Loans and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2016

Receivables [Abstract]

Loans and Allowance for Loan Losses

Loans and Allowance for Loan Losses

For financial reporting purposes, the Company classifies its loan portfolio based on the underlying collateral utilized to secure each loan. This classification is consistent with those utilized in the Quarterly Report of Condition and Income filed by the Bank with the Federal Deposit Insurance Corporation (“FDIC”).

The following schedule details the loans of the Company at March 31, 2016 and December 31, 2015:

	(In Thousands)
	March 31, 2016			December 31, 2015
Mortgage loans on real estate
Residential 1-4 family	$	350,575		$	349,631
Multifamily	77,088			49,564
Commercial	660,335			625,623
Construction and land development	294,722			275,319
Farmland	32,397			32,114
Second mortgages	8,102			7,551
Equity lines of credit	46,725			46,506
Total mortgage loans on real estate	1,469,944			1,386,308
Commercial loans	32,216			30,537
Agricultural loans	1,573			1,552
Consumer installment loans
Personal	40,132			40,196
Credit cards	3,094			3,271
Total consumer installment loans	43,226			43,467
Other loans	9,190			9,250
	1,556,149			1,471,114
Net deferred loan fees	(5,240		)	(5,035		)
Total loans	1,550,909			1,466,079
Less: Allowance for loan losses	(22,899		)	(22,900		)
Net loans	$	1,528,010		$	1,443,179

Risk characteristics relevant to each portfolio segment are as follows:

Construction and land development: Loans for non-owner-occupied real estate construction or land development are generally repaid through cash flow related to the operation, sale or refinance of the property. The Company also finances construction loans for owner-occupied properties. A portion of the Company’s construction and land portfolio segment is comprised of loans secured by residential product types (residential land and single-family construction). With respect to construction loans to developers and builders that are secured by non-owner occupied properties that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction and land development loans are underwritten utilizing independent appraisal reviews, sensitivity analysis of absorption and lease rates, market sales activity, and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayments substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

1-4 family residential real estate: Residential real estate loans represent loans to consumers or investors to finance a residence. These loans are typically financed on 15 to 30 year amortization terms, but generally with shorter maturities of 5 to 15 years. Many of these loans are extended to borrowers to finance their primary or secondary residence. Loans to an investor secured by a 1-4 family residence will be repaid from either the rental income from the property or from the sale of the property. This loan segment also includes closed-end home equity loans that are secured by a first or second mortgage on the borrower’s residence. This allows customers to borrow against the equity in their home. Loans in this portfolio segment are underwritten and approved based on a number of credit quality criteria including limits on maximum Loan-to-Value ("LTV"), minimum credit scores, and maximum debt to income. Real estate market values as of the time the loan is made directly affect the amount of credit extended and, in addition, changes in these residential property values impact the depth of potential losses in this portfolio segment.

1-4 family HELOC: This loan segment includes open-end home equity loans that are secured by a first or second mortgage on the borrower’s residence. This allows customers to borrow against the equity in their home utilizing a revolving line of credit. These loans are underwritten and approved based on a number of credit quality criteria including limits on maximum LTV, minimum credit scores, and maximum debt to income. Real estate market values as of the time the loan is made directly affect the amount of credit extended and, in addition, changes in these residential property values impact the depth of potential losses in this portfolio segment. Because of the revolving nature of these loans, as well as the fact that many represent second mortgages, this portfolio segment can contain more risk than the amortizing 1-4 family residential real estate loans.

Multi-family and commercial real estate: Multi-family and commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These 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 largely 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 properties securing the Company’s commercial real estate portfolio are diverse in terms of type. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. The Company also utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting the market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. Non-owner occupied commercial real estate loans are loans secured by multifamily and commercial properties where the primary source of repayment is derived from rental income associated with the property (that is, loans for which 50 percent or more of the source of repayment comes from third party, nonaffiliated, rental income) or the proceeds of the sale, refinancing, or permanent financing of the property. These loans are made to finance income-producing properties such as apartment buildings, office and industrial buildings, and retail properties. Owner-occupied commercial real estate loans are loans where the primary source of repayment is the cash flow from the ongoing operations and business activities conducted by the party, or affiliate of the party, who owns the property.

Commercial and Industrial: The commercial and industrial loan portfolio segment includes commercial and industrial loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases or other expansion projects. Collection risk in this portfolio is driven by the creditworthiness of underlying borrowers, particularly cash flow from customers’ business operations. Commercial and industrial loans are primarily made 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 and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and usually incorporates a personal guarantee; however, some 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.

Consumer: The consumer loan portfolio segment includes non-real estate secured direct loans to consumers for household, family, and other personal expenditures. Consumer loans may be secured or unsecured and are usually structured with short or medium term maturities. These loans are underwritten and approved based on a number of consumer credit quality criteria including limits on maximum LTV on secured consumer loans, minimum credit scores, and maximum debt to income. Many traditional forms of consumer installment credit have standard monthly payments and fixed repayment schedules of one to five years. These loans are made with either fixed or variable interest rates that are based on specific indices. Installment loans fill a variety of needs, such as financing the purchase of an automobile, a boat, a recreational vehicle or other large personal items, or for consolidating debt. These loan may be unsecured or secured by an assignment of title, as in an automobile loan, or by money in a bank account. In addition to consumer installment loans, this portfolio segment also includes secured and unsecured personal lines of credit as well as overdraft protection lines. Loans in this portfolio segment are sensitive to unemployment and other key consumer economic measures.

The adequacy of the allowance for loan losses is assessed at the end of each calendar quarter. The level of the allowance is based upon evaluation of the loan portfolio, past loan loss experience, current asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, historical loss experience, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations.

Transactions in the allowance for loan losses for the three months ended March 31, 2016 and year ended December 31, 2015 are summarized as follows:

	(In Thousands)
	Residential 1-4 Family			Multifamily	Commercial Real Estate		Construction		Farmland	Second Mortgages	Equity Lines of Credit		Commercial	Agricultural, Installment and Other		Total
March 31, 2016
Allowance for loan losses:
Beginning balance	$	5,024		619	9,986		5,136		654	106	594		301	480		22,900
Provision	(70		)	345	(82	)	(251	)	11	7	(30	)	20	117		67
Charge-offs	—			—	—		—		—	—	—		—	(180	)	(180	)
Recoveries	21			—	1		3		—	1	9		1	76		112
Ending balance	$	4,975		964	9,905		4,888		665	114	573		322	493		22,899
Ending balance individually evaluated for impairment	$	183		—	—		—		—	—	—		—	—		183
Ending balance collectively evaluated for impairment	$	4,792		964	9,905		4,888		665	114	573		322	493		22,716
Ending balance loans acquired with deteriorated credit quality	$	—		—	—		—		—	—	—		—	—		—
Loans:
Ending balance	$	350,575		77,088	660,335		294,722		32,397	8,102	46,725		32,216	53,989		1,556,149
Ending balance individually evaluated for impairment	$	686		—	4,639		1,938		—	—	—		—	—		7,263
Ending balance collectively evaluated for impairment	$	349,889		77,088	655,696		292,784		32,397	8,102	46,725		32,216	53,989		1,548,886
Ending balance loans acquired with deteriorated credit quality	$	—		—	—		—		—	—	—		—	—		—

	Residential 1-4 Family			Multifamily	Commercial Real Estate		Construction		Farmland		Second Mortgages		Equity Lines of Credit		Commercial	Agricultural, Installment and Other		Total
December 31, 2015
Allowance for loan losses:
Beginning balance	$	5,582		172	9,578		5,578		795		61		304		176	326		22,572
Provision	(290		)	447	(267	)	(455	)	(142	)	87		303		118	587		388
Charge-offs	(311		)	—	(44	)	(26	)	—		(45	)	(14	)	—	(664	)	(1,104	)
Recoveries	43			—	719		39		1		3		1		7	231		1,044
Ending balance	$	5,024		619	9,986		5,136		654		106		594		301	480		22,900
Ending balance individually evaluated for impairment	$	194		—	—		—		—		—		—		—	—		194
Ending balance collectively evaluated for impairment	$	4,830		619	9,986		5,136		654		106		594		301	480		22,706
Ending balance loans acquired with deteriorated credit quality	$	—		—	—		—		—		—		—		—	—		—
Loans:
Ending balance	$	349,631		49,564	625,623		275,319		32,114		7,551		46,506		30,537	54,269		1,471,114
Ending balance individually evaluated for impairment	$	1,449		—	4,643		1,938		575		—		—		—	—		8,605
Ending balance collectively evaluated for impairment	$	348,182		49,564	620,980		273,381		31,539		7,551		46,506		30,537	54,269		1,462,509
Ending balance loans acquired with deteriorated credit quality	$	—		—	—		—		—		—		—		—	—		—

Impaired Loans

At March 31, 2016, the Company had certain impaired loans of $4.3 million which were on non-accruing interest status. At December 31, 2015, the Company had certain impaired loans of $4.9 million which were on non-accruing interest status. In each case, at the date such loans were placed on nonaccrual status, the Company reversed all previously accrued interest income against current year earnings. The following table presents the Company’s impaired loans at March 31, 2016 and December 31, 2015.

	In Thousands
	Recorded Investment		Unpaid Principal Balance	Related Allowance	Average Recorded Investment	Interest Income Recognized
March 31, 2016
With no related allowance recorded:
Residential 1-4 family	$	150	149	—	392	2
Multifamily	—		—	—	—	—
Commercial real estate	4,640		4,639	—	4,643	4
Construction	1,943		1,938	—	1,943	22
Farmland	—		—	—	—	—
Second mortgages	—		—	—	—	—
Equity lines of credit	—		—	—	—	—
Commercial	—		—	—	—	—
Agricultural, installment and other	—		—	—	—	—
	$	6,733	6,726	—	6,978	28
With allowance recorded:
Residential 1-4 family	$	540	537	183	687	8
Multifamily	—		—	—	—	—
Commercial real estate	—		—	—	—	—
Construction	—		—	—	—	—
Farmland	—		—	—	—	—
Second mortgages	—		—	—	—	—
Equity lines of credit	—		—	—	—	—
Commercial	—		—	—	—	—
Agricultural, installment and other	—		—	—	—	—
	$	540	537	183	687	8
Total
Residential 1-4 family	$	690	686	183	1,079	10
Multifamily	—		—	—	—	—
Commercial real estate	4,640		4,639	—	4,643	4
Construction	1,943		1,938	—	1,943	22
Farmland	—		—	—	—	—
Second mortgages	—		—	—	—	—
Equity lines of credit	—		—	—	—	—
Commercial	—		—	—	—	—
Agricultural, installment and other	—		—	—	—	—
	$	7,273	7,263	183	7,665	36

	In Thousands
	Recorded Investment		Unpaid Principal Balance	Related Allowance	Average Recorded Investment	Interest Income Recognized
December 31, 2015
With no related allowance recorded:
Residential 1-4 family	$	633	622	—	724	39
Multifamily	—		—	—	—	—
Commercial real estate	4,645		4,643	—	5,048	24
Construction	1,943		1,938	—	486	97
Farmland	575		575	—	431	—
Second mortgages	—		—	—	—	—
Equity lines of credit	—		—	—	—	—
Commercial	—		—	—	—	—
Agricultural, installment and other	—		—	—	—	—
	$	7,796	7,778	—	6,689	160
With allowance recorded:
Residential 1-4 family	$	834	827	194	785	47
Multifamily	—		—	—	—	—
Commercial real estate	—		—	—	3,419	—
Construction	—		—	—	—	—
Farmland	—		—	—	144	—
Second mortgages	—		—	—	—	—
Equity lines of credit	—		—	—	—	—
Commercial	—		—	—	—	—
Agricultural, installment and other	—		—	—	—	—
	$	834	827	194	4,348	47
Total:
Residential 1-4 family	$	1,467	1,449	194	1,509	86
Multifamily	—		—	—	—	—
Commercial real estate	4,645		4,643	—	8,467	24
Construction	1,943		1,938	—	486	97
Farmland	575		575	—	575	—
Second mortgages	—		—	—	—	—
Equity lines of credit	—		—	—	—	—
Commercial	—		—	—	—	—
Agricultural, installment and other	—		—	—	—	—
	$	8,630	8,605	194	11,037	207

Impaired loans also include loans that the Company may elect to formally restructure due to the weakening credit status of a borrower such that the restructuring may facilitate a repayment plan that minimizes the potential losses that the Company may have to otherwise incur. These loans are classified as impaired loans and, if on non-accruing status as of the date of restructuring, the loans are included in the nonperforming loan balances. Not included in nonperforming loans are loans that have been restructured that were performing as of the restructure date.

Troubled Debt Restructuring

The Bank’s loan portfolio includes certain loans that have been modified in a troubled debt restructuring ("TDR"), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Bank’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.

The following table summarizes the carrying balances of TDR’s at March 31, 2016 and December 31, 2015.

	March 31, 2016		December 31, 2015
	(In thousands)
Performing TDRs	$	730	$	983
Nonperforming TDRs	2,707		3,121
Total TDRS	$	3,437	$	4,104

The following table outlines the amount of each troubled debt restructuring categorized by loan classification for the three months ended March 31, 2016 and the year ended December 31, 2015 (in thousands, except for number of contracts):

	March 31, 2016					December 31, 2015
	Number of Contracts	Pre Modification Outstanding Recorded Investment		Post Modification Outstanding Recorded Investment, Net of Related Allowance		Number of Contracts	Pre Modification Outstanding Recorded Investment		Post Modification Outstanding Recorded Investment, Net of Related Allowance
Residential 1-4 family	2	$	35	$	35	2	$	77	$	77
Multifamily	—	—		—		—	—		—
Commercial real estate	—	—		—		—	—		—
Construction	—	—		—		1	1,938		1,938
Farmland	—	—		—		—	—		—
Second mortgages	—	—		—		—	—		—
Equity lines of credit	—	—		—		—	—		—
Commercial	—	—		—		—	—		—
Agricultural, installment and other	1	3		3		1	2		1
Total	3	$	38	$	38	4	$	2,017	$	2,016

As of March 31, 2016, the Company had one loan relationship in the amount of $57,000 that had been previously classified as troubled debt restructuring subsequently default within twelve months of restructuring. As of December 31, 2015, the Company had two loans totaling $1,060,000 that had been previously classified as troubled debt restructuring subsequently default within twelve months of restructuring. A default is defined as an occurrence which violates the terms of the receivable’s contract.

As of March 31, 2016 and December 31, 2015, the Company’s recorded investment in consumer mortgage loans in the process of foreclosure amounted to $1,365,000 and $639,000, respectively.

Potential problem loans, which include nonperforming loans, amounted to approximately $25.3 million at March 31, 2016 compared to $25.2 million at December 31, 2015. Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by the FDIC, the Bank’s primary federal regulator, for loans classified as special mention, substandard, or doubtful.

The following summary presents our loan balances by primary loan classification and the amount classified within each risk rating category. Pass rated loans include all credits other than those included in special mention, substandard and doubtful which are defined as follows:

• Special mention loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date.

• Substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

• Doubtful loans have all the characteristics of substandard loans 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 Bank considers all doubtful loans to be impaired and places the loan on nonaccrual status.

The following table is a summary of the Bank’s loan portfolio by risk rating at March 31, 2016 and December 31, 2015:

	(In Thousands)
	Residential 1-4 Family		Multifamily	Commercial Real Estate	Construction	Farmland	Second Mortgages	Equity Lines of Credit	Commercial	Agricultural, installment and other	Total
March 31, 2016
Credit Risk Profile by Internally Assigned Rating
Pass	$	340,825	77,088	647,383	293,818	31,534	7,669	46,444	32,207	53,876	1,530,844
Special Mention	6,829		—	7,884	791	137	334	138	8	34	16,155
Substandard	2,921		—	5,068	113	726	99	143	1	79	9,150
Doubtful	—		—	—	—	—	—	—	—	—	—
Total	$	350,575	77,088	660,335	294,722	32,397	8,102	46,725	32,216	53,989	1,556,149
December 31, 2015
Credit Risk Profile by Internally Assigned Rating
Pass	$	340,019	49,564	612,318	274,926	30,933	7,097	46,361	30,525	54,154	1,445,897
Special Mention	6,957		—	8,227	277	200	353	—	10	38	16,062
Substandard	2,655		—	5,078	116	981	101	145	2	77	9,155
Doubtful	—		—	—	—	—	—	—	—	—	—
Total	$	349,631	49,564	625,623	275,319	32,114	7,551	46,506	30,537	54,269	1,471,114