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Loans And Allowance For Loan Losses | 9 Months Ended
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Sep. 30, 2014
Loans And Allowance For Loan Losses [Abstract] |
Loans And Allowance For Loan Losses | Note 6: Loans and Allowance for Loan Losses Loans are carried at the principal amounts outstanding adjusted by partial charge-offs and net deferred loan origination costs or fees. Interest on loans is accrued and credited to income based on the principal amount of loans outstanding. Residential real estate and home equity loans are generally placed on non-accrual status when reaching 90 days past due, or in process of foreclosure, or sooner if judged appropriate by management. Consumer loans are generally placed on non-accrual status when reaching 90 days or more past due, or sooner if judged appropriate by management. Secured consumer loans are written down to realizable value and unsecured consumer loans are charged-off upon reaching 120 days past due. Commercial real estate loans and commercial business loans that are 90 days or more past due are generally placed on non-accrual status, unless secured by sufficient cash or other assets immediately convertible to cash, and the loan is in the process of collection. Commercial real estate and commercial business loans may be placed on non-accrual status prior to the 90 days delinquency date if considered appropriate by management. When a loan has been placed on non-accrual status, previously accrued and uncollected interest is reversed against interest on loans. A loan can be returned to accrual status when principal is reasonably assured and the loan has performed for a period of time, generally six months. Commercial real estate and commercial business loans are considered impaired when it becomes probable the Bank will not be able to collect all amounts due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status and collateral value. In considering loans for evaluation of impairment, management generally excludes smaller balance, homogeneous loans, residential mortgage loans, home equity loans, and all consumer loans, unless such loans were restructured in a troubled debt restructuring. These loans are collectively evaluated for risk of loss. Loan origination, commitment fees and direct loan origination costs are deferred, and the net amount is amortized as an adjustment of the related loans yield, using the level yield method over the estimated lives of the related loans. The Companys lending activities are principally conducted in downeast, midcoast and central Maine. The following table summarizes the composition of the loan portfolio as of September 30, 2014, and December 31, 2013: LOAN PORTFOLIO SUMMARY
|  | September 30, |  |  | December 31, |
|  | 2014 |  |  | 2013 |
Commercial real estate mortgages | $ | 329,263 |  | $ | 336,542 |
Commercial and industrial |  | 76,152 |  |  | 73,972 |
Commercial construction and land development |  | 23,828 |  |  | 18,129 |
Agricultural and other loans to farmers |  | 28,649 |  |  | 26,929 |
Total commercial loans |  | 457,892 |  |  | 455,572 |
Residential real estate mortgages |  | 359,494 |  |  | 317,115 |
Home equity loans |  | 51,693 |  |  | 49,565 |
Other consumer loans |  | 12,239 |  |  | 14,523 |
Total consumer loans |  | 423,426 |  |  | 381,203 |
Tax exempt loans |  | 16,729 |  |  | 16,355 |
Net deferred loan costs and fees |  | (102 | ) |  | (273 | )
Total loans |  | 897,945 |  |  | 852,857 |
Allowance for loan losses |  | (8,635 | ) |  | (8,475 | )
Total loans net of allowance for loan losses | $ | 889,310 |  | $ | 844,382 |
Loan Origination/Risk Management: The Bank has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. The Banks board of directors reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management and the board with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing loans and potential problem loans. The Bank seeks to diversify the loan portfolio as a means of managing risk associated with fluctuations in economic conditions. Commercial Real Estate Mortgages: The Banks commercial real estate mortgage loans are collateralized by liens on real estate, typically have variable interest rates and amortize over a 15 to 20 year period. These loans are underwritten primarily as cash flow loans and secondarily as loans secured by real estate. Payments on loans secured by such properties are largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Accordingly, repayment of these loans may be subject to adverse economic conditions to a greater extent than other types of loans. The Bank seeks to minimize these risks in a variety of ways, including giving careful consideration to the propertys operating history, future operating projections, current and projected occupancy, location and physical condition in connection with underwriting these loans. The underwriting analysis also includes credit verification, analysis of global cash flows, appraisals and a review of the financial condition of the borrower. Reflecting the Banks business region, at September 30, 2014, approximately 32.5% of the commercial real estate mortgage portfolio was represented by loans to the lodging industry. The Bank underwrites lodging industry loans as operating businesses, lending primarily to seasonal establishments with stabilized cash flows. Commercial and Industrial Loans: Commercial and industrial loans are underwritten after evaluating and understanding the borrowers ability to operate profitably, and prudently expand its business. Commercial and industrial loans are primarily made in the Banks market areas and are underwritten on the basis of the borrowers ability to service the debt from income. As a general practice, the Bank takes as collateral a lien on any available real estate, equipment or other assets owned by the borrower and obtains a personal guaranty of the borrower(s) or principal(s). Working capital loans are primarily collateralized by short-term assets whereas term loans are primarily collateralized by long-term assets. The risk in commercial and industrial loans is principally due to the type of collateral securing these loans. The increased risk also derives from the expectation that commercial and industrial loans generally will be serviced principally from the operations of the business, and, if not successful, these loans are primarily secured by tangible, non-real estate collateral. Construction and Land Development Loans: The Bank makes loans to finance the construction of residential and, to a lesser extent, non-residential properties. Construction loans generally are collateralized by first liens on real estate. The Bank conducts periodic inspections, either directly or through an agent, prior to approval of periodic draws on these loans. Underwriting guidelines similar to those described immediately above are also used in the Banks construction lending activities. Construction loans involve additional risks attributable to the fact that loan funds are advanced against a project under construction and the project is of uncertain value prior to its completion. Because of uncertainties inherent in estimating construction costs, the market value of the completed project and the effects of governmental regulation on real property, it can be difficult to accurately evaluate the total funds required to complete a project and the related loan to value ratio. As a result of these uncertainties, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. In many cases the success of the project can also depend upon the financial support/strength of the sponsorship. If the Bank is forced to foreclose on a project prior to completion, there is no assurance that the Bank will be able to recover the entire unpaid portion of the loan. In addition, the Bank may be required to fund additional amounts to complete a project and may have to hold the property for an indeterminate period of time. While the Bank has underwriting procedures designed to identify what it believes to be acceptable levels of risks in construction lending, no assurance can be given that these procedures will prevent losses from the risks described above. Residential Real Estate Mortgages: The Bank originates first-lien, adjustable-rate and fixed-rate, one-to-four-family residential real estate loans for the construction, purchase or refinancing of residential property. These loans are principally collateralized by owner-occupied properties, and to a lesser extent second homes and vacation properties, and are amortized over 10 to 30 years. From time to time the Bank will sell longer-term, low rate, residential mortgage loans to the Federal Home Loan Mortgage Corporation (FHLMC) with servicing rights retained. This practice allows the Bank to better manage interest rate risk and liquidity risk. In an effort to manage risk of loss and strengthen secondary market liquidity opportunities, management typically uses secondary market underwriting, appraisal, and servicing guidelines for all loans, including those held in its portfolio. Loans on one-to-four-family residential real estate are mostly originated in amounts of no more than 80% of appraised value or have private mortgage insurance. Mortgage title insurance and hazard insurance are required. Construction loans have a unique risk, because they are secured by an incomplete dwelling. This risk is reduced through more stringent underwriting standards, including regular inspections throughout the construction period. Home Equity Loans: The Bank originates home equity lines of credit and second mortgage loans (loans which are secured by a junior lien position on one-to-four-family residential real estate). These loans carry a higher risk than first mortgage residential loans as they are in a second position relating to collateral. Risk is reduced through underwriting criteria, which include credit verification, appraisals and evaluations, a review of the borrower's financial condition, and personal cash flows. A security interest, with title insurance when necessary, is taken in the underlying real estate. Non-performing Loans: the following table sets forth information regarding non-accruing loans and accruing loans 90 days or more overdue at September 30, 2014, and December 31, 2013. TOTAL NON-PERFORMING LOANS
|  | September 30, |  | December 31,
|  | 2014 |  | 2013
Commercial real estate mortgages | $ | 1,053 | $ | 2,046
Commercial and industrial loans |  | 604 |  | 793
Commercial construction and land development |  | 1,328 |  | 1,913
Agricultural and other loans to farmers |  | 56 |  | 56
Total commercial loans |  | 3,041 |  | 4,808
Residential real estate mortgages |  | 2,545 |  | 3,227
Home equity loans |  | 622 |  | 745
Other consumer loans |  | 20 |  | 60
Total consumer loans |  | 3,187 |  | 4,032
Total non-accrual loans |  | 6,228 |  | 8,840
Accruing loans contractually past due 90 days or more |  | 87 | - | --
Total non-performing loans | $ | 6,315 | $ | 8,840
Troubled Debt Restructures: A Troubled Debt Restructure (TDR) results from a modification to a loan to a borrower who is experiencing financial difficulty in which the Bank grants a concession to the debtor that it would not otherwise consider but for the debtors financial difficulties. Financial difficulty arises when a debtor is bankrupt or contractually past due, or is likely to become so, based upon its ability to pay. A concession represents an accommodation not generally available to other customers, which may include a below-market interest rate, deferment of principal payments, extension of maturity dates, etc. Such accommodations extended to customers who are not experiencing financial difficulty do not result in TDR classification. Summary information pertaining to the TDRs that occurred during the three and nine months ended September 30, 2014 and 2013 follows:
| For the Three Months Ended | For the Nine Months Ended
| September 30, | September 30,
|  |  | 2014 |  |  |  |  | 2014 |  |
|  |  | Pre- |  | Post- |  |  | Pre- |  | Post-
|  |  | Modification |  | Modification |  |  | Modification |  | Modification
| Number |  | Outstanding |  | Outstanding | Number |  | Outstanding |  | Outstanding
| of |  | Recorded |  | Recorded | of |  | Recorded |  | Recorded
| Loans |  | Investment |  | Investment | Loans |  | Investment |  | Investment
Agricultural and other loans to farmers | 1 | $ | 100 | $ | 99 | 1 | $ | 100 | $ | 99
Total commercial loans | 1 |  | 100 |  | 99 | 1 |  | 100 |  | 99
Total | 1 | $ | 100 | $ | 99 | 1 | $ | 100 | $ | 99
| For the Three Months Ended | For the Nine Months Ended
| September 30, | September 30,
|  |  | 2013 |  |  |  |  | 2013 |  |
|  |  |  |  |  |  |  | Pre- |  |
|  |  | Pre- |  | Post- |  |  |  |  | Post-
|  |  | Modification |  | Modification |  |  | Modification |  | Modification
|  |  | Outstanding |  | Outstanding |  |  | Outstanding Outstanding |  |
| Number of |  | Recorded |  | Recorded | Number |  | Recorded |  | Recorded
| Loans |  | Investment |  | Investment | of Loans |  | Investment |  | Investment
Commercial and industrial loans | 0 | $ | --- | $ | --- | 1 | $ | 50 | $ | 47
Total commercial loans | 0 |  |  |  |  | 1 |  | 50 |  | 47
Residential real estate mortgages | 1 |  | 166 |  | 166 | 1 |  | 166 |  | 166
Home equity loans | 0 |  | --- |  | --- | 1 |  | 16 |  | 21
Other consumer loans | 0 |  | --- |  | --- | 1 |  | 14 |  | 13
Total consumer loans | 1 |  | 166 |  | 166 | 3 |  | 196 |  | 200
Total | 1 | $ | 166 | $ | 166 | 4 | $ | 246 | $ | 247
The following table shows the Banks post-modification balance of TDRs listed by type of modification for the three and nine months ended September 30, 2014 and 2013:
|  | September 30, 2014 |  | September 30, 2013
|  | Three |  | Nine |  | Three |  | Nine
|  | Months |  | Months |  | Months |  | Months
|  | Ended |  | Ended |  | Ended |  | Ended
Extended maturity and adjusted interest rate | $ | 99 | $ | 99 | $ | --- | $ | 81
Court ordered concession | - | -- | - | -- |  | 166 |  | 166
Total | $ | 99 | $ | 99 | $ | 166 | $ | 247
As of September 30, 2014, the Bank had six real estate secured loans, six commercial and industrial loans, one agricultural loan, and one other consumer loan, to nine relationships totaling $1,488 that were classified as TDRs. At September 30, 2014, seven of these TDRs totaling $383 were classified as non-accrual, and none were past due 30 days or more and still accruing. As of December 31, 2013, the Bank had six real estate secured, six commercial and industrial loans and one other consumer loan to eight relationships totaling $1,454 that were classified as TDRs. At December 31, 2013, seven TDRs totaling $416 were past due or classified as non-performing. During the nine months ended September 30, 2014 and 2013, there were no defaults on loans that had been modified as TDRs within the previous twelve months. A default for purposes of this disclosure is a TDR in which the borrower is 90 days or more past due or results in foreclosure and repossession of the applicable collateral. Past Due Loans: Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. The following tables set forth information regarding past due loans at September 30, 2014, and December 31, 2013. Amounts shown exclude deferred loan origination fees and costs.
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | >90Days
|  | 30-59 |  | 60-89 |  | 90 Days |  |  |  |  |  |  |  |  |  | Past Due
September 30, 2014 |  | Days |  | Days |  | or |  | Total |  |  |  |  |  | Non- |  | and
|  | Past Due |  | Past Due |  | Greater |  | Past Due |  | Current |  | Total Loans |  | Accrual |  | Accruing
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
mortgages | $ | 401 | $ | 1,611 | $ | 328 | $ | 2,340 | $ | 326,923 | $ | 329,263 | $ | 1,053 | $ | ---
Commercial and industrial |  | 133 |  | 10 |  | 372 |  | 515 |  | 75,637 |  | 76,152 |  | 604 | - | --
Commercial construction |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
and land development | - | -- | - | -- |  | 1,328 |  | 1,328 |  | 22,500 |  | 23,828 |  | 1,328 | - | --
Agricultural and other loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
to farmers |  | 39 |  | 58 | - | -- |  | 97 |  | 28,552 |  | 28,649 |  | 56 | - | --
Residential real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
mortgages |  | 472 |  | 3,753 |  | 847 |  | 5,072 |  | 354,422 |  | 359,494 |  | 2,545 |  | 87
Home equity |  | 907 | - | -- |  | 242 |  | 1,149 |  | 50,544 |  | 51,693 |  | 622 | - | --
Other consumer loans |  | 114 | - | -- |  | 8 |  | 122 |  | 12,117 |  | 12,239 |  | 20 | - | --
Tax exempt | - | -- | - | -- | - | -- | - | -- |  | 16,729 |  | 16,729 | - | -- | - | --
Total | $ | 2,066 | $ | 5,432 | $ | 3,125 | $ | 10,623 | $ | 887,424 | $ | 898,047 | $ | 6,228 | $ | 87
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | >90 Days
December 31, 2013 |  | 30-59 |  | 60-89 |  | 90 Days |  |  |  |  |  |  |  |  |  |  | Past Due
|  | Days |  | Days |  | or |  |  | Total |  |  |  |  |  | Non- |  | and
|  | Past Due |  | Past Due |  | Greater |  |  | Past Due |  | Current |  | Total Loans |  | Accrual |  | Accruing
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
mortgages | $ | 786 | $ | 361 | $ | 698 |  | $ | 1,845 | $ | 334,697 | $ | 336,542 | $ | 2,046 | $ | ---
Commercial and industrial |  | 29 |  | 20 |  | 456 |  |  | 505 |  | 73,467 |  | 73,972 |  | 793 |  | ---
Commercial construction |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
and land development | - | -- | - | -- |  | 1,845 |  |  | 1,845 |  | 16,284 |  | 18,129 |  | 1,913 |  | ---
Agricultural and other loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
to farmers |  | 22 | - | -- | - | -- |  |  | 22 |  | 26,907 |  | 26,929 |  | 56 |  | ---
Residential real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
mortgages |  | 2,170 |  | 1,864 |  | 1,649 |  |  | 5,683 |  | 311,432 |  | 317,115 |  | 3,227 |  | ---
Home equity |  | 67 | - | -- | - | -- |  |  | 67 |  | 49,498 |  | 49,565 |  | 745 |  | ---
Other consumer loans |  | 57 |  | 80 |  | 41 |  |  | 178 |  | 14,345 |  | 14,523 |  | 60 |  | ---
Tax exempt | - | -- | - | -- | - | -- |  | - | -- |  | 16,355 |  | 16,355 | - | -- |  | ---
Total | $ | 3,131 | $ | 2,325 | $ | 4,689 |  | $ | 10,145 | $ | 842,985 | $ | 853,130 | $ | 8,840 | $ | ---
Impaired Loans: Impaired loans are all commercial loans for which the Company believes it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan agreement, as well as all loans modified into a TDR, if any. Allowances for losses on impaired loans are determined by the lower of the present value of the expected cash flows related to the loan, using the original contractual interest rate, and its recorded value, or in the case of collateral dependent loans, the lower of the fair value of the collateral, less costs to dispose, and the recorded amount of the loans. When foreclosure is probable, impairment is measured based on the fair value of the collateral less cost to sell. Details of impaired loans as of September 30, 2014 and December 31, 2013 follows:
|  | September 30, 2014 |  | December 31, 2013
|  |  |  | Unpaid |  |  |  |  |  | Unpaid |  |
|  | Recorded |  | Principal |  | Related |  | Recorded |  | Principal |  | Related
|  | Investment |  | Balance |  | Allowance |  | Investment |  | Balance |  | Allowance
With no related allowance: |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate mortgages | $ | 1,560 | $ | 1,634 | $ | --- | $ | 1,949 | $ | 2,103 | $ | ---
Commercial and industrial |  | 326 |  | 506 | - | -- |  | 660 |  | 770 | - | --
Commercial construction |  |  |  |  |  |  |  |  |  |  |  |
and land development |  | 1,328 |  | 3,253 | - | -- |  | 68 |  | 68 | - | --
Agricultural and other loans |  |  |  |  |  |  |  |  |  |  |  |
to farmers |  | 155 |  | 155 | - | -- |  | 56 |  | 56 | - | --
Residential real estate loans |  | 438 |  | 438 | - | -- |  | 442 |  | 442 | - | --
Home equity loans |  | 19 |  | 19 | - | -- |  | 21 |  | 21 | - | --
Other consumer |  | 11 |  | 11 | - | -- |  | 13 |  | 13 | - | --
Subtotal | $ | 3,837 | $ | 6,016 | $ | --- | $ | 3,209 | $ | 3,473 | $ | ---
With an allowance: |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate mortgages | $ | 229 | $ | 229 | $ | 68 | $ | 854 | $ | 854 | $ | 100
Commercial and industrial |  | 290 |  | 290 |  | 237 |  | 150 |  | 150 |  | 150
Commercial construction |  |  |  |  |  |  |  |  |  |  |  |
and land development | - | -- | - | -- | - | -- |  | 1,845 |  | 3,770 |  | 20
Agricultural and other loans |  |  |  |  |  |  |  |  |  |  |  |
to farmers | - | -- | - | -- | - | -- | - | -- | - | -- | - | --
Residential real estate loans | - | -- | - | -- | - | -- | - | -- | - | -- | - | --
Home equity loans | - | -- | - | -- | - | -- | - | -- | - | -- | - | --
Other consumer | - | -- | - | -- | - | -- | - | -- | - | -- | - | --
Subtotal | $ | 519 |  | 519 | $ | 305 | $ | 2,849 | $ | 4,774 | $ | 270
Total | $ | 4,356 | $ | 6,535 | $ | 305 | $ | 6,058 | $ | 8,247 | $ | 270
Details of impaired loans for the three and nine months ended September 30, 2014 and 2013 follows:
|  |  |  | September 30, 2014 |  |  |  |  |  | September 30, 2013 |  |
|  | Three Months Ended |  | Nine Months Ended |  | Three Months Ended |  | Nine Months Ended
|  | Average |  |  |  | Average |  |  |  | Average |  |  |  | Average |  |
|  | Recorded |  | Interest |  | Recorded |  | Interest |  | Recorded |  | Interest |  | Recorded |  | Interest
|  | Investment |  | Recorded |  | Investment |  | Recorded |  | Investment |  | Recorded |  | Investment |  | Recorded
With no related allowance: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real | $ | 1,763 | $ | 11 | $ | 1,877 | $ | 43 | $ | 2,441 | $ | 17 | $ | 2,465 | $ | 49
estate mortgages |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  | 512 |  | 1 |  | 663 |  | 3 |  | 596 |  | 2 |  | 703 |  | 4
Commercial construction |  | 1,328 | - | -- |  | 1,576 | - | -- | - | -- | - | -- | - | -- | - | --
and land development |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Agricultural and other loans |  | 143 | - | -- |  | 89 |  | 2 |  | 119 | - | -- |  | 340 | - | --
to farmers |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential real |  | 468 |  | 3 |  | 470 |  | 10 |  | 457 | - | -- |  | 350 | - | --
estate mortgages |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Home equity loans |  | 20 |  | 1 |  | 20 |  | 1 |  | 21 | - | -- |  | 20 |  | 1
Other consumer |  | 11 | - | -- |  | 12 | - | -- |  | 13 | - | -- |  | 14 |  | 1
Subtotal | $ | 4,245 | $ | 16 | $ | 4,707 | $ | 59 | $ | 3,647 | $ | 19 | $ | 3,892 | $ | 55
With an allowance: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real | $ | 229 | $ | --- | $ | 498 | $ | --- | $ | --- | $ | --- | $ | --- | $ | ---
estate mortgages |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  | 404 | - | -- |  | 403 | - | -- |  | - | - | -- | - | -- | - | --
Commercial construction | - | -- | - | -- | - | -- | - | -- |  | 1,965 | - | -- |  | 2,075 | - | --
and land development |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Agricultural and other loans | - | -- | - | -- | - | -- | - | -- | - | -- | - | -- | - | -- | - | --
to farmers |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential real | - | -- | - | -- | - | -- | - | -- | - | -- | - | -- | - | -- | - | --
estate mortgages |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Home equity loans | - | -- | - | -- | - | -- | - | -- | - | -- | - | -- | - | -- | - | --
Other consumer | - | -- | - | -- | - | -- | - | -- | - | -- | - | -- | - | -- | - | --
Subtotal |  | 633 |  |  |  | 901 |  |  |  | 1,965 |  |  |  | 2,075 |  |
Total | $ | 4,878 | $ | 16 | $ | 5,608 | $ | 59 | $ | 5,612 | $ | 19 | $ | 5,967 | $ | 55
Credit Quality Indicators/Classified Loans: In monitoring the credit quality of the portfolio, management applies a credit quality indicator to all categories of commercial loans. These credit quality indicators range from one through nine, with a higher number correlating to increasing risk of loss. These ratings are used as inputs to the calculation of the allowance for loan losses. Loans rated one through five are consistent with the regulators Pass ratings, and are generally allocated a lesser percentage allocation in the allowance for loan losses than loans rated from six through nine. Consistent with regulatory guidelines, the Bank provides for the classification of loans which are considered to be of lesser quality as substandard, doubtful, or loss. The Bank considers a loan substandard if it is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard loans have a well defined weakness that jeopardizes liquidation of the debt. Substandard loans include those loans where there is the distinct possibility of some loss of principal, if the deficiencies are not corrected. Loans that the Bank classifies as doubtful have all of the weaknesses inherent in those loans that are classified as substandard but also have the added characteristic that the weaknesses present 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 high but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the loan, its classification as an estimated loss is deferred until its 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. The entire amount of the loan might not be classified as doubtful when collection of a specific portion appears highly probable. Loans are generally not classified doubtful for an extended period of time (i.e., over a year). Loans that the Bank classifies as loss are those considered uncollectible and of such little value that their continuance as an asset is not warranted and the uncollectible amounts are charged-off. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future. Losses are taken in the period in which they surface as uncollectible. Loans that do not expose the Bank to risk sufficient to warrant classification in one of the aforementioned categories, but which possess some weaknesses, are designated special mention. A special mention loan has potential weaknesses that deserve managements close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institutions credit position at some future date. This might include loans which the lending officer may be unable to supervise properly because of: (i) lack of expertise, inadequate loan agreement; (ii) the poor condition of or lack of control over collateral; (iii) failure to obtain proper documentation or any other deviations from prudent lending practices. Economic or market conditions which may, in the future, affect the obligor may warrant special mention of the asset. Loans for which an adverse trend in the borrower's operations or an imbalanced position in the balance sheet which has not reached a point where the liquidation is jeopardized may be included in this classification. Special mention assets are not adversely classified and do not expose an institution to sufficient risks to warrant classification. The following tables summarize the commercial loan portfolio as of September 30, 2014, and December 31, 2013, by credit quality indicator. Credit quality indicators are reassessed for each applicable commercial loan at least annually, or upon receipt and analysis of the borrowers financial statements, when applicable. Consumer loans, which principally consist of residential mortgage loans, are not rated, but are evaluated for credit quality after origination based on delinquency status (see past due loan aging table above).
|  |  |  |  |  | Commercial |  | Agricultural |  |
|  | Commercial |  | Commercial |  | construction |  | and other |  |
|  | real estate |  | and |  | and land |  | loans to |  |
September 30, 2014 |  | mortgages |  | industrial |  | development |  | farmers |  | Total
Pass | $ | 302,297 | $ | 64,193 | $ | 21,112 | $ | 28,186 | $ | 415,788
Other Assets |  |  |  |  |  |  |  |  |  |
Especially Mentioned |  | 17,850 |  | 9,130 |  | 422 |  | 167 |  | 27,569
Substandard |  | 9,116 |  | 2,829 |  | 2,294 |  | 296 |  | 14,535
Doubtful |  | --- |  | --- |  | --- |  | --- |  | ---
Loss |  | --- |  | --- |  | --- |  | --- |  | ---
Total | $ | 329,263 | $ | 76,152 | $ | 23,828 | $ | 28,649 | $ | 457,892
|  |  |  |  |  | Commercial |  | Agricultural |  |
|  | Commercial |  | Commercial |  | construction |  | and other |  |
|  | real estate |  | and |  | and land |  | loans to |  |
December 31, 2013 |  | mortgages |  | industrial |  | development |  | farmers |  | Total
Pass | $ | 307,486 | $ | 60,330 | $ | 14,403 | $ | 26,447 | $ | 408,666
Other Assets |  |  |  |  |  |  |  |  |  |
Especially Mentioned |  | 19,768 |  | 10,568 |  | 437 |  | 182 |  | 30,955
Substandard |  | 9,288 |  | 3,074 |  | 3,289 |  | 300 |  | 15,951
Doubtful |  | --- |  | --- |  | --- |  | --- |  | ---
Loss |  | --- |  | --- |  | --- |  | --- |  | ---
Total | $ | 336,542 | $ | 73,972 | $ | 18,129 | $ | 26,929 | $ | 455,572
Allowance for Loan Losses: The allowance for loan losses (the allowance) is a reserve established through a provision for loan losses (the provision) charged to expense, which represents managements best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to provide for estimated loan losses and risks inherent in the loan portfolio. The Banks allowance for loan loss methodology includes allowance allocations calculated in accordance with ASC Topic 310, Receivables and allowance allocations calculated in accordance with ASC Topic 450, Contingencies. Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The Banks process for determining the appropriate level of the allowance is designed to account for credit deterioration as it occurs. The provision reflects loan quality trends, including the levels of and trends related to non-accrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors. The provision also reflects the totality of actions taken on all loans for a particular period. In other words, the amount of the provision reflects not only the necessary increases in the allowance related to newly identified criticized loans, but it also reflects actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans or loan pools. The level of the allowance reflects managements continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Banks control, including, among other things, the performance of the Banks loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications. The Banks allowance for loan losses consists of three principal elements: (i) specific valuation allowances determined in accordance with ASC Topic 310 based on probable losses on specific loans; (ii) historical valuation allowances determined in accordance with ASC Topic 450 based on historical loan loss experience for similar loans with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; and (iii) general valuation allowances determined in accordance with ASC Topic 450 based on general economic conditions and other qualitative risk factors both internal and external to the Bank. The allowances established for probable losses on specific loans are based on a regular analysis and evaluation of problem loans. Loans are classified based on an internal credit risk grading process that evaluates, among other things: (i) the obligors ability to repay; (ii) the underlying collateral, if any; and (iii) the economic environment and industry in which the borrower operates. This analysis is performed at the relationship level for all commercial loans. When a loan has a classification of substandard or worse, the Bank analyzes the loan to determine whether the loan is impaired and, if impaired, the need to specifically allocate a portion of the allowance to the loan. Specific valuation allowances are determined by analyzing the borrowers ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrowers industry, among other observable considerations. Historical valuation allowances are calculated based on the historical loss experience of specific types of loans and the internal risk grade of such loans at the time they were charged-off. The Bank calculates historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool. The historical loss ratios are periodically updated based on actual charge-off experience. A historical valuation allowance is established for each pool of similar loans based upon the product of the historical loss ratio and the total dollar amount of the loans in the pool, net of any loans for which reserves are already established. The Banks pools of similar loans include similarly risk-graded groups of commercial real estate loans, commercial and industrial loans, consumer real estate loans and consumer and other loans. General valuation allowances are based on general economic conditions and other qualitative risk factors both internal and external to the Bank. In general, such valuation allowances are determined by evaluating, among other things: (i) the experience, ability and effectiveness of the Banks lending management and staff; (ii) the effectiveness of the Banks loan policies, procedures and internal controls; (iii) changes in asset quality; (iv) changes in loan portfolio volume; (v) the composition and concentrations of credit; (vi) the impact of competition on loan structuring and pricing; and (vii) the impact of environmental risks on portfolio risks. Management evaluates the degree of risk that each one of these components has on the quality of the loan portfolio on a quarterly basis. The results are then used to determine an appropriate general valuation allowance. Loans identified as losses by management, external loan review and/or bank examiners, are charged-off. Furthermore, consumer loan accounts are charged-off based on regulatory requirements. The following tables detail activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2014, and 2013. The tables also provide details regarding the Banks recorded investment in loans related to each balance in the allowance for loan losses by portfolio segment and disaggregated on the basis of the Banks impairment methodology. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
|  |  |  |  |  |  |  | Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Three Months Ended |  |  |  |  | Commercial |  |  | Construction |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
September 30, 2014 |  | Commercial |  |  | and |  |  | and land |  |  |  |  | Residential |  |  |  |  |  | Home |  | Tax |  |  |  |
|  | Real Estate |  |  | Industrial |  |  | development |  | Agricultural |  |  | Real Estate |  |  | Consumer |  |  | Equity |  | Exempt |  |  | Total |
Beginning Balance | $ | 4,887 |  | $ | 1,573 |  | $ | 254 | $ | 371 |  | $ | 1,149 |  | $ | 103 |  | $ | 241 | $ | 173 |  | $ | 8,751 |
Charged-off |  | (19 | ) |  | (317 | ) | - | -- | - | -- |  |  | (264 | ) |  | (68 | ) | - | -- | - | -- |  |  | (668 | )
Recoveries |  | 34 |  |  | 1 |  | - | -- |  | 11 |  | - | -- |  |  | 14 |  |  | 1 | - | -- |  |  | 61 |
Provision |  | (71 | ) |  | 150 |  |  | 77 |  | (26 | ) |  | 275 |  |  | 97 |  | - | -- |  | (11 | ) |  | 491 |
Ending Balance | $ | 4,831 |  | $ | 1,407 |  | $ | 331 | $ | 356 |  | $ | 1,160 |  | $ | 146 |  | $ | 242 | $ | 162 |  | $ | 8,635 |
|  |  |  |  |  |  |  | Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Nine Months Ended |  |  |  |  | Commercial |  |  | Construction |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
September 30, 2014 |  | Commercial |  |  | and |  |  | and land |  |  |  |  | Residential |  |  |  |  |  | Home |  |  | Tax |  |  |  |
|  | Real Estate |  |  | Industrial |  |  | development |  | Agricultural |  |  | Real Estate |  |  | Consumer |  |  | Equity |  |  | Exempt |  |  | Total |
Beginning Balance | $ | 4,825 |  | $ | 1,266 |  | $ | 314 | $ | 335 |  | $ | 1,166 |  | $ | 137 |  | $ | 264 |  | $ | 168 |  | $ | 8,475 |
Charged-off |  | (184 | ) |  | (416 | ) |  | -- |  | (14 | ) |  | (557 | ) |  | (148 | ) |  | (18 | ) | - | -- |  |  | (1,337 | )
Recoveries |  | 40 |  |  | 13 |  |  | -- |  | 26 |  |  | 12 |  |  | 29 |  |  | 1 |  | - | -- |  |  | 121 |
Provision |  | 150 |  |  | 544 |  |  | 17 |  | 9 |  |  | 539 |  |  | 128 |  |  | (5 | ) |  | (6 | ) |  | 1,376 |
Ending Balance | $ | 4,831 |  | $ | 1,407 |  | $ | 331 | $ | 356 |  | $ | 1,160 |  | $ | 146 |  | $ | 242 |  | $ | 162 |  | $ | 8,635 |
of which: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Amount for loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
individually |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
evaluated for |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
impairment | $ | 68 |  | $ | 237 |  | $ | -- | $ | --- |  | $ | --- |  | $ | --- |  | $ | --- |  | $ | --- |  | $ | 305 |
Amount for loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
collectively evaluated |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
for impairment | $ | 4,763 |  | $ | 1 ,170 |  | $ | 331 | $ | 356 |  | $ | 1,160 |  | $ | 146 |  | $ | 242 |  | $ | 162 |  | $ | 8,330 |
Loans individually |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
evaluated for |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
impairment | $ | 1,053 |  | $ | 604 |  | $ | 1,328 | $ | 56 |  | $ | --- |  | $ | --- |  | $ | --- |  | $ | --- |  | $ | 3,041 |
Loans collectively |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
evaluated for |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
impairment | $ | 329,538 |  | $ | 75,548 |  | $ | 22,500 | $ | 28,593 |  | $ | 359,494 |  | $ | 12,239 |  | $ | 51,693 |  | $ | 16,729 |  | $ | 895,006 |
|  |  |  |  |  |  |  | Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Three Months Ended |  |  |  |  | Commercial |  |  | Construction |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
September 30, 2013 |  | Commercial |  |  | and |  |  | and land |  |  |  |  | Residential |  |  |  |  |  | Home |  |  | Tax |  |  |
|  | Real Estate |  |  | Industrial |  |  | development |  | Agricultural |  |  | Real Estate |  |  | Consumer |  |  | Equity |  |  | Exempt |  | Total |
Beginning Balance | $ | 4,435 |  | $ | 1,062 |  | $ | 355 | $ | 323 |  | $ | 1,421 |  | $ | 147 |  | $ | 270 |  | $ | 154 | $ | 8,167 |
Charged-off |  | (55 | ) |  | (8 | ) | - | -- | - | -- |  |  | (32 | ) |  | (12 | ) | - | -- |  | - | -- |  | (107 | )
Recoveries |  | 102 |  |  | 12 |  | - | -- |  | 24 |  |  | 5 |  |  | 7 |  | - | -- |  | - | -- |  | 150 |
Provision |  | 223 |  |  | 146 |  |  | 19 |  | (5 | ) |  | (169 | ) |  | 3 |  |  | (57 | ) |  | 10 |  | 170 |
Ending Balance | $ | 4,705 |  | $ | 1,212 |  | $ | 374 | $ | 342 |  | $ | 1,225 |  | $ | 145 |  | $ | 213 |  | $ | 164 | $ | 8,380 |
|  |  |  |  |  |  |  | Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Nine Months Ended |  |  |  |  | Commercial |  |  | Construction |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
September 30, 2013 |  | Commercial |  |  | and |  |  | and land |  |  |  |  |  | Residential |  |  |  |  |  | Home |  |  | Tax |  |  |
|  | Real Estate |  |  | Industrial |  |  | development |  |  | Agricultural |  |  | Real Estate |  |  | Consumer |  |  | Equity |  |  | Exempt |  | Total |
Beginning Balance | $ | 4,320 |  | $ | 1,026 |  | $ | 515 |  | $ | 303 |  | $ | 1,330 |  | $ | 207 |  | $ | 255 |  | $ | 141 | $ | 8,097 |
Charged-off |  | (139 | ) |  | (186 | ) | - | -- |  |  | (81 | ) |  | (319 | ) |  | (80 | ) |  | (34 | ) | - | -- |  | (839 | )
Recoveries |  | 105 |  |  | 22 |  | - | -- |  |  | 25 |  |  | 6 |  |  | 17 |  |  | 19 |  | - | -- |  | 194 |
Provision |  | 419 |  |  | 350 |  |  | (141 | ) |  | 95 |  |  | 208 |  |  | 1 |  |  | (27 | ) |  | 23 |  | 928 |
Ending Balance | $ | 4,705 |  | $ | 1,212 |  | $ | 374 |  | $ | 342 |  | $ | 1,225 |  | $ | 145 |  | $ | 213 |  | $ | 164 | $ | 8,380 |
Loan concentrations: Because of the Companys proximity to Acadia National Park, a large part of the economic activity in the Banks area is generated from the hospitality business associated with tourism. At September 30, 2014, and December 31, 2013, loans to the lodging industry amounted to approximately $111,422 and $114,982, respectively.

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