NOTE 5 — LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans were as follows:

 

Financing receivables purchased during the years ended December 31, 2016 and 2015 by portfolio class are as follows.  These loans are included in the above table and all other tables below in the recorded investment amount.  No allowance for loan losses is provided for these loans at December 31, 2016 and 2015.

 

The remaining discount on the above loans was $7,313 and $2,198 at December 31, 2016 and 2015 respectively.

The Company purchased some credit impaired (PCI) loans in 2014 related to the MBT acquisition.  These loans had a net balance of under $1,000 so additional disclosures were not made due to their immateriality.  There were no loans classified as purchased credit impaired from 2015 purchases.  The Company purchased some PCI loans in 2016 related to the Cheviot acquisition.  These loans had a contractual balance of $16,175 with a fair value of $11,560.

The following tables present the activity in the allowance for loan losses by portfolio segment for the years ending December 31, 2016, 2015, and 2014:

 

 

 

 

The following table presents the balance in the allowance for loan losses and the recorded investment by portfolio segment and based on impairment method as of December 31, 2016 and 2015:

 

 

The allowance for loans collectively evaluated for impairment consists of reserves on groups of similar loans based on historical loss experience adjusted for other factors, as well as reserves on certain loans that are classified but determined not to be impaired based on an analysis which incorporates probability of default with a loss given default scenario. The reserves on these loans totaled $2,697 at December 31, 2016 and $1,583 at December 31, 2015.

Nonperforming loans were as follows:

Nonperforming loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.  

The following tables present loans individually evaluated for impairment by class of loans as of December 31, 2016, 2015, and 2014. Performing troubled debt restructurings at December 31, 2016, 2015, and 2014, totaling $1,925, $2,760 and $7,499 were excluded as allowed by ASC 310‑40.

 

 

 

 

 

The following table presents the average recorded investment of impaired loans in 2016, 2015, and 2014.

 

The following table presents the recorded investment in non‑accrual and loans past due over 90 days still on accrual by class of loans as of December 31, 2016 and 2015.

 

The following table presents the aging of the recorded investment in past due loans as of December 31, 2016 and 2015 by class of loans:

 

 

 

Troubled Debt Restructurings

During the years ending December 31, 2016 and 2015, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan, an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk, or a partial forgiveness of the principle balance.

Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from 60 months to 30 years. Modifications involving an extension of the maturity date were for periods ranging from 6 months to 40 years.

The total of troubled debt restructurings at December 31, 2016 and 2015 was $6,474 and $8,389 respectively. The Company has allocated $508 and $863 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2016 and 2015. The Company has committed to lend additional amounts totaling $0 to customers with outstanding loans that are classified as troubled debt restructuring at December 31, 2016 and 2015.

The following tables present loans by class modified as troubled debt restructurings that occurred during the year ending December 31, 2016, 2015 and 2014:

 

 

 

 

The troubled debt restructurings described above increased the allowance for loan losses by $0, $50 and $130 and resulted in charge offs of $0,  $261 and $3,849 during the years ending December 31, 2016, 2015 and 2014 respectively.

The following tables present loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the years ending December 31, 2016, 2015 and 2014:

 

 

 

 

 

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. The troubled debt restructurings that subsequently defaulted described above did not result in any increase in the allowance for loan losses or charge offs during the during the years ending December 31, 2016, 2015, and 2014 respectively.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the company’s internal underwriting policy.

The terms of certain other loans were modified during years ending December 31, 2016 and 2015 that did not meet the definition of a troubled debt restructuring. These loans have a total recorded investment as of December 31, 2016 and 2015 of $12,484 and $5,973. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be insignificant.

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of the borrower to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes commercial and commercial real estate loans individually by classifying the loans as to credit risk. This analysis includes the top 75 credit relationships on an annual basis. The Company uses the following definitions for risk ratings:

Special Mention — Loans classified as special mention have above average risk that requires management’s ongoing attention. The borrower may have demonstrated inability to generate profits or to maintain net worth, chronic delinquency and /or a demonstrated lack of willingness or capacity to meet obligations.

Substandard — Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well‑defined weakness or weaknesses that jeopardize the liquidation of the debt. They are classified by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Non‑accrual — Loans classified as non‑accrual are loans where the further accrual of interest is stopped because payment in full of principal and interest is not expected. In most cases, the principal and interest has been in default for a period of 90 days or more.

As of December 31, 2016 and 2015, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

 

 

 

Loans not analyzed individually as part of the above described process are classified by delinquency. These loans are primarily smaller commercial (<$250), smaller commercial real estate (<$250), residential mortgage and consumer loans. All commercial, commercial real estate, or consumer loans fully or partially secured by 1-4 family residential real estate that are 60‑89 days past due will be classified as Watch. If loans are greater than 90 days past due or commercial or commercial real estate loans on non-accrual, they will be classified as Substandard.  Consumer loans not secured by 1-4 family residential real estate that are 60‑119 days past due will be classified Substandard while loans greater than 119 days will be classified as Loss and charged off. As of December 31, 2016 and December 31, 2015, the grading of loans by category was as follows:

 

 

 

 

 

 

 

 

 

 

 

The following table presents financing receivables purchased and/or sold during the year by portfolio segment:

 

Purchased Credit Impaired Loans

The Company has purchased loans, for which there was, at acquisition, evidence of credit deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.  The carrying amount of these loans is as follows:

 

For those purchased credit impaired loans (PCI) disclosed above, the Company did not increase the allowance for loan losses during 2016, 2015, and 2014.  No allowances for loan losses were reversed in 2016, 2015, or 2014.

Purchased credit impaired loans purchased during the years ending December 31, 2016, 2015, and 2014 for which it was probable at acquisition that all contractually required payments would not be collected are as follows: