Note 3 - Loans Receivable and Related Allowance for Loan Losses

12 Months Ended

Dec. 31, 2018

Notes to Financial Statements

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

3. Loans Receivable and Related Allowance for Loan Losses

The following table summarizes the Corporation’s loans receivable as of

December 31:

	December 31,		December 31,
(Dollar amounts in thousands)	2018		2017
Mortgage loans on real estate:
Residential first mortgages	$	295,405	$	221,823
Home equity loans and lines of credit		103,752		99,940
Commercial real estate		238,734		193,068
Total		637,891		514,831
Other loans:
Commercial business		66,009		58,941
Consumer		11,272		9,589
Total		77,281		68,530
Total loans, gross		715,172		583,361
Less allowance for loan losses		6,508		6,127
Total loans, net	$	708,664	$	577,234

Included in total loans above are net deferred costs of

$2.2

 million and

$1.5

 million at

December 

31,

2018

 and

2017,

respectively.

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)	2018			2017
Balance at the beginning of the year	$	6,127		$	5,545
Provision for loan losses		1,280			903
Charge-offs		(989	)		(366	)
Recoveries		90			45
Balance at the end of the year	$	6,508		$	6,127

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

December 

31,

2018

 and

2017:

				Home Equity
	Residential			& Lines			Commercial			Commercial
(Dollar amounts in thousands)	Mortgages			of Credit			Real Estate			Business			Consumer			Total
December 31, 2018:
Beginning Balance	$	2,090		$	646		$	2,753		$	585		$	53		$	6,127
Charge-offs		(71	)		(155	)		(484	)		-			(279	)		(989	)
Recoveries		3			14			48			1			24			90
Provision		176			143			789			(86	)		258			1,280
Ending Balance	$	2,198		$	648		$	3,106		$	500		$	56		$	6,508
Ending ALL balance attributable to loans:
Individually evaluated for impairment	$	12		$	-		$	-		$	-		$	-		$	12
Acquired loans		-			-			-			-			-			-
Collectively evaluated for impairment		2,186			648			3,106			500			56			6,496
Total	$	2,198		$	648		$	3,106		$	500		$	56		$	6,508
Total loans:
Individually evaluated for impairment	$	389		$	6		$	34		$	39		$	-		$	468
Acquired loans		72,654			13,750			56,690			12,974			3,306			159,374
Collectively evaluated for impairment		222,362			89,996			182,010			52,996			7,966			555,330
Total	$	295,405		$	103,752		$	238,734		$	66,009		$	11,272		$	715,172
At December 31, 2017:
Beginning Balance	$	1,846		$	633		$	2,314		$	700		$	52		$	5,545
Charge-offs		(40	)		(114	)		(127	)		(14	)		(71	)		(366	)
Recoveries		-			23			8			2			12			45
Provision		284			104			558			(103	)		60			903
Ending Balance	$	2,090		$	646		$	2,753		$	585		$	53		$	6,127
Ending ALL balance attributable to loans:
Individually evaluated for impairment	$	7		$	-		$	-		$	-		$	-		$	7
Acquired loans		-			-			-			-			-			-
Collectively evaluated for impairment		2,083			646			2,753			585			53			6,120
Total	$	2,090		$	646		$	2,753		$	585		$	53		$	6,127
Total loans:
Individually evaluated for impairment	$	425		$	8		$	914		$	569		$	-		$	1,916
Acquired loans		20,300			10,873			27,404			1,451			2,893			62,921
Collectively evaluated for impairment		201,098			89,059			164,750			56,921			6,696			518,524
Total	$	221,823		$	99,940		$	193,068		$	58,941		$	9,589		$	583,361

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.

At

December 31, 2018 

and

2017,

there was

no

allowance for loan losses allocated to loans acquired in the acquisition of CFB in

October 2018,

Northern Hancock Bank and Trust Co. (NHB) in

September 2017 (

see Note

20

).

The following tables present 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, 2018						December 31, 2018
									Interest		Cash Basis
	Unpaid						Average		Income		Interest
	Principal		Recorded		Related		Recorded		Recognized		Recognized
	Balance		Investment		Allowance		Investment		in Period		in Period
Residential first mortgages	$	74	$	74	$	12	$	74	$	2	$	2
Home equity and lines of credit		6		6		-		7		-		-
Commercial real estate		-		-		-		-		-		-
Commercial business		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
Total	$	80	$	80	$	12	$	81	$	2	$	2

	Impaired Loans with No Specific Allowance
					For the year ended
	As of December 31, 2018				December 31, 2018
							Interest		Cash Basis
	Unpaid				Average		Income		Interest
	Principal		Recorded		Recorded		Recognized		Recognized
	Balance		Investment		Investment		in Period		in Period
Residential first mortgages	$	427	$	315	$	334	$	5	$	5
Home equity and lines of credit		-		-		-		-		-
Commercial real estate		34		34		768		156		73
Commercial business		39		39		248		74		74
Consumer		-		-		-		-		-
Total	$	500	$	388	$	1,350	$	235	$	152

(Dollar amounts in thousands)

	Impaired Loans with Specific Allowance
							For the year ended
	As of December 31, 2017						December 31, 2017
										Interest		Cash Basis
	Unpaid						Average		Income		Interest
	Principal		Recorded		Related		Recorded		Recognized		Recognized
	Balance		Investment		Allowance		Investment		in Period		in Period
Residential first mortgages	$	75	$	75	$	7	$	88	$	3	$	3
Home equity and lines of credit		8		8		-		2		-		-
Commercial real estate		-		-		-		111		-		-
Commercial business		-		-		-		118		-		-
Consumer		-		-		-		-		-		-
Total	$	83	$	83	$	7	$	319	$	3	$	3

	Impaired Loans with No Specific Allowance
					For the year ended
	As of December 31, 2017				December 31, 2017
								Interest		Cash Basis
	Unpaid				Average		Income		Interest
	Principal		Recorded		Recorded		Recognized		Recognized
	Balance		Investment		Investment		in Period		in Period
Residential first mortgages	$	461	$	350	$	289	$	8	$	8
Home equity and lines of credit		-		-		-		-		-
Commercial real estate		1,089		914		855		3		3
Commercial business		569		569		498		3		3
Consumer		-		-		-		-		-
Total	$	2,119	$	1,833	$	1,642	$	14	$	14

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 presented above or in the tables that follow 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,

2018

 and

2017,

the Corporation had

$394,000

and

$433,000,

respectively, of loans classified as TDRs, which are included in impaired loans above. At

December 

31,

2018

 and

2017,

the Corporation had

$12,000

and

$7,000,

respectively, of the allowance for loan losses allocated to these specific loans.

During the year ended

December 31, 2018,

the Corporation did

not

modify any loans as TDRs.  During the year ended

December 

31,

2017,

the Corporation modified

one

residential mortgage loan with a recorded investment of

$323,000

due to a bankruptcy order. At

December 

31,

2017,

the Corporation did

not

have any allowance for loan losses allocated to this specific loan. The modification did

not

have a material impact on the Corporation’s income statement during the period.

A loan is considered to be in payment default once it is

30

days contractually past due under the modified terms. During the year ended

December 

31,

2018

and

2017,

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,

2018

 and

2017:

(Dollar amounts in thousands)

					Special
	Not Rated		Pass		Mention		Substandard		Doubtful		Total
December 31, 2018:
Residential first mortgages	$	293,919	$	-	$	-	$	1,486	$	-	$	295,405
Home equity and lines of credit		102,869		-		-		883		-		103,752
Commercial real estate		-		222,335		5,942		10,457		-		238,734
Commercial business		-		62,022		542		3,445		-		66,009
Consumer		11,157		-		-		115		-		11,272
Total	$	407,945	$	284,357	$	6,484	$	16,386	$	-	$	715,172
December 31, 2017:
Residential first mortgages	$	220,730	$	-	$	-	$	1,093	$	-	$	221,823
Home equity and lines of credit		98,946		-		-		994		-		99,940
Commercial real estate		-		182,460		2,744		7,864		-		193,068
Commercial business		-		56,960		477		1,504		-		58,941
Consumer		9,443		-		-		146		-		9,589
Total	$	329,119	$	239,420	$	3,221	$	11,601	$	-	$	583,361

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,

2018

 and

2017:

(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
December 31, 2018:
Residential first mortgages	$	289,732	$	3,586	$	747	$	485	$	855	$	295,405
Home equity and lines of credit		101,920		707		351		287		487		103,752
Commercial real estate		232,865		5,013		231		19		606		238,734
Commercial business		65,538		50		247		-		174		66,009
Consumer		10,961		160		36		-		115		11,272
Total loans	$	701,016	$	9,516	$	1,612	$	791	$	2,237	$	715,172
December 31, 2017:
Residential first mortgages	$	218,515	$	1,936	$	357	$	159	$	856	$	221,823
Home equity and lines of credit		98,112		598		370		334		526		99,940
Commercial real estate		190,451		1,026		430		197		964		193,068
Commercial business		58,058		74		225		-		584		58,941
Consumer		9,162		273		81		-		73		9,589
Total loans	$	574,298	$	3,907	$	1,463	$	690	$	3,003	$	583,361

The following table presents the Corporation’s nonaccrual loans by aging category as of

December 

31,

2018

 and

2017:

(Dollar amounts in thousands)

	Not		30-59 Days		60-89 Days		90 Days +		Total
	Past Due		Past Due		Past Due		Past Due		Loans
December 31, 2018:
Residential first mortgages	$	335	$	-	$	74	$	446	$	855
Home equity and lines of credit		6		-		-		481		487
Commercial real estate		111		265		-		230		606
Commercial business		-		-		39		135		174
Consumer		-		-		-		115		115
Total loans	$	452	$	265	$	113	$	1,407	$	2,237
December 31, 2017:
Residential first mortgages	$	366	$	-	$	75	$	415	$	856
Home equity and lines of credit		8		-		-		518		526
Commercial real estate		341		-		-		623		964
Commercial business		569		-		-		15		584
Consumer		-		-		-		73		73
Total loans	$	1,284	$	-	$	75	$	1,644	$	3,003