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Loans
9 Months Ended
Sep. 30, 2017
Loans and Leases Receivable Disclosure [Abstract]  
Loans
Loans

The following table sets forth the classification of loans by class, including unearned fees, deferred costs and excluding the allowance for loan losses as of September 30, 2017 and December 31, 2016:
(In thousands)
 
September 30, 2017
 
December 31, 2016
SBA loans held for investment
 
$
44,001

 
$
42,492

SBA 504 loans
 
22,239

 
26,344

Commercial loans
 
 
 
 
Commercial other
 
69,812

 
58,447

Commercial real estate
 
452,764

 
422,418

Commercial real estate construction
 
46,190

 
28,306

Residential mortgage loans
 
330,787

 
289,093

Consumer loans
 
 
 
 
Home equity
 
56,193

 
47,411

Consumer other
 
53,163

 
44,130

Total loans held for investment
 
$
1,075,149

 
$
958,641

SBA loans held for sale
 
17,724

 
14,773

Total loans
 
$
1,092,873

 
$
973,414



Loans are made to individuals as well as commercial entities.  Specific loan terms vary as to interest rate, repayment, and collateral requirements based on the type of loan requested and the credit worthiness of the prospective borrower.  Credit risk tends to be geographically concentrated in that a majority of the loan customers are located in the markets serviced by the Bank.  Loan performance may be adversely affected by factors impacting the general economy or conditions specific to the real estate market such as geographic location and/or property type.  A description of the Company's different loan segments follows:

SBA Loans: SBA 7(a) loans, on which the SBA has historically provided guarantees of up to 90 percent of the principal balance, are considered a higher risk loan product for the Company than its other loan products.  The guaranteed portion of the Company’s SBA loans is generally sold in the secondary market with the nonguaranteed portion held in the portfolio as a loan held for investment.  SBA loans are for the purpose of providing working capital, financing the purchase of equipment, inventory or commercial real estate and for other business purposes.  Loans are guaranteed by the businesses' major owners.  SBA loans are made based primarily on the historical and projected cash flow of the business and secondarily on the underlying collateral provided.

SBA 504 Loans: The SBA 504 program consists of real estate backed commercial mortgages where the Company has the first mortgage and the SBA has the second mortgage on the property.  Loans will generally be guaranteed in full or for a meaningful amount by the businesses' major owners.  SBA 504 loans are made based primarily on the historical and projected cash flow of the business and secondarily on the underlying collateral provided.  Generally, the Company has a 50 percent loan to value ratio on SBA 504 program loans at origination.

Commercial Loans: Commercial credit is extended primarily to middle market and small business customers.  Commercial loans are generally made in the Company’s market place for the purpose of providing working capital, financing the purchase of equipment, inventory or commercial real estate and for other business purposes.  Loans will generally be guaranteed in full or for a meaningful amount by the businesses' major owners.  Commercial loans are made based primarily on the historical and projected cash flow of the business and secondarily on the underlying collateral provided.

Residential Mortgage and Consumer Loans: The Company originates mortgage and consumer loans including principally residential real estate and home equity lines and loans and consumer construction lines.  The Company originates qualified mortgages which are generally sold in the secondary market and nonqualified mortgages which are generally held for investment. Each loan type is evaluated on debt to income, type of collateral and loan to collateral value, credit history and Company’s relationship with the borrower.

Inherent in the lending function is credit risk, which is the possibility a borrower may not perform in accordance with the contractual terms of their loan.  A borrower’s inability to pay their obligations according to the contractual terms can create the risk of past due loans and, ultimately, credit losses, especially on collateral deficient loans.  The Company minimizes its credit risk by loan diversification and adhering to credit administration policies and procedures.  Due diligence on loans begins when we initiate contact regarding a loan with a borrower.  Documentation, including a borrower’s credit history, materials establishing the value and liquidity of potential collateral, the purpose of the loan, the source of funds for repayment of the loan, and other factors, are analyzed before a loan is submitted for approval.  The loan portfolio is then subject to on-going internal reviews for credit quality which in part is derived from ongoing collection and review of borrowers’ financial information, as well as independent credit reviews by an outside firm.

The Company's extension of credit is governed by the Credit Risk Policy which was established to control the quality of the Company's loans.  These policies and procedures are reviewed and approved by the Board of Directors on a regular basis.

Credit Ratings 

For SBA 7(a), SBA 504 and commercial loans, management uses internally assigned risk ratings as the best indicator of credit quality.  A loan’s internal risk rating is updated at least annually and more frequently if circumstances warrant a change in risk rating.  The Company uses a 1 through 10 loan grading system that follows regulatory accepted definitions.

Pass: Risk ratings of 1 through 6 are used for loans that are performing, as they meet, and are expected to continue to meet, all of the terms and conditions set forth in the original loan documentation, and are generally current on principal and interest payments.  These performing loans are termed “Pass”.

Special Mention: Criticized loans are assigned a risk rating of 7 and termed “Special Mention”, as the borrowers exhibit potential credit weaknesses or downward trends deserving management’s close attention.  If not checked or corrected, these trends will weaken the Bank’s collateral and position.  While potentially weak, these borrowers are currently marginally acceptable and no loss of interest or principal is anticipated.  As a result, special mention assets do not expose an institution to sufficient risk to warrant adverse classification.  Included in “Special Mention” could be turnaround situations, such as borrowers with deteriorating trends beyond one year, borrowers in startup or deteriorating industries, or borrowers with a poor market share in an average industry.  "Special Mention" loans may include an element of asset quality, financial flexibility, or below average management.  Management and ownership may have limited depth or experience.  Regulatory agencies have agreed on a consistent definition of “Special Mention” as an asset with potential weaknesses which, if left uncorrected, may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date.  This definition is intended to ensure that the “Special Mention” category is not used to identify assets that have as their sole weakness credit data exceptions or collateral documentation exceptions that are not material to the repayment of the asset.

Substandard: Classified loans are assigned a risk rating of an 8 or 9, depending upon the prospect for collection, and deemed “Substandard”.  A risk rating of 8 is used for borrowers with well-defined weaknesses that jeopardize the orderly liquidation of debt.  The loan is inadequately protected by the current paying capacity of the obligor or by the collateral pledged, if any.  Normal repayment from the borrower is in jeopardy, although no loss of principal is envisioned.  There is a distinct possibility that a partial loss of interest and/or principal will occur if the deficiencies are not corrected.  Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified “Substandard”.

A risk rating of 9 is used for borrowers that have all the weaknesses inherent in a loan with a risk rating of 8, with the added characteristic that the weaknesses make collection of debt in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.  Serious problems exist to the point where partial loss of principal is likely.  The possibility of loss is extremely high, but because of certain important, reasonably specific pending factors that may work to strengthen the assets, the loans’ classification as estimated losses is deferred until a more exact status may be determined.  Pending factors include proposed merger, acquisition, or liquidation procedures; capital injection; perfecting liens on additional collateral; and refinancing plans.  Partial charge-offs are likely.

Loss: Once a borrower is deemed incapable of repayment of unsecured debt, the risk rating becomes a 10, the loan is termed a “Loss”, and charged-off immediately.  Loans to such borrowers are considered uncollectible and of such little value that continuance as active assets of the Bank is not warranted.  This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off these basically worthless assets even though partial recovery may be affected in the future.

For residential mortgage and consumer loans, management uses performing versus nonperforming as the best indicator of credit quality.  Nonperforming loans consist of loans that are not accruing interest (nonaccrual loans) as a result of principal or interest being in default for a period of 90 days or more or when the ability to collect principal and interest according to the contractual terms is in doubt.  These credit quality indicators are updated on an ongoing basis, as a loan is placed on nonaccrual status as soon as management believes there is sufficient doubt as to the ultimate ability to collect interest on a loan.

At September 30, 2017, the Company owned $166 thousand of residential consumer properties that were included in OREO in the Consolidated Balance Sheets, compared to none owned at December 31, 2016.  Additionally, there were $4.5 million of residential consumer loans in the process of foreclosure at September 30, 2017, compared to $5.3 million at December 31, 2016.

The tables below detail the Company’s loan portfolio by class according to their credit quality indicators discussed in the paragraphs above as of September 30, 2017:
 
 
September 30, 2017
 
 
SBA, SBA 504 & Commercial loans - Internal risk ratings
(In thousands)
 
Pass
 
Special mention
 
Substandard
 
Total
SBA loans held for investment
 
$
41,562

 
$
758

 
$
1,681

 
$
44,001

SBA 504 loans
 
21,102

 
1,037

 
100

 
22,239

Commercial loans
 
 
 
 
 
 
 
 
Commercial other
 
69,288

 
499

 
25

 
69,812

Commercial real estate
 
447,902

 
3,212

 
1,650

 
452,764

Commercial real estate construction
 
45,440

 
750

 

 
46,190

Total commercial loans
 
562,630

 
4,461

 
1,675

 
568,766

Total SBA, SBA 504 and commercial loans
 
$
625,294

 
$
6,256

 
$
3,456

 
$
635,006

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage & Consumer loans - Performing/Nonperforming
(In thousands)
 
 
 
Performing
 
Nonperforming
 
Total
Residential mortgage loans
 
 
 
$
330,229

 
$
558

 
$
330,787

Consumer loans
 
 
 
 
 
 
 
 
Home equity
 
 
 
55,624

 
569

 
56,193

Consumer other
 
 
 
51,182

 
1,981

 
53,163

Total consumer loans
 
 
 
106,806

 
2,550

 
109,356

Total residential mortgage and consumer loans
 
 
 
$
437,035

 
$
3,108

 
$
440,143


The tables below detail the Company’s loan portfolio by class according to their credit quality indicators discussed in the paragraphs above as of December 31, 2016
 
 
December 31, 2016
 
 
SBA, SBA 504 & Commercial loans - Internal risk ratings
(In thousands)
 
Pass
 
Special mention
 
Substandard
 
Total
SBA loans held for investment
 
$
38,990

 
$
2,023

 
$
1,479

 
$
42,492

SBA 504 loans
 
24,635

 
1,073

 
636

 
26,344

Commercial loans
 
 
 
 
 
 
 
 
Commercial other
 
57,000

 
1,422

 
25

 
58,447

Commercial real estate
 
408,288

 
13,729

 
401

 
422,418

Commercial real estate construction
 
27,556

 
750

 

 
28,306

Total commercial loans
 
492,844

 
15,901

 
426

 
509,171

Total SBA, SBA 504 and commercial loans
 
$
556,469

 
$
18,997

 
$
2,541

 
$
578,007

 
 
 
 
 
 
 
 
 
 
 
Residential mortgage & Consumer loans - Performing/Nonperforming
(In thousands)
 
 
 
Performing
 
Nonperforming
 
Total
Residential mortgage loans
 
 
 
$
286,421

 
$
2,672

 
$
289,093

Consumer loans
 
 
 
 
 
 
 
 
Home equity
 
 
 
46,929

 
482

 
47,411

Consumer other
 
 
 
42,154

 
1,976

 
44,130

Total consumer loans
 
 
 
89,083

 
2,458

 
91,541

Total residential mortgage and consumer loans
 
 
 
$
375,504

 
$
5,130

 
$
380,634



Nonperforming and Past Due Loans

Nonperforming loans consist of loans that are not accruing interest (nonaccrual loans) as a result of principal or interest being in default for a period of 90 days or more or when the ability to collect principal and interest according to the contractual terms is in doubt.  Loans past due 90 days or more and still accruing interest are not included in nonperforming loans and generally represent loans that are well collateralized and in a continuing process expected to result in repayment or restoration to current status.  The risk of loss is difficult to quantify and is subject to fluctuations in collateral values, general economic conditions and other factors.  The improved state of the economy has resulted in a substantial reduction in nonperforming loans and loan delinquencies.  The Company values its collateral through the use of appraisals, broker price opinions, and knowledge of its local market. 

The following tables set forth an aging analysis of past due and nonaccrual loans as of September 30, 2017 and December 31, 2016:
 
 
September 30, 2017
(In thousands)
 
30-59 days past due
 
60-89 days past due
 
90+ days and still accruing
 
Nonaccrual (1)
 
Total past due
 
Current
 
Total loans
SBA loans held for investment
 
$
1,459

 
$
613

 
$

 
$
566

 
$
2,638

 
$
41,363

 
$
44,001

SBA 504 loans
 

 

 

 

 

 
22,239

 
22,239

Commercial loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial other
 
55

 

 

 
25

 
80

 
69,732

 
69,812

Commercial real estate
 
3,124

 
163

 
808

 
43

 
4,138

 
448,626

 
452,764

Commercial real estate construction
 

 

 

 

 

 
46,190

 
46,190

Residential mortgage loans
 
2,836

 
50

 
1,408

 
558

 
4,852

 
325,935

 
330,787

Consumer loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
 

 

 

 
569

 
569

 
55,624

 
56,193

Consumer other
 
8

 
208

 

 
1,981

 
2,197

 
50,966

 
53,163

Total loans held for investment
 
$
7,482

 
$
1,034

 
$
2,216

 
$
3,742

 
$
14,474

 
$
1,060,675

 
$
1,075,149

SBA loans held for sale
 

 

 

 

 

 
17,724

 
17,724

Total loans
 
$
7,482

 
$
1,034

 
$
2,216

 
$
3,742

 
$
14,474

 
$
1,078,399

 
$
1,092,873

(1)
At September 30, 2017, nonaccrual loans included $27 thousand of loans guaranteed by the SBA. 

 
 
December 31, 2016
(In thousands)
 
30-59 days past due
 
60-89 days past due
 
90+ days and still accruing
 
Nonaccrual (1)
 
Total past due
 
Current
 
Total loans
SBA loans held for investment
 
$
491

 
$
397

 
$

 
$
1,168

 
$
2,056

 
$
40,436

 
$
42,492

SBA 504 loans
 

 

 

 
513

 
513

 
25,831

 
26,344

Commercial loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial other
 
50

 

 

 
25

 
75

 
58,372

 
58,447

Commercial real estate
 
1,108

 
574

 

 
401

 
2,083

 
420,335

 
422,418

Commercial real estate construction
 

 

 

 

 

 
28,306

 
28,306

Residential mortgage loans
 
2,932

 
263

 

 
2,672

 
5,867

 
283,226

 
289,093

Consumer loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
 
227

 

 

 
482

 
709

 
46,702

 
47,411

Consumer other
 

 

 

 
1,976

 
1,976

 
42,154

 
44,130

Total loans held for investment
 
$
4,808

 
$
1,234

 
$

 
$
7,237

 
$
13,279

 
$
945,362

 
$
958,641

SBA loans held for sale
 

 

 

 

 

 
14,773

 
14,773

Total loans
 
$
4,808

 
$
1,234

 
$

 
$
7,237

 
$
13,279

 
$
960,135

 
$
973,414

(1)
At December 31, 2016, nonaccrual loans included $153 thousand of TDRs and $60 thousand of loans guaranteed by the SBA. 

Impaired Loans  

The Company has defined impaired loans to be all nonperforming loans individually evaluated for impairment and TDRs.  Management considers a loan impaired when, based on current information and events, it is determined that the Company will not be able to collect all amounts due according to the loan contract.  Impairment is evaluated on an individual basis for SBA, SBA 504, and commercial loans.

The following table provides detail on the Company’s impaired loans that are individually evaluated for impairment with the associated allowance amount, if applicable, as of September 30, 2017

 
 
September 30, 2017
(In thousands)
 
Unpaid principal balance
 
Recorded investment
 
Specific reserves
With no related allowance:
 
 
 
 
 
 
SBA loans held for investment (1)
 
$
244

 
$
161

 
$

Commercial loans
 
 
 
 
 
 
Commercial other
 
25

 
25

 

Commercial real estate
 
43

 
43

 

Total commercial loans
 
68

 
68

 

Total impaired loans with no related allowance
 
312

 
229

 

 
 
 
 
 
 
 
With an allowance:
 
 
 
 
 
 
SBA loans held for investment (1)
 
573

 
378

 
289

Total impaired loans with a related allowance
 
573

 
378

 
289

 
 
 
 
 
 
 
Total individually evaluated impaired loans:
 
 
 
 
 
 
SBA loans held for investment (1)
 
817

 
539

 
289

Commercial loans
 
 
 
 
 
 
Commercial other
 
25

 
25

 

Commercial real estate
 
43

 
43

 

Total commercial loans
 
68

 
68

 

Total individually evaluated impaired loans
 
$
885

 
$
607

 
$
289

(1)
Balances are reduced by amount guaranteed by the SBA of $27 thousand at September 30, 2017.

The following table provides detail on the Company’s impaired loans that are individually evaluated for impairment with the associated allowance amount, if applicable, as of December 31, 2016:
 
 
December 31, 2016
(In thousands)
 
Unpaid principal balance
 
Recorded investment
 
Specific reserves
With no related allowance:
 
 
 
 
 
 
SBA loans held for investment (1)
 
$
1,235

 
$
653

 
$

SBA 504 loans
 
513

 
513

 

Commercial loans
 
 
 
 
 
 
Commercial other
 
25

 
25

 

Commercial real estate
 
42

 
43

 

Total commercial loans
 
67

 
68

 

Total impaired loans with no related allowance
 
1,815

 
1,234

 

 
 
 
 
 
 
 
With an allowance:
 
 
 
 
 
 
SBA loans held for investment (1)
 
975

 
455

 
246

Commercial loans
 
 
 
 
 
 
Commercial other
 
13

 
1

 
1

Commercial real estate
 
358

 
357

 
33

Total commercial loans
 
371

 
358

 
34

Total impaired loans with a related allowance
 
1,346

 
813

 
280

 
 
 
 
 
 
 
Total individually evaluated impaired loans:
 
 
 
 
 
 
SBA loans held for investment (1)
 
2,210

 
1,108

 
246

SBA 504 loans
 
513

 
513

 

Commercial loans
 
 
 
 
 
 
Commercial other
 
38

 
26

 
1

Commercial real estate
 
400

 
400

 
33

Total commercial loans
 
438

 
426

 
34

Total individually evaluated impaired loans
 
$
3,161

 
$
2,047

 
$
280

(1)
Balances are reduced by amount guaranteed by the SBA of $60 thousand at December 31, 2016.

The following tables present the average recorded investments in impaired loans and the related amount of interest recognized during the time period in which the loans were impaired for the three and nine months ended September 30, 2017 and 2016.  The average balances are calculated based on the month-end balances of impaired loans.  When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual status, all payments are applied to principal under the cost recovery method, and therefore no interest income is recognized.  The interest income recognized on impaired loans noted below represents primarily nominal amounts of income recognized on a cash basis for well-collateralized impaired loans.
 
 
For the three months ended September 30,
 
 
2017
 
2016
(In thousands)
 
Average recorded investment
 
Interest income recognized on impaired loans
 
Average recorded investment
 
Interest income recognized on impaired loans
SBA loans held for investment (1)
 
$
369

 
$
29

 
$
1,341

 
$
2

SBA 504 loans
 

 

 
513

 

Commercial loans
 
 
 
 
 
 
 
 
Commercial other
 
25

 

 
1,217

 

Commercial real estate
 
271

 

 
731

 
21

Commercial real estate construction
 

 

 
306

 

Total
 
$
665

 
$
29

 
$
4,108

 
$
23

(1)
Balances are reduced by the average amount guaranteed by the SBA of $446 thousand and $257 thousand for the three months ended September 30, 2017 and 2016, respectively.

 
 
For the nine months ended September 30,
 
 
2017
 
2016
(In thousands)
 
Average recorded investment
 
Interest income recognized on impaired loans
 
Average recorded investment
 
Interest income recognized on impaired loans
SBA loans held for investment (1)
 
$
785

 
$
45

 
$
1,662

 
$
3

SBA 504 loans
 
110

 

 
893

 

Commercial loans
 
 
 
 
 
 
 
 
Commercial other
 
25

 

 
736

 
38

Commercial real estate
 
775

 
22

 
1,352

 
52

Commercial real estate construction
 

 

 
294

 

Total
 
$
1,695

 
$
67

 
$
4,937

 
$
93

(1)
Balances are reduced by the average amount guaranteed by the SBA of $249 thousand and $246 thousand for the nine months ended September 30, 2017 and 2016, respectively.

TDRs

The Company's loan portfolio also includes certain loans that have been modified as TDRs.  TDRs occur when a creditor, for economic or legal reasons related to a debtor’s financial condition, grants a concession to the debtor that it would not otherwise consider, unless it results in a delay in payment that is insignificant.  These concessions typically include reductions in interest rate, extending the maturity of a loan, or a combination of both.  When the Company modifies a loan, management evaluates for any possible impairment using either the discounted cash flows method, where the value of the modified loan is based on the present value of expected cash flows, discounted at the contractual interest rate of the original loan agreement, or by using the fair value of the collateral less selling costs if the loan is collateral-dependent.  If management determines that the value of the modified loan is less than the recorded investment in the loan, impairment is recognized by segment or class of loan, as applicable, through an allowance estimate or charge-off to the allowance.  This process is used, regardless of loan type, and for loans modified as TDRs that subsequently default on their modified terms.

As of September 30, 2017, the Company had no TDRs.  TDRs of $153 thousand are included in the impaired loan numbers as of December 31, 2016.  The decrease was due to the removal of one loan.  At December 31, 2016, there were specific reserves of $34 thousand on the nonperforming TDR.  At December 31, 2016, the $153 thousand TDR was in nonaccrual status and none were in accrual status.

To date, the Company’s TDRs consisted of interest rate reductions and maturity extensions.  There has been no principal forgiveness.  There were no loans modified during the three or nine months ended September 30, 2017 and 2016 that were deemed to be TDRs. There were no loans modified as a TDR within the previous 12 months that subsequently defaulted at some point during the three or nine months ended September 30, 2017.  In this case, the subsequent default is defined as 90 days past due or transferred to nonaccrual status.