Loans Receivable and Related Allowance for Loan Losses

3 Months Ended

Mar. 31, 2015

Loans Notes Trade and Other Receivables Disclosure [Abstract]

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

5. Loans Receivable and Related Allowance for Loan Losses

The Corporation’s loans receivable as of the respective dates are summarized as follows:

(Dollar amounts in thousands)	March 31,		December 31,
	2015		2014
Mortgage loans on real estate:
Residential first mortgages	$	106,251	$	107,173
Home equity loans and lines of credit		87,761		89,106
Commercial real estate		112,407		110,810
		306,419		307,089
Other loans:
Commercial business		68,072		70,185
Consumer		7,028		7,598
		75,100		77,783
Total loans, gross		381,519		384,872
Less allowance for loan losses		5,340		5,224
Total loans, net	$	376,179	$	379,648

During 2014, the Corporation purchased four syndicated national credits (SNCs) each having a principal amount of $1.0 million. The SNCs were purchased for a total of $4.0 million plus a net premium of $15,000 and other costs totaling $11,000 which are being amortized over the lives of the loans. The SNCs are recorded as commercial business loans and are collateralized by all business assets of the individual borrowers. These credits have been assigned allowance for loan losses equal to 125% of the Corporation’s normal allowance allocation for commercial business loans until sufficient historical performance data can be collected and analyzed. As of March 31, 2015, these SNC’s had an outstanding balance of $3.5 million.

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of March 31, 2015:

(Dollar amounts in thousands)
	Impaired Loans with Specific Allowance
							For the three months
	As of March 31, 2015						ended March 31, 2015
											Cash Basis
	Unpaid						Average		Interest Income		Interest
	Principal		Recorded		Related		Recorded		Recognized		Recognized
	Balance		Investment		Allowance		Investment		in Period		in Period
Residential first mortgages	$	170	$	170	$	27	$	170	$	2	$	2
Home equity and lines of credit		-		-		-		-		-		-
Commercial real estate		3,550		2,609		252		2,642		-		-
Commercial business		2,559		2,559		506		2,591		-		-
Consumer		-		-		-		-		-		-
Total	$	6,279	$	5,338	$	785	$	5,403	$	2	$	2

	Impaired Loans with No Specific Allowance
					For the three months
	As of March 31, 2015				ended March 31, 2015
									Cash Basis
	Unpaid				Average		Interest Income		Interest
	Principal		Recorded		Recorded		Recognized		Recognized
	Balance		Investment		Investment		in Period		in Period
Residential first mortgages	$	111	$	111	$	112	$	-	$	-
Home equity and lines of credit		-		-		-		-		-
Commercial real estate		1,208		809		832		5		5
Commercial business		51		51		51		2		2
Consumer		-		-		-		-		-
Total	$	1,370	$	971	$	995	$	7	$	7

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of December 31, 2014:

(Dollar amounts in thousands)
	Impaired Loans with Specific Allowance
							For the year ended
	As of December 31, 2014						December 31, 2014
											Cash Basis
	Unpaid						Average		Interest Income		Interest
	Principal		Recorded		Related		Recorded		Recognized		Recognized
	Balance		Investment		Allowance		Investment		in Period		in Period
Residential first mortgages	$	171	$	171	$	27	$	136	$	12	$	12
Home equity and lines of credit		-		-		-		-		-		-
Commercial real estate		3,615		2,674		268		2,673		16		-
Commercial business		2,622		2,622		495		1,524		66		-
Consumer		-		-		-		-		-		-
Total	$	6,408	$	5,467	$	790	$	4,333	$	94	$	12

	Impaired Loans with No Specific Allowance
					For the year ended
	As of December 31, 2014				December 31, 2014
									Cash Basis
	Unpaid				Average		Interest Income		Interest
	Principal		Recorded		Recorded		Recognized		Recognized
	Balance		Investment		Investment		in Period		in Period
Residential first mortgages	$	114	$	114	$	74	$	2	$	-
Home equity and lines of credit		-		-		-		-		-
Commercial real estate		1,254		855		839		15		4
Commercial business		51		51		250		1		1
Consumer		-		-		1,078		533		533
Total	$	1,419	$	1,020	$	2,241	$	551	$	538

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of March 31, 2014:

(Dollar amounts in thousands)
	Impaired Loans with Specific Allowance
							For the three months
	As of March 31, 2014						ended March 31, 2014
											Cash Basis
	Unpaid						Average		Interest Income		Interest
	Principal		Recorded		Related		Recorded		Recognized		Recognized
	Balance		Investment		Allowance		Investment		in Period		in Period
Residential first mortgages	$	81	$	81	$	21	$	82	$	1	$	1
Home equity and lines of credit		-		-		-		-		-		-
Commercial real estate		3,664		2,723		209		2,621		7		2
Commercial business		417		417		235		209		5		-
Consumer		-		-		-		-		-		-
Total	$	4,162	$	3,221	$	465	$	2,912	$	13	$	3

	Impaired Loans with No Specific Allowance
					For the three months
	As of March 31, 2014				ended March 31, 2014
									Cash Basis
	Unpaid				Average		Interest Income		Interest
	Principal		Recorded		Recorded		Recognized		Recognized
	Balance		Investment		Investment		in Period		in Period
Residential first mortgages	$	-	$	-	$	10	$	-	$	-
Home equity and lines of credit		-		-		-		-		-
Commercial real estate		1,103		704		690		2		2
Commercial business		388		386		361		-		-
Consumer		1,348		1,348		1,348		-		-
Total	$	2,839	$	2,438	$	2,409	$	2	$	2

Unpaid principal balance includes any loans that have been partially charged off but not forgiven. Accrued interest is not included in the recorded investment in loans based on the amounts not being material.

Troubled debt restructurings (TDR). The Corporation has certain loans that have been modified in order to maximize collection of loan balances. If, for economic or legal reasons related to the customer’s financial difficulties, management grants a concession compared to the original terms and conditions of the loan that it would not have otherwise considered, the modified loan is classified as a TDR. Concessions related to TDRs generally do not include forgiveness of principal balances. The Corporation generally does not extend additional credit to borrowers with loans classified as TDRs.

At March 31, 2015 and December 31, 2014, the Corporation had $5.4 million and $5.6 million, respectively, of loans classified as TDRs, which are included in impaired loans above. At March 31, 2015 and December 31, 2014, the Corporation had $496,000 and $513,000 of the allowance for loan losses allocated to these specific loans. At March 31, 2014, the Corporation had $2.5 million of loans classified as TDRs with $56,000 of the allowance for loan losses allocated to these specific loans.

During the three month periods ended March 31, 2015 and 2014, the Corporation did not modify any loans as TDRs.

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. During the three month period ended March 31, 2015, there was a default on one $90,000 residential mortgage loan within 12 months following modification classified as a TDR at March 31, 2015. At March 31, 2015, this loan was 30-59 days past due. During the three month period ended March 31, 2014, the Corporation did not have any loans which were modified as TDRs for which there was a payment default within twelve months following the modification.

Credit Quality Indicators. Management categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors.

Commercial real estate and commercial business loans not identified as impaired are evaluated as risk rated pools of loans utilizing a risk rating practice that is supported by a quarterly special asset review. In this review process, strengths and weaknesses are identified, evaluated and documented for each criticized and classified loan and borrower, strategic action plans are developed, risk ratings are confirmed and the loan’s performance status is reviewed.

Management has determined certain portions of the loan portfolio to be homogeneous in nature and assigns like reserve factors for the following loan pool types: residential real estate, home equity loans and lines of credit, and consumer installment and personal lines of credit.

The reserve allocation for risk rated loan pools is developed by applying the following factors:

Historic: Management utilizes a computer model to develop the historical net charge-off experience which is used to formulate the assumptions employed in the migration analysis applied to estimate future losses in the portfolio. Outstanding balance and charge-off information are input into the model and historical loss migration rate assumptions are developed to apply to pass, special mention, substandard and doubtful risk rated loans. A twelve-quarter rolling weighted-average is utilized to estimate probable incurred losses in the portfolios.

Qualitative: Qualitative adjustment factors for pass, special mention, substandard and doubtful ratings are developed and applied to risk rated loans to allow for: quality of lending policies and procedures; national and local economic and business conditions; changes in the nature and volume of the portfolio; experiences, ability and depth of lending management; changes in trends, volume and severity of past due, nonaccrual and classified loans and loss and recovery trends; quality of loan review systems; concentrations of credit and other external factors.

Management uses the following definitions for risk ratings:

Pass: Loans classified as pass typically exhibit good payment performance and have underlying borrowers with acceptable financial trends where repayment capacity is evident. These borrowers typically would have a sufficient cash flow that would allow them to weather an economic downturn and the value of any underlying collateral could withstand a moderate degree of depreciation due to economic conditions.

Special Mention: Loans classified as special mention are characterized by potential weaknesses that could jeopardize repayment as contractually agreed. These loans may exhibit adverse trends such as increasing leverage, shrinking profit margins and/or deteriorating cash flows. These borrowers would inherently be more vulnerable to the application of economic pressures.

Substandard: Loans classified as substandard exhibit weaknesses that are well-defined to the point that repayment is jeopardized. Typically, the Corporation is no longer adequately protected by both the apparent net worth and repayment capacity of the borrower.

Doubtful: Loans classified as doubtful have advanced to the point that collection or liquidation in full, on the basis of currently ascertainable facts, conditions and value, is highly questionable or improbable.

The following table presents the classes of the loan portfolio summarized by the aggregate pass and the criticized categories of special mention, substandard and doubtful within the Corporation’s internal risk rating system as of March 31, 2015 and December 31, 2014:

(Dollar amounts in thousands)
					Special
	Not Rated		Pass		Mention		Substandard		Doubtful		Total
March 31, 2015:
Residential first mortgages	$	105,158	$	-	$	-	$	1,093	$	-	$	106,251
Home equity and lines of credit		87,016		-		-		745		-		87,761
Commercial real estate		-		105,368		496		6,543		-		112,407
Commercial business		-		64,095		102		3,693		182		68,072
Consumer		7,028		-		-		-		-		7,028
Total	$	199,202	$	169,463	$	598	$	12,074	$	182	$	381,519
December 31, 2014:
Residential first mortgages	$	106,448	$	-	$	-	$	725	$	-	$	107,173
Home equity and lines of credit		88,699		-		-		407		-		89,106
Commercial real estate		-		103,908		515		6,387		-		110,810
Commercial business		-		65,627		1,292		3,266		-		70,185
Consumer		7,598		-		-		-		-		7,598
Total	$	202,745	$	169,535	$	1,807	$	10,785	$	-	$	384,872

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonperforming loans as of March 31, 2015 and December 31, 2014:

(Dollar amounts in thousands) 

	Performing						Nonperforming
	Accruing		Accruing		Accruing		Accruing
	Loans Not		30-59 Days		60-89 Days		90 Days +				Total
	Past Due		Past Due		Past Due		Past Due		Nonaccrual		Loans
March 31, 2015:
Residential first mortgages	$	104,215	$	949	$	-	$	-	$	1,087	$	106,251
Home equity and lines of credit		86,753		263		-		231		514		87,761
Commercial real estate		109,003		81		-		-		3,323		112,407
Commercial business		65,730		-		24		-		2,318		68,072
Consumer		7,000		28		-		-		-		7,028
Total loans	$	372,701	$	1,321	$	24	$	231	$	7,242	$	381,519
December 31, 2014:
Residential first mortgages	$	104,523	$	1,523	$	402	$	78	$	647	$	107,173
Home equity and lines of credit		87,982		675		42		-		407		89,106
Commercial real estate		107,292		30		55		16		3,417		110,810
Commercial business		67,808		-		-		-		2,377		70,185
Consumer		7,545		41		12		-		-		7,598
Total loans	$	375,150	$	2,269	$	511	$	94	$	6,848	$	384,872

The following table presents the Corporation’s nonaccrual loans by aging category as of March 31, 2015 and December 31, 2014:

(Dollar amounts in thousands) 

	Not		30-59 Days		60-89 Days		90 Days +		Total
	Past Due		Past Due		Past Due		Past Due		Loans
March 31, 2015:
Residential first mortgages	$	188	$	170	$	-	$	729	$	1,087
Home equity and lines of credit		32		17		-		465		514
Commercial real estate		2,765		-		-		558		3,323
Commercial business		2,136		-		-		182		2,318
Consumer		-		-		-		-		-
Total loans	$	5,121	$	187	$	-	$	1,934	$	7,242
December 31, 2014:
Residential first mortgages	$	283	$	-	$	80	$	284	$	647
Home equity and lines of credit		33		18		-		356		407
Commercial real estate		2,848		-		-		569		3,417
Commercial business		2,151		-		188		38		2,377
Consumer		-		-		-		-		-
Total loans	$	5,315	$	18	$	268	$	1,247	$	6,848

An allowance for loan losses (ALL) is maintained to absorb probable incurred losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience and the amount of nonperforming loans.

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.

The following table details activity in the ALL and the recorded investment by portfolio segment based on impairment method:

(Dollar amounts in thousands) 

			Home Equity
	Residential		& Lines		Commercial		Commercial
	Mortgages		of Credit		Real Estate		Business		Consumer		Total
Three months ended March 31, 2015:
Allowance for loan losses:
Beginning Balance	$	955	$	543	$	2,338	$	1,336	$	52	$	5,224
Charge-offs		(4)		(64)		-		-		(22)		(90)
Recoveries		-		4		5		20		8		37
Provision		137		128		(110)		4		10		169
Ending Balance	$	1,088	$	611	$	2,233	$	1,360	$	48	$	5,340
Three months ended March 31, 2014:
Allowance for loan losses:
Beginning Balance	$	923	$	625	$	2,450	$	822	$	49	$	4,869
Charge-offs		(78)		-		(2)		(17)		(35)		(132)
Recoveries		-		-		5		7		9		21
Provision		91		(6)		(232)		282		28		163
Ending Balance	$	936	$	619	$	2,221	$	1,094	$	51	$	4,921
At March 31, 2015:
Ending ALL balance attributable to loans:
Individually evaluated for impairment		27		-		252		506		-		785
Collectively evaluated for impairment		1,061		611		1,981		854		48		4,555
Total loans:
Individually evaluated for impairment		281		-		3,418		2,610		-		6,309
Collectively evaluated for impairment		105,970		87,761		108,989		65,462		7,028		375,210
At December 31, 2014:
Ending ALL balance attributable to loans:
Individually evaluated for impairment		27		-		268		495		-		790
Collectively evaluated for impairment		928		543		2,070		841		52		4,434
Total loans:
Individually evaluated for impairment		285		-		3,529		2,673		-		6,487
Collectively evaluated for impairment		106,888		89,106		107,281		67,512		7,598		378,385

The allowance for loan losses is based on estimates and actual losses may vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date.