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)	2017		2016
Mortgage loans on real estate:
Residential first mortgages	$	221,823	$	198,167
Home equity loans and lines of credit	99,940		91,359
Commercial real estate	193,068		166,994
	514,831		456,520
Other loans:
Commercial business	58,941		57,788
Consumer	9,589		6,672
	68,530		64,460
Total loans, gross	583,361		520,980
Less allowance for loan losses	6,127		5,545
Total loans, net	$	577,234	$	515,435


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

During 2016, the Corporation purchased a pool of residential mortgage loans totaling $6.9 million.

Included in total loans above are net deferred costs of $1.5 million and $1.3 million at December 31, 2017 and 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.

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)	2017			2016
Balance at the beginning of the year	$	5,545		$	5,205
Provision for loan losses	903			464
Charge-offs	(366		)	(296		)
Recoveries	45			172
Balance at the end of the year	$	6,127		$	5,545


3.	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, 2017 and 2016:



	Residential			Home Equity & Lines			Commercial			Commercial
(Dollar amounts in thousands)	Mortgages			of Credit			Real Estate			Business			Consumer			Total
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

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

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, 2017 and 2016, there was no allowance for loan losses allocated to loans acquired in the acquisition of Northern Hancock Bank and Trust Co. in September 2017 or United American Savings Bank in April 2016 (see Note 20).


3.	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, 2017						December 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	$	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



(Dollar amounts in thousands)	Impaired Loans with No Specific Allowance
					For the year ended
	As of December 31, 2017				December 31, 2017
	Unpaid Principal Balance		Recorded Investment		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized 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


3.	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, 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

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, 2017 and 2016, the Corporation had $433,000 and $239,000, respectively, of loans classified as TDRs, which are included in impaired loans above. At December 31, 2017 and 2016, the Corporation had $7,000 and $19,000, respectively, of the allowance for loan losses allocated to these specific loans.

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.


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

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.

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, 2017, there were no loans classified as TDRs which defaulted within twelve months of their modification. During the year ended December 31, 2016, there was a default on one $10,000 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.


3.	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, 2017 and 2016:



					Special
(Dollar amounts in thousands)	Not Rated		Pass		Mention		Substandard		Doubtful		Total
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

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

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, 2017 and 2016:



	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, 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

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


3.	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, 2017 and 2016:



	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, 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

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