3.	Loans and Allowance for Loan Losses

The Company’s loan and allowance for loan loss policies are as follows:

Loans are stated at unpaid principal balances, less net deferred loan fees and the allowance for loan losses. The Company grants real estate mortgage, commercial business and consumer loans. A substantial portion of the loan portfolio is represented by mortgage loans to customers in the Louisville, Kentucky metropolitan statistical area (MSA). The ability of the Company’s customers to honor their loan agreements is dependent upon the real estate and general economic conditions in this area.

Loan origination and commitment fees, as well as certain direct costs of underwriting and closing loans, are deferred and amortized as a yield adjustment to interest income over the lives of the related loans using the interest method. Amortization of net deferred loan fees is discontinued when a loan is placed on nonaccrual status.

The recognition of income on a loan is discontinued and previously accrued interest is reversed, when interest or principal payments become

ninety

(90)

days past due unless, in the opinion of management, the outstanding interest remains collectible. Past due status is determined based on contractual terms. Generally, by applying the cash receipts method, interest income is subsequently recognized only as received until the loan is returned to accrual status. The cash receipts method is used when the likelihood of further loss on the loan is remote. Otherwise, the Company applies the cost recovery method and applies all payments as a reduction of the unpaid principal balance until the loan qualifies for return to accrual status. Interest income on impaired loans is recognized using the cost recovery method, unless the likelihood of further loss on the loan is remote.

A loan is restored to accrual status when all principal and interest payments are brought current and the borrower has demonstrated the ability to make future payments of principal and interest as scheduled, which generally requires that the borrower demonstrate a period of performance of at least

six

consecutive months.

For portfolio segments other than consumer loans, the Company’s practice is to charge-off any loan or portion of a loan when the loan is determined by management to be uncollectible due to the borrower’s failure to meet repayment terms, the borrower’s deteriorating or deteriorated financial condition, the depreciation of the underlying collateral, the loan’s classification as a loss by regulatory examiners, or for other reasons. A partial charge-off is recorded on a loan when the uncollectibility of a portion of the loan has been confirmed, such as when a loan is discharged in bankruptcy, the collateral is liquidated, a loan is restructured at a reduced principal balance, or other identifiable events that lead management to determine the full principal balance of the loan will not be repaid. A specific reserve is recognized as a component of the allowance for estimated losses on loans individually evaluated for impairment. Partial charge-offs on nonperforming and impaired loans are included in the Company’s historical loss experience used to estimate the general component of the allowance for loan losses as discussed below. Specific reserves are not considered charge-offs in management’s analysis of the allowance for loan losses because they are estimates and the outcome of the loan relationship is undetermined. At

March

31,

2017,

the Company had

six

loans on which partial charge-offs of

$200,000

had been recorded.

Consumer loans not secured by real estate are typically charged off at

days past due, or earlier if deemed uncollectible, unless the loans are in the process of collection. Overdrafts are charged off after

days past due. Charge-offs are typically recorded on loans secured by real estate when the property is foreclosed upon.

The allowance for loan losses reflects management’s judgment of probable loan losses inherent in the loan portfolio at the balance sheet date. Additions to the allowance for loan losses are made by the provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The Company uses a disciplined process and methodology to evaluate the allowance for loan losses on at least a quarterly basis that is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that

may

affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific and general components. The specific component relates to loans that are individually evaluated for impairment or loans otherwise classified as doubtful, substandard, or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.

The general component covers non-classified loans and classified loans that are found, upon individual evaluation, to not be impaired. Such loans are pooled by segment and losses are modeled using annualized historical loss experience adjusted for qualitative factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent

twenty

calendar quarters unless the historical loss experience is not considered indicative of the level of risk in the remaining balance of a particular portfolio segment, in which case an adjustment is determined by management. The Company’s historical loss experience is then adjusted by an overall loss factor weighting adjustment based on a qualitative analysis prepared by management and reviewed on a quarterly basis. The overall loss factor considers changes in underwriting standards, economic conditions, changes and trends in past due and classified loans and other internal and external factors.

Management also applies additional loss factor multiples to loans classified as watch, special mention and substandard that are not individually evaluated for impairment. The loss factor multiples for classified loans are based on management’s assessment of historical trends regarding losses experienced on classified loans in prior periods. See below for additional discussion of the overall loss factor and loss factor multiples for classified loans as of

March

31,

2017

and

December

31,

2016.

Management exercises significant judgment in evaluating the relevant historical loss experience and the qualitative factors. Management also monitors the differences between estimated and actual incurred loan losses for loans considered impaired in order to evaluate the effectiveness of the estimation process and make any changes in the methodology as necessary.

Management utilizes the following portfolio segments in its analysis of the allowance for loan losses: residential real estate, land, construction, commercial real estate, commercial business, home equity and

second

mortgage, and other consumer loans. Additional discussion of the portfolio segments and the risks associated with each segment can be found in the Company’s Annual Report on Form

-K for the year ended

December

31,

2016.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Values for collateral dependent loans are generally based on appraisals obtained from independent licensed real estate appraisers, with adjustments applied for estimated costs to sell the property, costs to complete unfinished or repair damaged property and other factors. New appraisals are generally obtained for all significant properties when a loan is identified as impaired, and a property is considered significant if the value of the property is estimated to exceed

$200,000.

Subsequent appraisals are obtained as needed or if management believes there has been a significant change in the market value of the property. In instances where it is not deemed necessary to obtain a new appraisal, management bases its impairment and allowance for loan loss analysis on the original appraisal with adjustments for current conditions based on management’s assessment of market factors and management’s inspection of the property.

March

31,

2017

and

December

31,

2016,

the recorded investments in loans secured by residential real estate properties for which formal foreclosure proceedings are in process was

$738,000

and

$793,000,

respectively.

Loans at

March

31,

2017

and

December

31,

2016

consisted of the following:

(In thousands)	March 31, 2017			December 31, 2016

Real estate mortgage loans:
Residential	$	136,714		$	137,842
Land		16,252			13,895
Residential construction		30,207			29,561
Commercial real estate		92,825			96,462
Commercial real estate contruction		8,626			8,921
Commercial business loans		26,097			24,056
Consumer loans:
Home equity and second mortgage loans		44,456			42,908
Automobile loans		34,657			34,279
Loans secured by savings accounts		1,853			1,879
Unsecured loans		3,661			3,912
Other consumer loans		8,446			9,025
Gross loans		403,794			402,740
Less undisbursed portion of loans in process		(16,187	)		(19,037	)

Principal loan balance		387,607			383,703

Deferred loan origination fees, net		895			837
Allowance for loan losses		(3,418	)		(3,386	)

Loans, net	$	385,084		$	381,154

The following table provides the components of the Company’s recorded investment in loans at

March

31,

2017:

	Residential Real Estate		Land		Construction		Commercial Real Estate			Commercial Business		Home Equity & 2nd Mtg		Other Consumer		Total
	(In thousands)
Recorded Investment in Loans:
Principal loan balance	$	136,714	$	16,252	$	22,646	$	92,825		$	26,097	$	44,456	$	48,617	$	387,607

Accrued interest receivable		437		37		56		230			69		137		184		1,150

Net deferred loan origination fees and costs		83		16		1		(33	)		3		825		0		895

Recorded investment in loans	$	137,234	$	16,305	$	22,703	$	93,022		$	26,169	$	45,418	$	48,801	$	389,652


Recorded Investment in Loans as Evaluated for Impairment:
Individually evaluated for impairment	$	2,236	$	0	$	0	$	1,082		$	123	$	242	$	27	$	3,710
Collectively evaluated for impairment		134,604		16,305		22,703		91,738			26,046		45,176		48,774		385,346
Acquired with deteriorated credit quality		394		0		0		202			0		0		0		596

Ending balance	$	137,234	$	16,305	$	22,703	$	93,022		$	26,169	$	45,418	$	48,801	$	389,652

The following table provides the components of the Company’s recorded investment in loans at

December

31,

2016:

	Residential Real Estate		Land		Construction		Commercial Real Estate			Commercial Business		Home Equity & 2nd Mtg		Other Consumer		Total
	(In thousands)
Recorded Investment in Loans:
Principal loan balance	$	137,842	$	13,895	$	19,445	$	96,462		$	24,056	$	42,908	$	49,095	$	383,703

Accrued interest receivable		455		42		44		249			67		141		226		1,224

Net deferred loan origination fees and costs		80		14		0		(42	)		3		782		0		837

Recorded investment in loans	$	138,377	$	13,951	$	19,489	$	96,669		$	24,126	$	43,831	$	49,321	$	385,764


Recorded Investment in Loans as Evaluated for Impairment:
Individually evaluated for impairment	$	2,083	$	0	$	0	$	1,217		$	143	$	244	$	20	$	3,707
Collectively evaluated for impairment		135,904		13,951		19,489		95,212			23,983		43,587		49,301		381,427
Acquired with deteriorated credit quality		390		0		0		240			0		0		0		630

Ending balance	$	138,377	$	13,951	$	19,489	$	96,669		$	24,126	$	43,831	$	49,321	$	385,764

An analysis of the allowance for loan losses as of

March

31,

2017

is as follows:

	Residential Real Estate		Land		Construction		Commercial Real Estate		Commercial Business		Home Equity & 2nd Mtg		Other Consumer		Total
	(In thousands)
Ending allowance balance attributable to loans:

Individually evaluated for impairment	$	19	$	0	$	0	$	0	$	40	$	13	$	2	$	74
Collectively evaluated for impairment		252		109		223		1,585		204		685		286		3,344
Acquired with deteriorated credit quality		0		0		0		0		0		0		0		0

Ending balance	$	271	$	109	$	223	$	1,585	$	244	$	698	$	288	$	3,418

An analysis of the allowance for loan losses as of

December

31,

2016

is as follows:

	Residential Real Estate		Land		Construction		Commercial Real Estate		Commercial Business		Home Equity & 2nd Mtg		Other Consumer		Total
	(In thousands)
Ending allowance balance attributable to loans:

Individually evaluated for impairment	$	23	$	0	$	0	$	0	$	43	$	13	$	6	$	85
Collectively evaluated for impairment		357		56		80		1,670		155		670		313		3,301
Acquired with deteriorated credit quality		0		0		0		0		0		0		0		0

Ending balance	$	380	$	56	$	80	$	1,670	$	198	$	683	$	319	$	3,386

An analysis of the changes in the allowance for loan losses for the

three

months ended

March

31,

2017

is as follows:

	Residential Real Estate			Land		Construction		Commercial Real Estate			Commercial Business			Home Equity & 2nd Mtg		Other Consumer			Total
	(In thousands)
Allowance for loan losses:

Beginning balance	$	380		$	56	$	80	$	1,670		$	198		$	683	$	319		$	3,386
Provisions for loan losses		(85	)		53		143		(128	)		85			14		129			211
Charge-offs		(40	)		0		0		(1	)		(43	)		0		(204	)		(288	)
Recoveries		16			0		0		44			4			1		44			109

Ending balance	$	271		$	109	$	223	$	1,585		$	244		$	698	$	288		$	3,418

An analysis of the changes in the allowance for loan losses for the

three

months ended

March

31,

2016

is as follows:

	Residential Real Estate			Land			Construction			Commercial Real Estate			Commercial Business		Home Equity & 2nd Mtg			Other Consumer			Total
	(In thousands)
Allowance for loan losses:

Beginning balance	$	527		$	157		$	47		$	1,541		$	261	$	626		$	256		$	3,415
Provisions for loan losses		(29	)		(64	)		(2	)		(63	)		10		126			97			75
Charge-offs		(40	)		(9	)		0			(14	)		0		(35	)		(125	)		(223	)
Recoveries		12			0			0			4			2		4			30			52

Ending balance	$	470		$	84		$	45		$	1,468		$	273	$	721		$	258		$	3,319

March

31,

2017

and

December

31,

2016,

management applied specific qualitative factor adjustments to various portfolio segments as they determined that the historical loss experience was not indicative of the level of risk in the remaining balance of those portfolio segments. These adjustments increased the loss factors by

0.33%

20%

for certain loan groups, and increased the estimated allowance for loan losses related to those portfolio segments by approximately

$2.2

million at

March

31,

2017

and

$1.8

million at

December

31,

2016.

These changes were made to reflect management’s estimates of inherent losses in these portfolio segments at

March

31,

2017

and

December

31,

2016.

March

31,

2017

and

December

31,

2016,

for each loan portfolio segment, management applied an overall qualitative factor of

1.18

to the Company’s historical loss factors. The overall qualitative factor is derived from management’s analysis of changes and trends in the following qualitative factors: underwriting standards, economic conditions, past due loans and other internal and external factors. Each of the

four

factors above was assigned an equal weight to arrive at an average for the overall qualitative factor of

1.18

March

31,

2017

and

December

31,

2016.

The effect of the overall qualitative factor was to increase the estimated allowance for loan losses by

$518,000

and

$501,000

March

31,

2017

and

December

31,

2016,

respectively. Additional discussion of the overall qualitative factor can be found in the Company’s Annual Report on Form

-K for the year ended

December

31,

2016.

There were no changes in management’s assessment of the overall qualitative factor components from

December

31,

2016

March

31,

2017.

Management also adjusts the historical loss factors for loans classified as watch, special mention and substandard that are not individually evaluated for impairment. The adjustments consider the increased likelihood of loss on classified loans based on the Company’s separate historical experience for classified loans. The effect of the adjustments for classified loans was to increase the estimated allowance for loan losses by

$589,000

and

$559,000

March

31,

2017

and

December

31,

2016,

respectively. During the period from

December

31,

2016

March

31,

2017,

management adjusted these factors due to changes in the historical experience for classified loans.

The following table summarizes the Company’s impaired loans as of

March

31,

2017

and for the

three

months ended

March

31,

2017

and

2016.

The Company did not recognize any interest income on impaired loans using the cash receipts method of accounting for the

three

month periods ended

March

31,

2017

and

2016.

	At March 31, 2017						Three Months Ended March 31, 2017				Three Months Ended March 31, 2016
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
Loans with no related allowance recorded:
Residential	$	2,148	$	2,351	$	0	$	2,010	$	8	$	1,845	$	6
Land		0		0		0		0		0		12		0
Construction		0		0		0		0		0		0		0
Commercial real estate		1,082		1,379		0		1,150		3		3,259		19
Commercial business		73		80		0		74		0		65		0
Home equity/2nd mortgage		229		235		0		230		0		56		0
Other consumer		11		11		0		6		0		0		0

		3,543		4,056		0		3,470		11		5,237		25

Loans with an allowance recorded:
Residential		88		92		19		150		0		134		0
Land		0		0		0		0		0		0		0
Construction		0		0		0		0		0		0		0
Commercial real estate		0		0		0		0		0		233		0
Commercial business		50		50		40		59		0		100		0
Home equity/2nd mortgage		13		14		13		13		0		47		0
Other consumer		16		16		2		18		0		24		0

		167		172		74		240		0		538		0

Total:
Residential		2,236		2,443		19		2,160		8		1,979		6
Land		0		0		0		0		0		12		0
Construction		0		0		0		0		0		0		0
Commercial real estate		1,082		1,379		0		1,150		3		3,492		19
Commercial business		123		130		40		133		0		165		0
Home equity/2nd mortgage		242		249		13		243		0		103		0
Other consumer		27		27		2		24		0		24		0

	$	3,710	$	4,228	$	74	$	3,710	$	11	$	5,775	$	25

The following table summarizes the Company’s impaired loans as of

December

31,

2016:

	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(In thousands)
Loans with no related allowance recorded:
Residential	$	1,871	$	2,223	$	0
Land		0		0		0
Construction		0		0		0
Commercial real estate		1,217		1,540		0
Commercial business		75		81		0
Home equity/2nd mortgage		231		237		0
Other consumer		0		0		0

		3,394		4,081		0

Loans with an allowance recorded:
Residential		212		217		23
Land		0		0		0
Construction		0		0		0
Commercial real estate		0		0		0
Commercial business		68		68		43
Home equity/2nd mortgage		13		14		13
Other consumer		20		20		6

		313		319		85

Total:
Residential		2,083		2,440		23
Land		0		0		0
Construction		0		0		0
Commercial real estate		1,217		1,540		0
Commercial business		143		149		43
Home equity/2nd mortgage		244		251		13
Other consumer		20		20		6

	$	3,707	$	4,400	$	85

Nonperforming loans consists of nonaccrual loans and loans over

days past due and still accruing interest. The following table presents the recorded investment in nonperforming loans at

March

31,

2017

and

December

31,

2016:

	March 31, 2017						December 31, 2016
	Nonaccrual Loans		Loans 90+ Days Past Due Still Accruing		Total Nonperforming Loans		Nonaccrual Loans		Loans 90+ Days Past Due Still Accruing		Total Nonperforming Loans
	(In thousands)

Residential	$	1,789	$	132	$	1,921	$	1,634	$	55	$	1,689
Land		0		0		0		0		0		0
Construction		0		0		0		0		0		0
Commercial real estate		903		0		903		924		0		924
Commercial business		123		0		123		142		0		142
Home equity/2nd mortgage		225		0		225		226		0		226
Other consumer		27		11		38		20		23		43

Total	$	3,067	$	143	$	3,210	$	2,946	$	78	$	3,024

The following table presents the aging of the recorded investment in loans at

March

31,

2017:

	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Credit Purchased Impaired Loans		Total Loans
	(In thousands)

Residential	$	3,176	$	563	$	843	$	4,582	$	132,258	$	394	$	137,234
Land		75		0		0		75		16,230		0		16,305
Construction		0		0		0		0		22,703		0		22,703
Commercial real estate		420		0		27		447		92,373		202		93,022
Commercial business		70		0		65		135		26,034		0		26,169
Home equity/2nd mortgage		145		60		114		319		45,099		0		45,418
Other consumer		199		24		37		260		48,541		0		48,801

Total	$	4,085	$	647	$	1,086	$	5,818	$	383,238	$	596	$	389,652

The following table presents the aging of the recorded investment in loans at

December

31,

2016:

	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Purchased Credit Impaired Loans		Total Loans
	(In thousands)

Residential	$	2,444	$	707	$	1,021	$	4,172	$	133,815	$	390	$	138,377
Land		0		52		0		52		13,899		0		13,951
Construction		0		0		0		0		19,489		0		19,489
Commercial real estate		0		0		27		27		96,402		240		96,669
Commercial business		155		0		83		238		23,888		0		24,126
Home equity/2nd mortgage		352		0		13		365		43,466		0		43,831
Other consumer		319		66		43		428		48,893		0		49,321

Total	$	3,270	$	825	$	1,187	$	5,282	$	379,852	$	630	$	385,764

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, public information, historical payment experience, credit documentation, and current economic trends, among other factors. The Company classifies loans based on credit risk at least quarterly. The Company uses the following regulatory definitions for risk ratings:

Special Mention:

Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses

may

result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

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 characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful:

Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, 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.

Loss:

Loans classified as loss are considered uncollectible and of such little value that their continuance on the institution’s books as an asset is not warranted.

Loans not meeting the criteria above that are analyzed individually as part of the described process are considered to be pass rated loans.

The following table presents the recorded investment in loans by risk category as of the date indicated:

	Residential Real Estate		Land		Construction		Commercial Real Estate		Commercial Business		Home Equity & 2nd Mtg		Other Consumer		Total
	(In thousands)
March 31, 2017
Pass	$	133,720	$	16,150	$	22,703	$	84,487	$	25,320	$	45,190	$	48,758	$	376,328
Special Mention		394		85		0		1,843		648		0		16		2,986
Substandard		1,038		70		0		5,709		78		3		0		6,898
Doubtful		2,082		0		0		983		123		225		27		3,440
Loss		0		0		0		0		0		0		0		0

Total	$	137,234	$	16,305	$	22,703	$	93,022	$	26,169	$	45,418	$	48,801	$	389,652

December 31, 2016
Pass	$	135,328	$	13,795	$	19,489	$	87,782	$	23,246	$	43,601	$	49,256	$	372,497
Special Mention		403		86		0		1,892		661		0		45		3,087
Substandard		721		70		0		5,991		77		4		0		6,863
Doubtful		1,925		0		0		1,004		142		226		20		3,317
Loss		0		0		0		0		0		0		0		0

Total	$	138,377	$	13,951	$	19,489	$	96,669	$	24,126	$	43,831	$	49,321	$	385,764

Troubled Debt Restructurings

The following table summarizes the Company’s troubled debt restructurings (TDRs) by accrual status as of

March

31,

2017

and

December

31,

2016:

	March 31, 2017								December 31, 2016
	Accruing		Nonaccrual		Total		Related Allowance for Loan Losses		Accruing		Nonaccrual		Total		Related Allowance for Loan Losses
	(In thousands)
Troubled debt restructurings:
Residential real estate	$	333	$	199	$	532	$	0	$	433	$	229	$	662	$	0
Commercial real estate		178		165		343		0		291		168		459		0
Home equity and 2nd mortgage		17		0		17		0		18		0		18		0

Total	$	528	$	364	$	892	$	0	$	742	$	397	$	1,139	$	0

March

31,

2017

and

December

31,

2016,

there were no commitments to lend additional funds to debtors whose loan terms have been modified in a TDR.

There were no TDRs that were restructured during the

three

months ended

March

31,

2017

2016.

There were no principal charge-offs recorded as a result of TDRs and there was no specific allowance for loan losses related to TDRs modified during the

three

months ended

March

31,

2017

2016.

There were no TDRs modified within the previous

months for which there was a subsequent payment default (defined as the loan becoming more than

days past due, being moved to nonaccrual status, or the collateral being foreclosed upon) during the

three

months ended

March

31,

2017

and

2016.

In the event that a TDR subsequently defaults, the Company evaluates the restructuring for possible impairment. As a result, the related allowance for loan losses

may

be increased or charge-offs

may

be taken to reduce the carrying amount of the loan.

Purchased Credit Impaired (PCI) Loans

Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date with no carryover of the related allowance for loan and lease losses. Such loans are accounted for individually or aggregated into pools of loans based on common risk characteristics such as credit score, loan type and date of origination. In determining the estimated fair value of purchased loans or pools, management considers a number of factors including the remaining life, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, and net present value of cash flows expected to be received, among others. Purchased loans that have evidence of credit deterioration since origination for which it is deemed probable at the date of acquisition that the acquirer will not collect all contractually required principal and interest payments are accounted for in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC)

310

30.

The difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. The difference between the expected cash flows and the fair value at acquisition is recorded as interest income over the remaining life of the loan or pool of loans and is referred to as the accretable yield. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in expected cash flows will result in a reversal of the provision for loan losses to the extent of prior charges and then an adjustment to accretable yield, which is recognized as future interest income.

The following table presents the carrying amount of PCI loans accounted for under ASC

310

March

31,

2017

and

December

31,

2016:

(In thousands)	March 31 , 2017		December 31 , 2016

Residential real estate	$	392	$	390
Commercial real estate		204		240
Carrying amount		596		630

The outstanding balance of PCI loans accounted for under ASC

310

30,

including contractual principal, interest, fees and penalties was

$711,000

and

$754,000

March

31,

2017

and

December

31,

2016,

respectively.

There was no allowance for loan losses related to PCI loans at

March

31,

2017

December

31,

2016.

There were no provisions for loan loss related to PCI loans for the

three

-month period ended

March

31,

2017.

Provisions for loan losses of

$6,000

related to PCI loans were recognized for the

three

-month period ended

March

31,

2016.

There were no reductions of the allowance for loan losses on PCI loans for the

three

-month periods ended

March

31,

2017

and

2016.

Accretable yield, or income expected to be collected, is as follows for the

three

-month periods ended

March

31,

2017

and

2016:

(In thousands)	2017			2016

Balance at beginning of period	$	252		$	319
New loans purchased		-			-
Accretion to income		(14	)		(25	)
Disposals and other adjustments		-			(53	)
Reclassification (to) from nonaccretable difference		6			(96	)

Balance at end of period	$	244		$	145