Loans and Allowance for Loan Losses

6 Months Ended

Jun. 30, 2016

Loans and Allowance For Loan Losses [Abstract]

Loans and Allowance for Loan Losses

Note 3: Loans and Allowance for Loan Losses

 

Categories of loans include:

	June 30,		December 31,
	2016		2015
	(In thousands)
Commercial loans	$	86,539	$	67,247
Commercial real estate		168,517		163,459
Residential real estate		78,307		81,498
Installment loans		15,459		17,459
Total gross loans		348,822		329,663
Less allowance for loan losses		(2,465)		(2,437)
Total loans	$	346,357	$	327,226

The risk characteristics of each loan portfolio segment are as follows:

Commercial

Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may include a personal guarantee. Short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial Real Estate

Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The characteristics of properties securing the Company’s commercial real estate portfolio are diverse, but with geographic location almost entirely in the Company’s market area. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In general, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate versus nonowner-occupied loans.

Residential and Consumer

Residential and consumer loans consist of two segments - residential mortgage loans and personal loans. For residential mortgage loans that are secured by 1-4 family residences and are generally owner-occupied, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and consumer personal loans are secured by consumer personal assets, such as automobiles or recreational vehicles. Some consumer personal loans are unsecured, such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Allowance for Loan Losses and Recorded Investment in Loans

As of and for the three and six month period ended June 30, 2016

	Commercial		Commercial Real Estate		Residential		Installment		Unallocated		Total
			(In thousands)
Allowance for loan losses:
Balance, April 1, 2016	$	192	$	702	$	166	$	236	$	1,079	$	2,375
Provision charged to expense		231		(278)		(15)		9		158		105
Losses charged off		—		—		—		(120)		—		(120)
Recoveries		74		3		12		16		—		105
Balance, June 30, 2016	$	497	$	427	$	163	$	141	$	1,237	$	2,465
Balance, January 1, 2016	$	184	$	597	$	170	$	113	$	1,373	$	2,437
Provision charged to expense		238		(177)		72		179		(136)		176
Losses charged off		(2)		—		(91)		(191)		—		(284)
Recoveries		77		7		12		40		—		136
Balance, June 30, 2016	$	497	$	427	$	163	$	141	$	1,237	$	2,465
Ending balance: individually evaluated for impairment	$	—	$	278	$	—	$	—	$	—	$	278
Ending balance: collectively evaluated for impairment	$	497	$	149	$	163	$	141	$	1,237	$	2,187
Loans:
Ending balance: individually evaluated for impairment	$	1	$	1,368	$	—	$	—	$	—	$	1,369
Ending balance: collectively evaluated for impairment	$	86,538	$	167,149	$	78,307	$	15,459	$	—	$	348,822

Allowance for Loan Losses and Recorded Investment in Loans

As of and for the three and six month period ended June 30, 2015

	Commercial		Commercial Real Estate		Residential		Installment		Unallocated		Total
	(In thousands)
Allowance for loan losses:
Balance, April 1, 2015	$	238	$	1,119	$	171	$	91	$	887	$	2,506
Provision charged to expense		(11)		(351)		79		71		357		145
Losses charged off		––		––		(40)		—		––		(40)
Recoveries		7		3		66		10		––		86
Balance, June 30, 2015	$	234	$	771	$	276	$	172	$	1,244	$	2,697
Balance, January 1, 2015	$	254	$	1,116	$	147	$	92	$	791	$	2,400
Provision charged to expense		(46)		(352)		140		66		453		261
Losses charged off		––		––		(93)		—		––		(93)
Recoveries		26		7		82		14		––		129
Balance, June 30, 2015	$	234	$	771	$	276	$	172	$	1,244	$	2,697
Ending balance: individually evaluated for impairment	$	86	$	377	$	—	$	—	$	—	$	463
Ending balance: collectively evaluated for impairment	$	148	$	394	$	276	$	172	$	1,244	$	2,234
Loans:
Ending balance: individually evaluated for impairment	$	98	$	1,947	$	—	$	—	$	—	$	2,045
Ending balance: collectively evaluated for impairment	$	57,380	$	150,317	$	82,857	$	19,323	$	—	$	309,877

Allowance for Loan Losses and Recorded Investment in Loans

As of December 31, 2015

	Commercial		Commercial Real Estate		Residential		Installment		Unallocated		Total
	(In thousands)
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	9	$	172	$	––	$	––	$	––	$	181
Ending balance: collectively evaluated for impairment	$	175	$	425	$	170	$	113	$	1,373	$	2,256
Loans:
Ending balance: individually evaluated for impairment	$	57	$	1,273	$	––	$	80	$	––	$	1,410
Ending balance: collectively evaluated for impairment	$	67,190	$	162,186	$	81,498	$	17,379	$	––	$	328,253

The following tables show the portfolio quality indicators.

	June 30, 2016
Loan Class	Commercial		Commercial Real Estate		Residential		Installment		Total
	(In thousands)
Pass Grade	$	86,436	$	163,724	$	78,307	$	15,459	$	343,926
Special Mention		102		673		—		—		775
Substandard		1		4,120		—		—		4,121
Doubtful		—		—		—		—		—
	$	86,539	$	168,517	$	78,307	$	15,459	$	348,822

	December 31, 2015
Loan Class	Commercial		Commercial Real Estate		Residential		Installment		Total
	(In thousands)
Pass Grade	$	67,150	$	158,362	$	81,498	$	17,363	$	324,373
Special Mention		39		996		—		—		1,035
Substandard		58		4,101		—		96		4,255
Doubtful		—		—		—		—		—
	$	67,247	$	163,459	$	81,498	$	17,459	$	329,663

To facilitate the monitoring of credit quality within the loan portfolio, and for purposes of analyzing historical loss rates used in the determination of the ALLL, the Company utilizes the following categories of credit grades: pass, special mention, substandard, and doubtful. The four categories, which are derived from standard regulatory rating definitions, are assigned upon initial approval of credit to borrowers and updated periodically thereafter. Pass ratings, which are assigned to those borrowers that do not have identified potential or well defined weaknesses and for which there is a high likelihood of orderly repayment, are updated periodically based on the size and credit characteristics of the borrower. All other categories are updated on at least a quarterly basis.

The Company assigns a special mention rating to loans that have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects for the loan or the Company’s credit position.

The Company assigns a substandard rating to loans that are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged. Substandard loans have well defined weaknesses or weaknesses that could jeopardize the orderly repayment of the debt. Loans and leases in this grade also are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies noted are not addressed and corrected.

The Company assigns a doubtful rating to loans that have all the attributes of a substandard rating with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors that may work to the advantage of and strengthen the credit quality of the loan or lease, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceeding, capital injection, perfecting liens on additional collateral or refinancing plans.

The Company evaluates the loan risk grading system definitions and allowance for loan losses methodology on an ongoing basis. No significant changes were made to either during the past year to date period.

Loan Portfolio Aging Analysis

As of June 30, 2016

	30-59 Days Past Due and Accruing		60-89 Days Past Due and Accruing		Greater Than 90 Days and Accruing		Non Accrual		Total Past Due and Non Accrual		Current		Total Loans Receivable
	(In thousands)
Commercial	$	47	$	86	$	—	$	2	$	135	$	86,404	$	86,539
Commercial real estate		199		—		—		474		673		167,844		168,517
Residential		780		354		—		707		1,841		76,466		78,307
Installment		112		2		—		45		159		15,300		15,459
Total	$	1,138	$	442	$	—	$	1,228	$	2,808	$	346,014	$	348,822

Loan Portfolio Aging Analysis

As of December 31, 2015

	30-59 Days Past Due and Accruing		60-89 Days Past Due and Accruing		Greater Than 90 Days and Accruing		Non Accrual		Total Past Due and Non Accrual		Current		Total Loans Receivable
	(In thousands)
Commercial	$	141	$	—	$	—	$	63	$	204	$	67,043	$	67,247
Commercial real estate		319		—		132		250		701		162,758		163,459
Residential		737		500		—		599		1,836		79,662		81,498
Installment		220		71		—		132		423		17,036		17,459
Total	$	1,417	$	571	$	132	$	1,044	$	3,164	$	326,499	$	329,663

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

Impaired Loans

	As of June 30, 2016						For the three months ended June 30, 2016				For the six months ended June 30, 2016
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized
	(In thousands)
Loans without a specific valuation allowance:
Commercial	$	1	$	1	$	—	$	1	$	—	$	1	$	—
Commercial real estate		471		471		—		875		9		884		17
Residential		—		—		—		—		—		—		—
Installment		—		—		—		—		—		—		—
		472		472		—		876		9		885		17
Loans with a specific valuation allowance:
Commercial		—		—		—		—		—		—		—
Commercial real estate		897		897		278		1,098		6		1,102		17
Residential		—		—		—		—		—		—		—
Installment		—		—		—		—		2		—		2
		897		897		278		1,098		8		1,102		19
Total:
Commercial	$	1	$	1	$	—	$	1	$	—	$	1	$	—
Commercial real estate	$	1,368	$	1,368	$	278	$	1,973	$	15	$	1,986	$	34
Residential	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Installment	$	—	$	—	$	—	$	—	$	2	$	—	$	2

Impaired Loans

	As of December 31, 2015						For the three months ended June 30, 2015				For the six months ended June 30, 2015
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized
	(In thousands)
Loans without a specific valuation allowance:
Commercial	$	44	$	74	$	—	$	—	$	—	$	—	$	—
Commercial real estate		464		464		—		1,493		17		1,500		26
Residential		80		203		—		—		—		—		—
Installment		—		—		—		—		—		—		—
		588		741		—		1,493		17		1,500		26
Loans with a specific valuation allowance:
Commercial		13		49		9		100		2		102		4
Commercial real estate		809		961		172		928		3		945		18
Residential		—		—		—		—		—		—		—
Installment		—		—		—		—		—		—		—
		822		1,010		181		1,028		5		1,047		22
Total:
Commercial	$	57	$	123	$	9	$	100	$	2	$	102	$	4
Commercial real estate	$	1,273	$	1,425	$	172	$	2,421	$	20	$	2,445	$	44
Residential	$	80	$	203	$	—	$	—	$	—	$	—	$	—
Installment	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Interest income recognized on a cash basis was not materiality different than interest income recognized.

For the TDRs noted in the tables below, the Company extended the maturity dates and granted interest rate concessions as part of each of those loan restructurings. The loans included in the tables are considered impaired and specific loss calculations are performed on the individual loans. In conjunction with the restructuring there were no amounts charged-off.

	Three Months ended June 30, 2016
	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(In thousands)
Commercial		—	$	—	$	—
Commercial real estate		—		—		—
Residential		—		—		—
Installment		—		—		—

	Three Months Ended June 30, 2016
	Interest Only		Term		Combination		Total Modification
			(In thousands)
Commercial	$	—	$	—	$	—	$	—
Commercial real estate		—		—		—		—
Residential		—		—		—		—
Consumer		—		—		—		—

	Six Months ended June 30, 2016
	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(In thousands)
Commercial		—	$	—	$	—
Commercial real estate		2		85		85
Residential		—		—		—
Installment		—		—		—

	Six Months Ended June 30, 2016
	Interest Only		Term		Combination		Total Modification
			(In thousands)
Commercial	$	—	$	—	$	—	$	—
Commercial real estate		—		85		—		85
Residential		—		—		—		—
Consumer		—		—		—		—

During the six months ended June 30, 2016, troubled debt restructurings described above increased the allowance for loan losses by $8,300. During the three and six the months ended June 30, 2015, the Company did have any loans classified as troubled debt restructurings.

At June 30, 2016 and 2015 and for three and six month periods then ended, there were no material defaults of any troubled debt restructurings that were modified in the last 12 months. The Company generally considers TDR’s that become 90 days or more past due under the modified terms as subsequently defaulted.