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Note 3 - Loans and Allowance for Loan Losses
 9 Months Ended
Sep. 30, 2017
Notes to Financial Statements  
Loans, Notes, Trade and Other Receivables Disclosure [Text Block]
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 originates 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 largely 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
September 30, 2017,
the Company had
six
loans on which partial charge-offs of
$173,000
had been recorded.
 
Consumer loans
not
secured by real estate are typically charged off at
90
days past due, or earlier if deemed uncollectible, unless the loans are in the process of collection. Overdrafts are charged off after
45
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
twelve
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
September 30, 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
10
-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.
 
At
September 30, 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
$1.5
million and
$793,000,
respectively.
 
Loans at
September 30, 2017
and
December 31, 2016
consisted of the following:
 
(In thousands)   September 30,
2017		   December 31,
2016
         
Real estate mortgage loans:                
Residential   $
136,273
     $
137,842
  
Land    
17,638
      
13,895
  
Residential construction    
33,263
      
29,561
  
Commercial real estate    
95,339
      
96,462
  
Commercial real estate contruction    
7,044
      
8,921
  
Commercial business loans    
28,525
      
24,056
  
Consumer loans:                
Home equity and second mortgage loans    
48,951
      
42,908
  
Automobile loans    
38,033
      
34,279
  
Loans secured by savings accounts    
1,916
      
1,879
  
Unsecured loans    
3,747
      
3,912
  
Other consumer loans    
9,880
      
9,025
  
Gross loans    
420,609
      
402,740
  
Less undisbursed portion of loans in process    
(17,333
 )    
(19,037
 )
                 
Principal loan balance    
403,276
      
383,703
  
                 
Deferred loan origination fees, net    
1,023
      
837
  
Allowance for loan losses    
(3,537
 )    
(3,386
 )
                 
Loans, net   $
400,762
     $
381,154
  
 
The following table provides the components of the Company’s recorded investment in loans at
September 30, 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   $
136,273
     $
17,638
     $
22,974
     $
95,339
     $
28,525
     $
48,951
     $
53,576
     $
403,276
  
                                                                 
Accrued interest receivable    
454
      
83
      
48
      
206
      
70
      
174
      
227
      
1,262
  
                                                                 
Net deferred loan origination fees and costs    
86
      
16
      
(3
 )    
(33
 )    
3
      
954
      
0
      
1,023
  
                                                                 
Recorded investment in loans   $
136,813
     $
17,737
     $
23,019
     $
95,512
     $
28,598
     $
50,079
     $
53,803
     $
405,561
  
                                                                 
                                                                 
Recorded Investment in Loans as Evaluated for Impairment:
 
      
 
      
 
      
 
      
 
      
 
  
Individually evaluated for impairment   $
2,950
     $
0
     $
0
     $
297
     $
55
     $
256
     $
0
     $
3,558
  
Collectively evaluated for impairment    
133,480
      
17,737
      
23,019
      
95,162
      
28,543
      
49,823
      
53,803
      
401,567
  
Acquired with deteriorated credit quality    
383
      
0
      
0
      
53
      
0
      
0
      
0
      
436
  
                                                                 
Ending balance   $
136,813
     $
17,737
     $
23,019
     $
95,512
     $
28,598
     $
50,079
     $
53,803
     $
405,561
  
 
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
September 30, 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   $
24
     $
0
     $
0
     $
0
     $
0
     $
13
     $
0
     $
37
  
Collectively evaluated for impairment    
176
      
126
      
261
      
1,591
      
235
      
727
      
380
      
3,496
  
Acquired with deteriorated credit quality    
4
      
0
      
0
      
0
      
0
      
0
      
0
      
4
  
                                                                 
Ending balance   $
204
     $
126
     $
261
     $
1,591
     $
235
     $
740
     $
380
     $
3,537
  
 
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 and
nine
months ended
September 30, 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:                                                                
Changes in Allowance for Loan Losses for the three-months ended September 30, 2017
      
 
      
 
      
 
      
 
  
Beginning balance   $
212
     $
124
     $
306
     $
1,583
     $
290
     $
680
     $
331
     $
3,526
  
Provisions for loan losses    
(9
 )    
2
      
(45
 )    
(15
 )    
(8
 )    
58
      
167
      
150
  
Charge-offs    
(2
 )    
0
      
0
      
0
      
(47
 )    
0
      
(157
 )    
(206
 )
Recoveries    
3
      
0
      
0
      
23
      
0
      
2
      
39
      
67
  
                                                                 
Ending balance   $
204
     $
126
     $
261
     $
1,591
     $
235
     $
740
     $
380
     $
3,537
  
                                                                 
                                                                 
Changes in Allowance for Loan Losses for the nine-months ended September 30, 2017
      
 
      
 
      
 
      
 
  
Beginning balance   $
380
     $
56
     $
80
     $
1,670
     $
198
     $
683
     $
319
     $
3,386
  
Provisions for loan losses    
(155
 )    
70
      
181
      
(147
 )    
123
      
59
      
486
      
617
  
Charge-offs    
(48
 )    
0
      
0
      
(3
 )    
(90
 )    
(6
 )    
(547
 )    
(694
 )
Recoveries    
27
      
0
      
0
      
71
      
4
      
4
      
122
      
228
  
                                                                 
Ending balance   $
204
     $
126
     $
261
     $
1,591
     $
235
     $
740
     $
380
     $
3,537
  
 
 
An analysis of the changes in the allowance for loan losses for the
three
months and
nine
months ended
September 30, 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:                                                                
Changes in Allowance for Loan Losses for the three-months ended September 30, 2016
      
 
      
 
      
 
      
 
  
Beginning balance   $
408
     $
47
     $
42
     $
1,473
     $
162
     $
791
     $
266
     $
3,189
  
Provisions for loan losses    
(29
 )    
2
      
21
      
100
      
(21
 )    
31
      
96
      
200
  
Charge-offs    
(14
 )    
0
      
0
      
0
      
0
      
0
      
(106
 )    
(120
 )
Recoveries    
17
      
0
      
0
      
3
      
0
      
4
      
27
      
51
  
                                                                 
Ending balance   $
382
     $
49
     $
63
     $
1,576
     $
141
     $
826
     $
283
     $
3,320
  
                                                                 
                                                                 
Changes in Allowance for Loan Losses for the nine-months ended September 30, 2016
      
 
      
 
      
 
      
 
  
Beginning balance   $
527
     $
157
     $
47
     $
1,541
     $
261
     $
626
     $
256
     $
3,415
  
Provisions for loan losses    
(70
 )    
(99
 )    
16
      
96
      
(9
 )    
223
      
268
      
425
  
Charge-offs    
(108
 )    
(9
 )    
0
      
(82
 )    
(114
 )    
(36
 )    
(325
 )    
(674
 )
Recoveries    
33
      
0
      
0
      
21
      
3
      
13
      
84
      
154
  
                                                                 
Ending balance   $
382
     $
49
     $
63
     $
1,576
     $
141
     $
826
     $
283
     $
3,320
  
 
 
At
September 30, 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%
to
20%
for certain loan groups, and increased the estimated allowance for loan losses related to those portfolio segments by approximately
$2.3
million and
$1.8
million at
September 30, 2017
and
December 31, 2016,
respectively. These changes were made to reflect management’s estimates of inherent losses in these portfolio segments at
September 30, 2017
and
December 31, 2016.
 
At
September 30, 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
at
September 30, 2017
and
December 31, 2016.
The effect of the overall qualitative factor was to increase the estimated allowance for loan losses by
$544,000
and
$501,000
at
September 30, 2017
and
December 31, 2016,
respectively. Additional discussion of the overall qualitative factor can be found in the Company’s Annual Report on Form
10
-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
to
September 30, 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
$590,000
and
$559,000
at
September 30, 2017
and
December 31, 2016,
respectively. During the period from
December 31, 2016
to
September 30, 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
September 30, 2017
and for the
three
months and
nine
months ended
September 30, 2017.
The Company did
not
recognize any interest income on impaired loans using the cash receipts method of accounting for the
three
or
nine
month periods ended
September 30, 2017:
 
                Three Months Ended   Nine Months Ended
    At September 30, 2017   September 30, 2017   September 30, 2017
        Unpaid       Average   Interest   Average   Interest
    Recorded   Principal   Related   Recorded   Income   Recorded   Income
    Investment   Balance   Allowance   Investment   Recognized   Investment   Recognized
    (In thousands)
Loans with no related allowance recorded:
      
 
      
 
      
 
      
 
      
 
      
 
  
Residential   $
2,846
     $
3,060
     $
0
     $
2,736
     $
7
     $
2,373
     $
20
  
Land    
0
      
0
      
0
      
0
      
0
      
0
      
0
  
Construction    
0
      
0
      
0
      
0
      
0
      
0
      
0
  
Commercial real estate    
297
      
438
      
0
      
366
      
5
      
758
      
13
  
Commercial business    
55
      
64
      
0
      
63
      
0
      
69
      
0
  
Home equity/2nd mortgage    
225
      
232
      
0
      
226
      
0
      
228
      
1
  
Other consumer    
0
      
0
      
0
      
6
      
0
      
6
      
0
  
                                                         
     
3,423
      
3,794
      
0
      
3,397
      
12
      
3,434
      
34
  
                                                         
Loans with an allowance recorded:
      
 
      
 
      
 
      
 
      
 
      
 
  
Residential    
104
      
111
      
24
      
95
      
0
      
122
      
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
      
0
      
0
  
Commercial business    
0
      
0
      
0
      
25
      
0
      
42
      
0
  
Home equity/2nd mortgage    
31
      
32
      
13
      
32
      
0
      
22
      
0
  
Other consumer    
0
      
0
      
0
      
17
      
0
      
17
      
0
  
                                                         
     
135
      
143
      
37
      
169
      
0
      
203
      
0
  
                                                         
Total:                                                        
Residential    
2,950
      
3,171
      
24
      
2,831
      
7
      
2,495
      
20
  
Land    
0
      
0
      
0
      
0
      
0
      
0
      
0
  
Construction    
0
      
0
      
0
      
0
      
0
      
0
      
0
  
Commercial real estate    
297
      
438
      
0
      
366
      
5
      
758
      
13
  
Commercial business    
55
      
64
      
0
      
88
      
0
      
111
      
0
  
Home equity/2nd mortgage    
256
      
264
      
13
      
258
      
0
      
250
      
1
  
Other consumer    
0
      
0
      
0
      
23
      
0
      
23
      
0
  
                                                         
    $
3,558
     $
3,937
     $
37
     $
3,566
     $
12
     $
3,637
     $
34
  
 
The following table summarizes the Company’s impaired loans for the
three
months and
nine
months ended
September 30, 2016.
The Company did
not
recognize any interest income on impaired loans using the cash receipts method of accounting for the
three
or
nine
month periods ended
September 30, 2016:
 
    Three Months Ended   Nine Months Ended
    September 30, 2016   September 30, 2016
    Average   Interest   Average   Interest
    Recorded   Income   Recorded   Income
    Investment   Recognized   Investment   Recognized
     
Loans with no related allowance recorded:                                
Residential   $
1,903
     $
6
     $
1,912
     $
20
  
Land    
0
      
0
      
6
      
0
  
Construction    
0
      
3
      
0
      
3
  
Commercial real estate    
3,396
      
18
      
3,394
      
55
  
Commercial business    
62
      
0
      
64
      
0
  
Home equity/2nd mortgage    
52
      
0
      
53
      
1
  
Other consumer    
7
      
0
      
5
      
0
  
                                 
     
5,420
      
27
      
5,434
      
79
  
                                 
Loans with an allowance recorded:                                
Residential    
157
      
0
      
132
      
0
  
Land    
0
      
0
      
0
      
0
  
Construction    
0
      
0
      
0
      
0
  
Commercial real estate    
87
      
0
      
124
      
0
  
Commercial business    
33
      
0
      
50
      
0
  
Home equity/2nd mortgage    
13
      
0
      
30
      
0
  
Other consumer    
29
      
0
      
22
      
0
  
                                 
     
319
      
0
      
358
      
0
  
                                 
Total:                                
Residential    
2,060
      
6
      
2,044
      
20
  
Land    
0
      
0
      
6
      
0
  
Construction    
0
      
3
      
0
      
3
  
Commercial real estate    
3,483
      
18
      
3,518
      
55
  
Commercial business    
95
      
0
      
114
      
0
  
Home equity/2nd mortgage    
65
      
0
      
83
      
1
  
Other consumer    
36
      
0
      
27
      
0
  
                                 
    $
5,739
     $
27
     $
5,792
     $
79
  
 
 
The following table summarizes the Company’s impaired loans as of
December 31, 2016:
 
        Unpaid    
    Recorded   Principal   Related
    Investment   Balance   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
90
days past due and still accruing interest. The following table presents the recorded investment in nonperforming loans at
September 30, 2017
and
December 31, 2016:
 
    September 30, 2017   December 31, 2016
        Loans 90+ Days   Total       Loans 90+ Days   Total
    Nonaccrual   Past Due   Nonperforming   Nonaccrual   Past Due   Nonperforming
    Loans   Still Accruing   Loans   Loans   Still Accruing   Loans
    (In thousands)
                         
Residential   $
2,338
     $
13
     $
2,351
     $
1,634
     $
55
     $
1,689
  
Land    
0
      
0
      
0
      
0
      
0
      
0
  
Construction    
0
      
0
      
0
      
0
      
0
      
0
  
Commercial real estate    
33
      
0
      
33
      
924
      
0
      
924
  
Commercial business    
55
      
0
      
55
      
142
      
0
      
142
  
Home equity/2nd mortgage    
239
      
0
      
239
      
226
      
0
      
226
  
Other consumer    
0
      
0
      
0
      
20
      
23
      
43
  
                                                 
Total   $
2,665
     $
13
     $
2,678
     $
2,946
     $
78
     $
3,024
  
 
 
The following table presents the aging of the recorded investment in loans at
September 30, 2017:
 
                        Purchased    
    30-59 Days   60-89 Days   90 Days or More   Total       Credit   Total
    Past Due   Past Due   Past Due   Past Due   Current   Impaired Loans   Loans
    (In thousands)
                             
Residential   $
1,635
     $
905
     $
1,449
     $
3,989
     $
132,441
     $
383
     $
136,813
  
Land    
147
      
5
      
0
      
152
      
17,585
      
0
      
17,737
  
Construction    
0
      
0
      
0
      
0
      
23,019
      
0
      
23,019
  
Commercial real estate    
0
      
0
      
33
      
33
      
95,426
      
53
      
95,512
  
Commercial business    
651
      
65
      
0
      
716
      
27,882
      
0
      
28,598
  
Home equity/2nd mortgage    
78
      
40
      
179
      
297
      
49,782
      
0
      
50,079
  
Other consumer    
272
      
44
      
0
      
316
      
53,487
      
0
      
53,803
  
                                                         
Total   $
2,783
     $
1,059
     $
1,661
     $
5,503
     $
399,622
     $
436
     $
405,561
  
 
 
The following table presents the aging of the recorded investment in loans at
December 31, 2016:
 
                        Purchased    
    30-59 Days   60-89 Days   90 Days or More   Total       Credit   Total
    Past Due   Past Due   Past Due   Past Due   Current   Impaired Loans   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           Commercial   Commercial   Home Equity &   Other    
    Real Estate   Land   Construction   Real Estate   Business   2nd Mtg   Consumer   Total
    (In thousands)
September 30, 2017                                
Pass   $
133,323
     $
17,528
     $
22,952
     $
89,685
     $
27,620
     $
49,838
     $
53,670
     $
394,616
  
Special Mention    
385
      
85
      
67
      
2,749
      
781
      
0
      
133
      
4,200
  
Substandard    
721
      
124
      
0
      
3,045
      
142
      
2
      
0
      
4,034
  
Doubtful    
2,384
      
0
      
0
      
33
      
55
      
239
      
0
      
2,711
  
Loss    
0
      
0
      
0
      
0
      
0
      
0
      
0
      
0
  
                                                                 
Total   $
136,813
     $
17,737
     $
23,019
     $
95,512
     $
28,598
     $
50,079
     $
53,803
     $
405,561
  
                                                                 
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
  
 
 
The following table summarizes the Company’s troubled debt restructurings (TDRs) by accrual status as of
September 30, 2017
and
December 31, 2016:
 
    September 30, 2017   December 31, 2016
                Related Allowance               Related Allowance
    Accruing   Nonaccrual   Total   for Loan Losses   Accruing   Nonaccrual   Total   for Loan Losses
    (In thousands)
Troubled debt restructurings:                                                                
Residential real estate   $
490
     $
102
     $
592
     $
0
     $
433
     $
229
     $
662
     $
0
  
Commercial real estate    
358
      
0
      
358
      
0
      
291
      
168
      
459
      
0
  
Home equity and 2nd mortgage    
16
      
0
      
16
      
0
      
18
      
0
      
18
      
0
  
                                                                 
Total   $
864
     $
102
     $
966
     $
0
     $
742
     $
397
     $
1,139
     $
0
  
 
At
September 30, 2017
and
December 31, 2016,
there were
no
commitments to lend additional funds to debtors whose loan terms have been modified in a TDR.
 
The following table summarizes information in regard to TDRs that were restructured during the
three
months and
nine
months ended
September 30, 2017:
 
    Three months ended September 30, 2017   Nine months ended September 30, 2017
        Pre-Modifcation   Post-Modifcation       Pre-Modifcation   Post-Modifcation
    Number of   Outstanding   Outstanding   Number of   Outstanding   Outstanding
    Contracts   Balance   Balance   Contracts   Balance   Balance
    (Dollars in thousands)
Troubled debt restructurings:                                                
Residential real estate    
1
     $
65
     $
65
      
1
     $
65
     $
65
  
                                                 
Total    
1
     $
65
     $
65
      
1
     $
65
     $
65
  
 
For the TDR listed above, the terms of modification included the deferral of contractual principal payments. There were
no
TDRs that were restructured during the
three
and
nine
months ended
September 30, 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
and
nine
months ended
September 30, 2017
or
2016.
 
There were
no
TDRs modified within the previous
12
months for which there was a subsequent payment default (defined as the loan becoming more than
90
days past due, being moved to nonaccrual status, or the collateral being foreclosed upon) during the
three
and
nine
months ended
September 30, 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
-
30
at
September 30, 2017
and
December 31, 2016:
 
    September 30,   December 31,
(In thousands)   2017   2016
         
Residential real estate   $
383
     $
390
  
Commercial real estate    
53
      
240
  
Carrying amount    
436
      
630
  
Allowance for loan losses    
4
      
0
  
Carrying amount, net of allowance   $
432
     $
630
  
 
The outstanding balance of PCI loans accounted for under ASC
310
-
30,
including contractual principal, interest, fees and penalties was
$699,000
and
$754,000
at
September 30, 2017
and
December 31, 2016,
respectively.
 
The allowance for loan losses related to PCI loans was
$4,000
at
September 30, 2017.
There was
no
allowance for loan losses related to PCI loans at
December 31, 2016.
Provisions for loan losses related to PCI loans were
$4,000
for the
three
-month and
nine
-month periods ended
September 30, 2017.
There were
no
net provisions for loan losses related to PCI loans for the
nine
-month period ended
September 30, 2016.
There was a
$6,000
reduction of the allowance for loan losses on PCI loans for the
three
months ended
September 30, 2016.

 
Accretable yield, or income expected to be collected, is as follows for the
three
and
nine
month periods ended
September 30, 2017
and
2016:
 
    Three Months Ended   Nine Months Ended
    9/30/2017   9/30/2016   9/30/2017   9/30/2016
                 
Balance at beginning of period   $
223
     $
165
     $
252
     $
319
  
New loans purchased    
-
      
-
      
-
      
-
  
Accretion to income    
(12
 )    
(17
 )    
(40
 )    
(61
 )
Disposals and other adjustments    
(1
 )    
(19
 )    
(18
 )    
(93
 )
Reclassification from nonaccretable difference    
271
      
42
      
287
      
6
  
                                 
Balance at end of period   $
481
     $
171
     $
481
     $
171