Loans and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2017

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, 2017 and December 31, 2016:

	(In Thousands)
	March 31, 2017			December 31, 2016
Mortgage loans on real estate
Residential 1-4 family	$	409,497		$	393,268
Multifamily	108,465			109,410
Commercial	695,865			689,695
Construction and land development	326,867			297,315
Farmland	44,378			46,314
Second mortgages	8,859			9,193
Equity lines of credit	56,966			56,038
Total mortgage loans on real estate	1,650,897			1,601,233
Commercial loans	41,432			40,301
Agricultural loans	1,500			1,562
Consumer installment loans
Personal	38,627			41,117
Credit cards	3,161			3,157
Total consumer installment loans	41,788			44,274
Other loans	9,678			9,055
Total loans before net deferred loan fees	1,745,295			1,696,425
Net deferred loan fees	(7,348		)	(6,606		)
Total loans	1,737,947			1,689,819
Less: Allowance for loan losses	(22,987		)	(22,731		)
Net loans	$	1,714,960		$	1,667,088

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 incorporate 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, 2017 and year ended December 31, 2016 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, 2017
Allowance for loan losses:
Beginning balance	$	4,571		839	9,541	5,387		658		112		675		386		562		22,731
Provision	436			300	98	(649	)	107		1		—		(14	)	110		389
Charge-offs	(112		)	—	—	—		(3	)	(11	)	(1	)	—		(245	)	(372	)
Recoveries	11			—	87	17		—		—		—		1		123		239
Ending balance	$	4,906		1,139	9,726	4,755		762		102		674		373		550		22,987
Ending balance individually evaluated for impairment	$	188		—	315	—		—		—		—		—		—		503
Ending balance collectively evaluated for impairment	$	4,718		1,139	9,411	4,755		762		102		674		373		550		22,484
Loans:
Ending balance	$	409,497		108,465	695,865	326,867		44,378		8,859		56,966		41,432		52,966		1,745,295
Ending balance individually evaluated for impairment	$	675		—	4,054	1,518		102		—		—		—		—		6,349
Ending balance collectively evaluated for impairment	$	408,822		108,465	691,811	325,349		44,276		8,859		56,966		41,432		52,966		1,738,946

	Residential 1-4 Family			Multifamily	Commercial Real Estate		Construction		Farmland	Second Mortgages	Equity Lines of Credit	Commercial		Agricultural, Installment and Other		Total
December 31, 2016
Allowance for loan losses:
Beginning balance	$	5,024		619	9,986		5,136		654	106	594	301		480		22,900
Provision	(400		)	220	(399	)	283		2	2	66	81		524		379
Charge-offs	(109		)	—	(100	)	(66	)	—	—	—	(11	)	(674	)	(960	)
Recoveries	56			—	54		34		2	4	15	15		232		412
Ending balance	$	4,571		839	9,541		5,387		658	112	675	386		562		22,731
Ending balance individually evaluated for impairment	$	196		—	120		—		—	—	—	—		—		316
Ending balance collectively evaluated for impairment	$	4,375		839	9,421		5,387		658	112	675	386		562		22,415
Loans:
Ending balance	$	393,268		109,410	689,695		297,315		46,314	9,193	56,038	40,301		54,891		1,696,425
Ending balance individually evaluated for impairment	$	679		—	4,689		1,618		103	—	—	—		—		7,089
Ending balance collectively evaluated for impairment	$	392,589		109,410	685,006		295,697		46,211	9,193	56,038	40,301		54,891		1,689,336

Impaired Loans

At March 31, 2017, the Company had certain impaired loans of $2.7 million which were on non-accruing interest status. At December 31, 2016, the Company had certain impaired loans of $3.0 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, 2017 and December 31, 2016.

	In Thousands
	Recorded Investment		Unpaid Principal Balance	Related Allowance	Average Recorded Investment	Interest Income Recognized
March 31, 2017
With no related allowance recorded:
Residential 1-4 family	$	149	147	—	150	2
Multifamily	—		—	—	—	—
Commercial real estate	915		913	—	2,582	10
Construction	1,523		1,518	—	1,573	18
Farmland	102		102	—	103	2
Second mortgages	—		—	—	—	—
Equity lines of credit	—		—	—	—	—
Commercial	—		—	—	—	—
Agricultural, installment and other	—		—	—	—	—
	$	2,689	2,680	—	4,408	32
With allowance recorded:
Residential 1-4 family	$	539	704	188	540	8
Multifamily	—		—	—	—	—
Commercial real estate	3,141		3,141	315	1,792	4
Construction	—		—	—	—	—
Farmland	—		—	—	—	—
Second mortgages	—		—	—	—	—
Equity lines of credit	—		—	—	—	—
Commercial	—		—	—	—	—
Agricultural, installment and other	—		—	—	—	—
	$	3,680	3,845	503	2,332	12
Total
Residential 1-4 family	$	688	851	188	690	10
Multifamily	—		—	—	—	—
Commercial real estate	4,056		4,054	315	4,374	14
Construction	1,523		1,518	—	1,573	18
Farmland	102		102	—	103	2
Second mortgages	—		—	—	—	—
Equity lines of credit	—		—	—	—	—
Commercial	—		—	—	—	—
Agricultural, installment and other	—		—	—	—	—
	$	6,369	6,525	503	6,740	44

	In Thousands
	Recorded Investment		Unpaid Principal Balance	Related Allowance	Average Recorded Investment	Interest Income Recognized
December 31, 2016
With no related allowance recorded:
Residential 1-4 family	$	150	148	—	150	7
Multifamily	—		—	—	—	—
Commercial real estate	4,248		4,246	—	4,352	38
Construction	1,623		1,618	—	1,778	82
Farmland	104		103	—	79	5
Second mortgages	—		—	—	—	—
Equity lines of credit	—		—	—	—	—
Commercial	—		—	—	—	—
Agricultural, installment and other	—		—	—	—	—
	$	6,125	6,115	—	6,359	132
With allowance recorded:
Residential 1-4 family	$	540	531	196	540	32
Multifamily	—		—	—	—	—
Commercial real estate	443		443	120	111	5
Construction	—		—	—	—	—
Farmland	—		—	—	—	—
Second mortgages	—		—	—	—	—
Equity lines of credit	—		—	—	—	—
Commercial	—		—	—	—	—
Agricultural, installment and other	—		—	—	—	—
	$	983	974	316	651	37
Total:
Residential 1-4 family	$	690	679	196	690	39
Multifamily	—		—	—	—	—
Commercial real estate	4,691		4,689	120	4,463	43
Construction	1,623		1,618	—	1,778	82
Farmland	104		103	—	79	5
Second mortgages	—		—	—	—	—
Equity lines of credit	—		—	—	—	—
Commercial	—		—	—	—	—
Agricultural, installment and other	—		—	—	—	—
	$	7,108	7,089	316	7,010	169

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 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, 2017 and December 31, 2016.

	March 31, 2017		December 31, 2016
	(In thousands)
Performing TDRs	$	3,053	$	3,277
Nonperforming TDRs	1,297		1,319
Total TDRS	$	4,350	$	4,596

The following table outlines the amount of each troubled debt restructuring categorized by loan classification for the three months ended March 31, 2017 and the year ended December 31, 2016 (in thousands, except for number of contracts):

	March 31, 2017					December 31, 2016
	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	—	$	—	$	—	4	$	130	$	130
Multifamily	—	—		—		—	—		—
Commercial real estate	—	—		—		2	1,364		1,244
Construction	—	—		—		—	—		—
Farmland	—	—		—		1	103		103
Second mortgages	—	—		—		—	—		—
Equity lines of credit	—	—		—		—	—		—
Commercial	—	—		—		—	—		—
Agricultural, installment and other	—	—		—		2	17		17
Total	—	$	—	$	—	9	$	1,614	$	1,494

As of March 31, 2017 and December 31, 2016, the Company had no loan relationships 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, 2017 and December 31, 2016, the Company’s recorded investment in consumer mortgage loans in the process of foreclosure amounted to $746,000 and $389,000, respectively.

Potential problem loans, which include nonperforming loans, amounted to approximately $15.7 million at March 31, 2017 compared to $16.2 million at December 31, 2016. 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, 2017 and December 31, 2016:

	(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, 2017
Credit Risk Profile by Internally Assigned Rating
Pass	$	400,517	108,465	690,966	326,581	43,529	8,449	56,788	41,429	52,828	1,729,552
Special Mention	5,801		—	754	89	156	298	24	3	48	7,173
Substandard	3,179		—	4,145	197	693	112	154	—	90	8,570
Doubtful	—		—	—	—	—	—	—	—	—	—
Total	$	409,497	108,465	695,865	326,867	44,378	8,859	56,966	41,432	52,966	1,745,295
December 31, 2016
Credit Risk Profile by Internally Assigned Rating
Pass	$	384,383	109,410	684,202	297,089	45,470	8,775	55,883	40,301	54,754	1,680,267
Special Mention	5,616		—	668	121	147	303	—	—	26	6,881
Substandard	3,269		—	4,825	105	697	115	155	—	111	9,277
Doubtful	—		—	—	—	—	—	—	—	—	—
Total	$	393,268	109,410	689,695	297,315	46,314	9,193	56,038	40,301	54,891	1,696,425