Ending balance individually evaluated for impairment	$	566	$	—	$	838	$	—	$	—	$	—	$	—	$	1,404
Ending balance collectively evaluated for impairment		206,501		108,423		447,794		450,673		40,748		2,370		19		1,256,528
Totals	$	207,067	$	108,423	$	448,632	$	450,673	$	40,748	$	2,370	$	19	$	1,257,932
Components:
Allowance for loan losses	$	2,833	$	631	$	2,959	$	5,238	$	493	$	56	$	—	$	12,210
Reserve for undisbursed lines of credit		558		29		80		70		51		—		—		788
Total allowance for credit losses	$	3,391	$	660	$	3,039	$	5,308	$	544	$	56	$	—	$	12,998

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		Totals
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 $664 thousand at September 30, 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 September 30, 2015:

													91 Days or
					91 Days or								more past
	31-60 Days		61-90 Days		More		Total Past						due and
(In thousands)	Past Due		Past Due		Past Due		Due		Current		Total		Accruing
Commercial, financial and agricultural	$	38		—		—	$	38	$	207,029	$	207,067	$	—
Municipal		—		—		—		—		108,423		108,423		—
Real estate-residential:
First mortgage		167		—		587		754		413,328		414,082		—
Second mortgage		—		—		—		—		34,550		34,550		—
Real estate-commercial:
Owner occupied		—		—		—		—		178,995		178,995		—
Non-owner occupied		—		—		—		—		271,678		271,678		—
Real estate-construction:
Residential		—		—		—		—		2,118		2,118		—
Commercial		—		—		—		—		38,630		38,630		—
Installment		—		—		—		—		2,370		2,370		—
Other		—		—		—		—		19		19		—
Total	$	205	$	—	$	587	$	792	$	1,257,140	$	1,257,932	$	—

Of the total past due loans in the aging table above,  $628 thousand are non-performing of which $0 are restructured loans and $0 were greater than 91 days past due and accruing.  There was a $164 thousand past due performing loan at September 30, 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
					91 Days or								more past
	31-60 Days		61-90 Days		More		Total 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		—		—		—		—		179,851		179,851		—
Non-owner occupied		202		22		—		224		232,372		232,596		—
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 September 30, 2015 and average balance for the three and nine months ended September 30, 2015 are as follows:

								Three Months Ended	Nine Months Ended
								September 30, 2015	September 30, 2015
			Unpaid					Average		Average
	Recorded		Principal		Related			Recorded		Recorded
(In thousands)	Investment		Balance		Allowance			Investment		Investment
With no related allowance recorded
Commercial, financial and agricultural	$	566	$	572	$	—	$	571	$	303
Residential:
First mortgage		457		543		—		293		200
Second mortgage		—		—		—		52		70
Commercial Real Estate:
Owner occupied		—		—		—		—		—
Non-owner occupied		—		—		—		—		3
Construction:
Residential		—		—		—		—		—
Commercial		—		—		—		—		—
Installment		—		—		—		—		—
With related allowance recorded
Commercial, financial and agricultural		—		—		—		—		166
Residential:
First mortgage		381		383		139		541		497
Second mortgage		—		—		—		—		6
Commercial Real Estate:
Owner occupied		—		—		—		—		—
Total
Commercial, financial and agricultural		566		572		—		571		469
Residential:		838		926		139		886		773
Commercial Real Estate:		—		—		—		—		3
Construction		—		—		—		—		—
Installment		—		—		—		—		—
Total	$	1,404	$	1,498	$	139	$	1,457	$	1,245

Impaired loans by class at December 31, 2014 and average balance for the three and nine months ended September 30, 2014 are as follows:

							Three Months Ended		Nine Months Ended
							September 30, 2014		September 30, 2014
			Unpaid				Average		Average
	Recorded		Principal		Related		Recorded		Recorded
(In thousands)	Investment		Balance		Allowance		Investment		Investment
With no related allowance recorded
Commercial, financial and agricultural	$	134	$	136	$	—	$	66	$	65
Residential:
First mortgage		147		257		—		283		284
Second mortgage		79		79		—		131		156
Commercial Real Estate:
Owner occupied		—		—		—		—		17
Installment		—		—		—		—		—
With related allowance recorded
Commercial, financial and agricultural		—		—		—		—		16
Residential:
First mortgage		431		432		63		190		189
Second mortgage		—		—		—		—		—
Commercial Real Estate:
Owner occupied		—		—		—		156		159
Installment		—		—		—		—		—
Total
Commercial, financial and agricultural		134		136		—		66		81
Residential:		657		768		63		604		629
Commercial Real Estate:		—		—		—		156		176
Installment		—		—		—		-		—
Total	$	791	$	904	$	63	$	826	$	886

Residential and commercial loans serviced for others at September 30, 2015 and December 31, 2014 amounted to approximately $14.44 million and $13.53 million, respectively.

Nonperforming loans at September 30, 2015 and December 31, 2014 are as follows:

(In thousands)	September 30, 2015		December 31, 2014
Nonaccrual  loans	$	713	$	598
Loans greater than 90 days and accruing		—		—
Troubled debt restructurings ("TDRs")		691		193
Total nonperforming loans	$	1,404	$	791

Of the total TDRs in the table above, $51 thousand at September 30, 2015 and $63 thousand at December 31, 2014 were nonaccruing. We have reviewed all restructurings that occurred on or after January 1, 2015 for identification as TDRs. Loans with a balance of $88 thousand and $0 thousand were restructured during the three months ended September 30, 2015 and September 30, 2014, respectively and considered to be TDRs. Loans with a balance of $559 thousand were restructured during the nine months ended September 30, 2015 as compared to loan balances of $113 thousand for the nine months ended September 30, 2014 and considered to be TDRs.

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 September 30, 2015 continue to pay as agreed according to the modified terms and four of the six TDRs are considered well-secured.  At September 30, 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 September 30, 2015. Interest income on restructured loans during the three and nine months ended September 30, 2015 and 2014 was insignificant.

Nonaccrual loans by class as of September 30, 2015 and December 31, 2014 are as follows:

(In thousands)	September 30, 2015		December 31, 2014
Commercial, financial and agricultural	$	6	$	88
Real estate - residential:
First mortgage		707		431
Second mortgage		—		79
Real estate - commercial:
Owner occupied		—		—
Non owner occupied		—		—
Installment		—		—
Total nonaccruing non-TDR loans	$	713	$	598
Nonaccruing TDR’s
Commercial, financial and agricultural		2		5
Real estate – residential:
First mortgage		49		58
Real estate - commercial:
Owner occupied		—		—
Total nonaccrual loans including TDRs	$	764	$	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 September 30, 2015:

					Pass-		Special		Sub-
(In thousands)	Unrated		Pass		Watch		Mention		Standard		Total
Commercial, financial and agricultural	$	369		173,855		18,151		4,211		10,481	$	207,067
Municipal		69		95,495		10,991		1,868		—		108,423
Real estate – residential:
First mortgage		411,221		2,015		166		—		680		414,082
Second mortgage		34,550		—		—		—		—		34,550
Real estate – commercial:
Owner occupied		129		147,644		14,236		3,583		13,403		178,995
Non-owner occupied		167		252,110		15,670		2,140		1,591		271,678
Real estate – construction:
Residential		51		2,067		—		—		—		2,118
Commercial		172		34,147		2,474		—		1,837		38,630
Installment		2,370		—		—		—		—		2,370
All other loans		19		—		—		—		—		19
Total	$	449,117	$	707,333	$	61,688	$	11,802	$	27,992	$	1,257,932

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

					Pass-		Special		Sub-
(In thousands)	Unrated		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		127		142,741		17,136		1,378		18,469		179,851
Non-owner occupied		249		208,128		22,345		—		1,874		232,596
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