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, 2017		December 31, 2016
Mortgage loans on real estate:
Residential first mortgages	$	209,694	$	198,167
Home equity loans and lines of credit	90,648		91,359
Commercial real estate	178,024		166,994
	478,366		456,520
Other loans:
Commercial business	55,753		57,788
Consumer	6,773		6,672
	62,526		64,460

Total loans, gross	540,892		520,980

Less allowance for loan losses	5,688		5,545

Total loans, net	$	535,204	$	515,435

Included in total loans above are net deferred costs of $1.4 million and $1.3 million at March 31, 2017 and December 31, 2016, 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.


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

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)	Residential Mortgages			Home Equity & Lines of Credit			Commercial Real Estate			Commercial Business			Consumer			Total

Three months ended March 31, 2017:
Allowance for loan losses:
Beginning Balance	$	1,846		$	633		$	2,314		$	700		$	52		$	5,545
Charge-offs	(26		)	(1		)	—			—			(19		)	(46		)
Recoveries	—			19			2			—			6			27
Provision	136			(3		)	133			(117		)	13			162

Ending Balance	$	1,956		$	648		$	2,449		$	583		$	52		$	5,688

Three months ended March 31, 2016:
Allowance for loan losses:
Beginning Balance	$	1,429		$	586		$	2,185		$	960		$	45		$	5,205
Charge-offs	(33		)	—			—			—			(9		)	(42		)
Recoveries	—			1			4			—			3			8
Provision	181			49			(263		)	202			12			181

Ending Balance	$	1,577		$	636		$	1,926		$	1,162		$	51		$	5,352

At March 31, 2017:
Ending ALL balance attributable to loans:
Individually evaluated for impairment	$	10		$	—		$	—		$	—		$	—		$	10
Acquired loans collectively evaluated for impairment	—			—			—			—			—			—
Originated loans collectively evaluated for impairment	1,946			648			2,449			583			52			5,678

Total	$	1,956		$	648		$	2,449		$	583		$	52		$	5,688

Total loans:
Individually evaluated for impairment	$	449		$	—		$	991		$	641		$	—		$	2,081
Acquired loans collectively evaluated for impairment	23,574			4,760			26,559			1,043			—			55,936
Originated loans collectively evaluated for impairment	185,671			85,888			150,474			54,069			6,773			482,875

Total	$	209,694		$	90,648		$	178,024		$	55,753		$	6,773		$	540,892

At December 31, 2016:
Ending ALL balance attributable to loans:
Individually evaluated for impairment	$	19		$	—		$	95		$	6		$	—		$	120
Acquired loans collectively evaluated for impairment	—			—			—			—			—			—
Originated 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 collectively evaluated for impairment	25,024			5,225			27,492			1,182			13			58,936
Originated loans 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


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

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.

At March 31, 2017, there was no allowance for loan losses allocated to loans acquired in the April 2016 merger with United American (See Note 2).

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, 2017:



(Dollar amounts in thousands)
	Impaired Loans with Specific Allowance
	As of March 31, 2017						For the three months ended March 31, 2017
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	77	$	77	$	10	$	106	$	1	$	1
Home equity and lines of credit	—		—		—		—		—		—
Commercial real estate	—		—		—		279		—		—
Commercial business	—		—		—		294		—		—
Consumer	—		—		—		—		—		—

Total	$	77	$	77	$	10	$	679	$	1	$	1



	Impaired Loans with No Specific Allowance
	As of March 31, 2017				March 31, 2017
	Unpaid Principal Balance		Recorded Investment		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	409	$	372	$	186	$	7	$	7
Home equity and lines of credit	—		—		—		—		—
Commercial real estate	1,165		991		724		1		1
Commercial business	641		641		369		—		—
Consumer	—		—		—		—		—

Total	$	2,215	$	2,004	$	1,279	$	8	$	8


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

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, 2016:



(Dollar amounts in thousands)
	Impaired Loans with Specific Allowance
	As of December 31, 2016						For the year ended 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



	Impaired Loans with No Specific Allowance
	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)

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, 2016:



(Dollar amounts in thousands)
	Impaired Loans with Specific Allowance
	As of March 31, 2016						For the three months ended March 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	$	78	$	78	$	19	$	124	$	1	$	1
Home equity and lines of credit	—		—		—		—		—		—
Commercial real estate	—		—		—		47		—		—
Commercial business	629		629		78		776		—		—
Consumer	—		—		—		—		—		—

Total	$	707	$	707	$	97	$	947	$	1	$	1



	Impaired Loans with No Specific Allowance
	As of March 31, 2016				For the three months ended March 31, 2016
	Unpaid Principal Balance		Recorded Investment		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period

Residential first mortgages	$	91	$	58	$	29	$	2	$	2
Home equity and lines of credit	—		—		—		—		—
Commercial real estate	1,256		857		801		1		1
Commercial business	75		75		76		—		—
Consumer	—		—		—		—		—

Total	$	1,422	$	990	$	906	$	3	$	3

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 generally does not extend additional credit to borrowers with loans classified as TDRs.

At March 31, 2017 and December 31, 2016, the Corporation had $549,000 and $239,000, respectively, of loans classified as TDRs, which are included in impaired loans above. The Corporation had allocated $10,000 and $19,000 of specific allowance for these loans at March 31, 2017 and December 31, 2016, respectively.


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

During the three month period ended March 31, 2017, the Corporation modified one residential mortgage loan with a recorded investment of $323,000 due to a bankruptcy order. At March 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 periods. During the three month period ended March 31, 2016, 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 periods ended March 31, 2017 and 2016, 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 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.


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 March 31, 2017 and December 31, 2016:



(Dollar amounts in thousands)
	Not Rated		Pass		Special Mention		Substandard		Doubtful		Total
March 31, 2017:
Residential first mortgages	$	208,905	$	—	$	—	$	789	$	—	$	209,694
Home equity and lines of credit	89,997		—		—		651		—		90,648
Commercial real estate	—		171,228		1,505		5,291		—		178,024
Commercial business	—		54,105		472		1,176		—		55,753
Consumer	6,773		—		—		—		—		6,773

Total	$	305,675	$	225,333	$	1,977	$	7,907	$	—	$	540,892

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


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

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, 2017 and December 31, 2016:



(Dollar amounts in thousands)
	Performing						Nonperforming
	Accruing Loans Not Past Due		Accruing 30-59 Days Past Due		Accruing 60-89 Days Past Due		Accruing 90+ Days Past Due		Nonaccrual		Total
March 31, 2017:
Residential first mortgages	$	207,189	$	1,756	$	7	$	—	$	742	$	209,694
Home equity and lines of credit	89,722		265		10		123		528		90,648
Commercial real estate	176,115		835		—		47		1,027		178,024
Commercial business	54,980		32		100		—		641		55,753
Consumer	6,754		17		2		—		—		6,773

Total loans	$	534,760	$	2,905	$	119	$	170	$	2,938	$	540,892

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


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

The following table presents the Corporation’s nonaccrual loans by aging category as of March 31, 2017 and December 31, 2016:



(Dollar amounts in thousands)
	Not Past Due		30-59 Days Past Due		60-89 Days Past Due		90 Days + Past Due		Total
March 31, 2017:
Residential first mortgages	$	71	$	394	$	—	$	277	$	742
Home equity and lines of credit	—		—		—		528		528
Commercial real estate	384		—		—		643		1,027
Commercial business	578		39		—		24		641
Consumer	—		—		—		—		—

Total loans	$	1,033	$	433	$	—	$	1,472	$	2,938

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