Loans Receivable and Related Allowance for Loan Losses

12 Months Ended

Dec. 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 following table summarizes the Corporation’s loans receivable as of December 31:

(Dollar amounts in thousands)	2015		2014
Mortgage loans on real estate:
Residential first mortgages	$	139,305	$	107,173
Home equity loans and lines of credit		87,410		89,106
Commercial real estate		129,691		110,810
		356,406		307,089
Other loans:
Commercial business		71,948		70,185
Consumer		6,742		7,598
		78,690		77,783
Total loans, gross		435,096		384,872
Less allowance for loan losses		5,205		5,224
Total loans, net	$	429,891	$	379,648

During 2015, 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 $21,000 which is being amortized over the lives of the loans. During 2014, the Corporation purchased four 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. Until sufficient historical performance data can be collected and analyzed, these credits are assigned allowance for loan losses equal to a multiple of the Corporation’s normal allowance allocation for Bank originated commercial business loans. As of December 31, 2015, these SNC’s had a remaining outstanding balance of $5.8 million.

During 2015, the Corporation also purchased two pools of residential mortgage loans totaling $19.2 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 December 31:

(Dollar amounts in thousands)	Impaired Loans with
	Specific Allowance
							For the year ended
	As of December 31, 2015						December 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	$	169	$	169	$	29	$	170	$	6	$	6
Home equity and lines of credit		-		-		-		-		-		-
Commercial real estate		93		93		5		1,613		12		9
Commercial business		923		923		76		1,641		112		99
Consumer		-		-		-		-		-		-
Total	$	1,185	$	1,185	$	110	$	3,424	$	130	$	114

	Impaired Loans with
	No Specific Allowance
					For the year ended
	As of December 31, 2015				December 31, 2015
									Cash Basis
	Unpaid				Average		Interest Income		Interest
	Principal		Recorded		Recorded		Recognized		Recognized
	Balance		Investment		Investment		in Period		in Period
Residential first mortgages	$	-	$	-	$	45	$	7	$	7
Home equity and lines of credit		-		-		-		-		-
Commercial real estate		1,145		746		1,069		49		40
Commercial business		76		76		66		3		3
Consumer		-		-		-		-		-
Total	$	1,221	$	822	$	1,180	$	59	$	50

	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

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 has no legal obligation to extend additional credit to borrowers with loans classified as TDRs.

At December 31, 2015 and 2014, the Corporation had $835,000 and $5.6 million, respectively, of loans classified as TDRs, which are included in impaired loans above. At December 31, 2015 and 2014, the Corporation had $63,000 and $513,000, respectively, of the allowance for loan losses allocated to these specific loans.

During the year ended December 31, 2015, the Corporation did not modify any loans as TDRs.

During the year ended December 31, 2014, the Corporation modified ten loans to be identified as TDRs. One commercial relationship consisting of seven loans with pre- and post-modification recorded investments of $2.4 million was modified as the Corporation granted repayment concessions due to financial difficulties experienced by the borrower. Concessions on these seven loans included reduced monthly payments through the notes’ maturities. At December 31, 2014, the Corporation had $285,000 of the allowance for loan losses allocated to this specific relationship. These loans were repaid during 2015.

Also during 2014, an additional relationship consisting of two commercial real estate loans with pre- and post-modification recorded investments of $2.1 million was modified as the Corporation granted a payment concession on one loan and interest rate concessions on both loans due to cash flow considerations caused by vacancy rates. These loans were previously impaired with specific reserves allocated to them. At December 31, 2014 the Corporation had $126,000 of the allowance for loan losses allocated to this specific relationship. These loans were repaid during 2015.

In addition, the Corporation modified a residential mortgage loan with pre- and post-modification recorded investments of $76,000 and $93,000, respectively, due to a bankruptcy court order. The modifications included capitalization of $5,000 of accrued and unpaid interest and $13,000 of legal expenses, a reduction in the interest rate from 6.25% to 5.00% and a 15 year extension of the original term. At December 31, 2015 and 2014, the Corporation had allowance for loan losses allocated to this specific loan of $10,000 abd $7,000, respectively.

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. During year ended December 31, 2015, there was a default on one $91,000 residential mortgage loan within 12 months following modification classified as a TDR. At December 31, 2015, this loan was over 90 days past due. This default had no impact on the provision for loan losses for the year ended December 31, 2015. During the year ended December 31, 2014, there were no loans classified as TDRs which defaulted within twelve months of their 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 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. These homogeneous loans are not rated unless identified as impaired.

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 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 December 31, 2015 and 2014:

					Special
(Dollar amounts in thousands)	Not Rated		Pass		Mention		Substandard		Doubtful		Total
December 31, 2015:
Residential first mortgages	$	138,096	$	-	$	-	$	1,209	$	-	$	139,305
Home equity and lines of credit		87,015		-		-		395		-		87,410
Commercial real estate		-		125,539		88		4,064		-		129,691
Commercial business		-		69,740		942		1,266		-		71,948
Consumer		6,742		-		-		-		-		6,742
Total	$	231,853	$	195,279	$	1,030	$	6,934	$	-	$	435,096
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

Accrued interest is not included in the recorded investment in loans based on the amounts not being material.

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 required 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 December 31, 2015 and 2014:

	Performing						Nonperforming
	Accruing		Accruing		Accruing		Accruing
	Loans Not		30-59 Days		60-89 Days		90 Days +				Total
(Dollar amounts in thousands)	Past Due		Past Due		Past Due		Past Due		Nonaccrual		Loans
December 31, 2015:
Residential first mortgages	$	136,924	$	1,097	$	75	$	-	$	1,209	$	139,305
Home equity and lines of credit		86,691		308		16		-		395		87,410
Commercial real estate		128,945		-		-		-		746		129,691
Commercial business		71,229		-		-		-		719		71,948
Consumer		6,723		19		-		-		-		6,742
Total loans	$	430,512	$	1,424	$	91	$	-	$	3,069	$	435,096
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 December 31, 2015 and 2014:

	Not		30-59 Days		60-89 Days		90 Days +		Total
(Dollar amounts in thousands)	Past Due		Past Due		Past Due		Past Due		Loans
December 31, 2015:
Residential first mortgages	$	75	$	-	$	79	$	1,055	$	1,209
Home equity and lines of credit		14		-		-		381		395
Commercial real estate		623		-		-		123		746
Commercial business		690		-		-		29		719
Consumer		-		-		-		-		-
Total loans	$	1,402	$	-	$	79	$	1,588	$	3,069
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.

Following is an analysis of the changes in the ALL for the years ended December 31:

(Dollar amounts in thousands)	2015		2014
Balance at the beginning of the year	$	5,224	$	4,869
Provision for loan losses		381		670
Charge-offs		(567)		(364)
Recoveries		167		49
Balance at the end of the year	$	5,205	$	5,224

The following table details activity in the ALL and the recorded investment by portfolio segment based on impairment method at December 31, 2015 and 2014:

			Home Equity
	Residential		& Lines		Commercial		Commercial
(Dollar amounts in thousands)	Mortgages		of Credit		Real Estate		Business		Consumer		Total
December 31, 2015:
Beginning Balance	$	955	$	543	$	2,338	$	1,336	$	52	$	5,224
Charge-offs		(79)		(221)		(35)		(182)		(50)		(567)
Recoveries		-		30		88		31		18		167
Provision		553		234		(206)		(225)		25		381
Ending Balance	$	1,429	$	586	$	2,185	$	960	$	45	$	5,205
Ending ALL balance attributable to loans:
Individually evaluated for impairment		29		-		5		76		-		110
Collectively evaluated for impairment		1,400		586		2,180		884		45		5,095
Total loans:
Individually evaluated for impairment		169		-		839		999		-		2,007
Collectively evaluated for impairment		139,136		87,410		128,852		70,949		6,742		433,089
December 31, 2014:
Beginning Balance	$	923	$	625	$	2,450	$	822	$	49	$	4,869
Charge-offs		(134)		(72)		(2)		(17)		(139)		(364)
Recoveries		-		1		18		7		23		49
Provision		166		(11)		(128)		524		119		670
Ending Balance	$	955	$	543	$	2,338	$	1,336	$	52	$	5,224
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 will 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.