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)	2016		2015
Mortgage loans on real estate:
Residential first mortgages	$	198,167	$	139,305
Home equity loans and lines of credit	91,359		87,410
Commercial real estate	166,994		129,691
	456,520		356,406
Other loans:
Commercial business	57,788		71,948
Consumer	6,672		6,742
	64,460		78,690
Total loans, gross	520,980		435,096
Less allowance for loan losses	5,545		5,205
Total loans, net	$	515,435	$	429,891


5.	Loans Receivable and Related Allowance for Loan Losses (continued)

During 2016, the Corporation purchased a pool of residential mortgage loans totaling $6.9 million. There were two pools of residential mortgage loans purchased during 2015 totaling $19.2 million.

Included in total loans above are net deferred costs of $1.3 million and $835,000 at December 31, 2016 and 2015, 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)	2016			2015
Balance at the beginning of the year	$	5,205		$	5,224
Provision for loan losses	464			381
Charge-offs	(296		)	(567		)
Recoveries	172			167
Balance at the end of the year	$	5,545		$	5,205


5.	Loans Receivable and Related Allowance for Loan Losses (continued)

The following table details activity in the ALL and the recorded investment by portfolio segment based on impairment method at December 31, 2016 and 2015:



	Residential			Home Equity & Lines			Commercial			Commercial
(Dollar amounts in thousands)	Mortgages			of Credit			Real Estate			Business			Consumer			Total
December 31, 2016:
Beginning Balance	$	1,429		$	586		$	2,185		$	960		$	45		$	5,205
Charge-offs	(101		)	(118		)	(18		)	(11		)	(48		)	(296		)
Recoveries	—			3			158			—			11			172
Provision	518			162			(11		)	(249		)	44			464
Ending Balance	$	1,846		$	633		$	2,314		$	700		$	52		$	5,545

Ending ALL balance attributable to loans:
Individually evaluated for impairment	$	19		$	—		$	95		$	6		$	—		$	120
Acquired loans	—			—			—			—			—			—
Collectively evaluated for impairment	1,827			633			2,219			694			52			5,425
Total	$	1,846		$	633		$	2,314		$	700		$	52		$	5,545

Total loans:
Individually evaluated for impairment	$	135		$	—		$	1,014		$	684		$	—		$	1,833
Acquired loans	25,024			5,225			27,492			1,182			13			58,936
Collectively evaluated for impairment	173,008			86,134			138,488			55,922			6,659			460,211
Total	$	198,167		$	91,359		$	166,994		$	57,788		$	6,672		$	520,980

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	$	1,429		$	586		$	2,185		$	960		$	45		$	5,205

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
Total	$	139,305		$	87,410		$	129,691		$	71,948		$	6,742		$	435,096

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, 2016, there was no allowance for loan losses allocated to loans acquired in the acquisition of United American Savings Bank in April 2016 (see Note 22).


5.	Loans Receivable and Related Allowance for Loan Losses (continued)

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:



	Impaired Loans with
(Dollar amounts in thousands)	Specific Allowance
							For the year ended
	As of December 31, 2016						December 31, 2016
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	168	$	135	$	19	$	119	$	6	$	6
Home equity and lines of credit	—		—		—		—		—		—
Commercial real estate	557		557		95		130		23		—
Commercial business	588		588		6		428		—		—
Consumer	—		—		—		—		—		—
Total	$	1,313	$	1,280	$	120	$	677	$	29	$	6



(Dollar amounts in thousands)	Impaired Loans with No Specific Allowance
					For the year ended
	As of December 31, 2016				December 31, 2016
	Unpaid Principal Balance		Recorded Investment		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	—	$	—	$	23	$	—	$	—
Home equity and lines of credit	—		—		—		—		—
Commercial real estate	631		457		735		3		3
Commercial business	96		96		322		2		2
Consumer	—		—		—		—		—
Total	$	727	$	553	$	1,080	$	5	$	5


5.	Loans Receivable and Related Allowance for Loan Losses (continued)



(Dollar amounts in thousands)	Impaired Loans with Specific Allowance
							For the year ended
	As of December 31, 2015						December 31, 2015
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized 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



(Dollar amounts in thousands)	Impaired Loans with No Specific Allowance
					For the year ended
	As of December 31, 2015				December 31, 2015
	Unpaid Principal Balance		Recorded Investment		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized 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

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, 2016 and 2015, the Corporation had $239,000 and $835,000, respectively, of loans classified as TDRs, which are included in impaired loans above. At December 31, 2016 and 2015, the Corporation had $19,000 and $63,000, respectively, of the allowance for loan losses allocated to these specific loans.

During the year ended December 31, 2016, the Corporation modified one home equity loan with a recorded investment of $10,000 due to a bankruptcy order. At December 31, 2016, 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.

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


5.	Loans Receivable and Related Allowance for Loan Losses (continued)

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, 2016, there was a default on one $10,000 residential mortgage loan within 12 months following modification classified as a TDR. The default did not have a material impact on the Corporation's income statement during the period. During the year ended December 31, 2015, there was a default on one $91,000 residential mortgage loan within 12 months following modification. The default did not have a material impact on the Corporation's income statement during the period.

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.


5.	Loans Receivable and Related Allowance for Loan Losses (continued)

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, 2016 and 2015:



					Special
(Dollar amounts in thousands)	Not Rated		Pass		Mention		Substandard		Doubtful		Total
December 31, 2016:
Residential first mortgages	$	197,041	$	—	$	—	$	1,126	$	—	$	198,167
Home equity and lines of credit	91,017		—		—		342		—		91,359
Commercial real estate	—		161,312		1,077		4,605		—		166,994
Commercial business	—		52,125		4,926		737		—		57,788
Consumer	6,659		—		—		13		—		6,672
Total	$	294,717	$	213,437	$	6,003	$	6,823	$	—	$	520,980

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

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, 2016 and 2015:



	Performing						Nonperforming
	Accruing Loans Not		Accruing 30-59 Days		Accruing 60-89 Days		Accruing 90 Days +				Total
(Dollar amounts in thousands)	Past Due		Past Due		Past Due		Past Due		Nonaccrual		Loans
December 31, 2016:
Residential first mortgages	$	194,830	$	1,916	$	295	$	—	$	1,126	$	198,167
Home equity and lines of credit	90,557		460		—		2		340		91,359
Commercial real estate	165,318		561		—		42		1,073		166,994
Commercial business	56,972		56		34		—		726		57,788
Consumer	6,602		28		29		—		13		6,672
Total loans	$	514,279	$	3,021	$	358	$	44	$	3,278	$	520,980

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


5.	Loans Receivable and Related Allowance for Loan Losses (continued)

The following table presents the Corporation’s nonaccrual loans by aging category as of December 31, 2016 and 2015:



	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, 2016:
Residential first mortgages	$	72	$	77	$	—	$	977	$	1,126
Home equity and lines of credit	—		—		—		340		340
Commercial real estate	397		—		557		119		1,073
Commercial business	631		—		—		95		726
Consumer	—		—		—		13		13
Total loans	$	1,100	$	77	$	557	$	1,544	$	3,278

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