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)	June 30, 2018		December 31, 2017
Mortgage loans on real estate:
Residential first mortgages	$	230,504	$	221,823
Home equity loans and lines of credit	100,454		99,940
Commercial real estate	198,602		193,068
	529,560		514,831
Other loans:
Commercial business	54,693		58,941
Consumer	9,123		9,589
	63,816		68,530

Total loans, gross	593,376		583,361

Less allowance for loan losses	6,118		6,127

Total loans, net	$	587,258	$	577,234

Included in total loans above are net deferred costs of $1.8 million and $1.5 million at June 30, 2018 and December 31, 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.

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 June 30, 2018, there was no allowance for loan losses allocated to loans acquired in the April 2016 acquisition of United American Savings Bank or the September 2017 acquisition of Northern Hancock Bank and Trust Co.


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:



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

Three months ended June 30, 2018:
Allowance for loan losses:
Beginning Balance	$	1,919		$	651		$	2,751		$	560		$	54		$	5,935
Charge-offs	—			(63		)	(33		)	—			(51		)	(147		)
Recoveries	—			10			16			1			3			30
Provision	114			52			148			(62		)	48			300

Ending Balance	$	2,033		$	650		$	2,882		$	499		$	54		$	6,118

Six months ended June 30, 2018:
Allowance for loan losses:
Beginning Balance	$	2,090		$	646		$	2,753		$	585		$	53		$	6,127
Charge-offs	(61		)	(83		)	(418		)	—			(170		)	(732		)
Recoveries	3			11			18			2			9			43
Provision	1			76			529			(88		)	162			680

Ending Balance	$	2,033		$	650		$	2,882		$	499		$	54		$	6,118

At June 30, 2018:
Ending ALL balance attributable to loans:
Individually evaluated for impairment	$	7		$	—		$	—		$	—		$	—		$	7
Acquired loans collectively evaluated for impairment	—			—			—			—			—			—
Originated loans collectively evaluated for impairment	2,026			650			2,882			499			54			6,111

Total	$	2,033		$	650		$	2,882		$	499		$	54		$	6,118

Total loans:
Individually evaluated for impairment	$	408		$	7		$	43		$	39		$	—		$	497
Acquired loans collectively evaluated for impairment	18,501			10,203			24,247			2,173			1,307			56,431
Originated loans collectively evaluated for impairment	211,595			90,244			174,312			52,481			7,816			536,448

Total	$	230,504		$	100,454		$	198,602		$	54,693		$	9,123		$	593,376

At December 31, 2017:
Ending ALL balance attributable to loans:
Individually evaluated for impairment	$	7		$	—		$	—		$	—		$	—		$	7
Acquired loans collectively evaluated for impairment	—			—			—			—			—			—
Originated 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 collectively evaluated for impairment	20,300			10,873			27,404			1,451			2,893			62,921
Originated loans 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

Three months ended June 30, 2017:
Allowance for loan losses:
Beginning Balance	$	1,956		$	648		$	2,449		$	583		$	52		$	5,688
Charge-offs	(10		)	(10		)	(90		)	(10		)	(8		)	(128		)
Recoveries	—			1			2			—			3			6
Provision	48			—			99			48			6			201

Ending Balance	$	1,994		$	639		$	2,460		$	621		$	53		$	5,767

Six months ended June 30, 2017:
Allowance for loan losses:
Beginning Balance	$	1,846		$	633		$	2,314		$	700		$	52		$	5,545
Charge-offs	(36		)	(11		)	(90		)	(10		)	(27		)	(174		)
Recoveries	—			20			4			—			9			33
Provision	184			(3		)	232			(69		)	19			363

Ending Balance	$	1,994		$	639		$	2,460		$	621		$	53		$	5,767


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 June 30, 2018:



(Dollar amounts in thousands)
	Impaired Loans with Specific Allowance
	As of June 30, 2018						For the three months ended June 30, 2018
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	74	$	74	$	7	$	75	$	1	$	1
Home equity and lines of credit	7		7		—		8		—		—
Commercial real estate	—		—		—		—		—		—
Commercial business	—		—		—		—		—		—
Consumer	—		—		—		—		—		—

Total	$	81	$	81	$	7	$	83	$	1	$	1

							For the six months ended June 30, 2018
							Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages							$	75	$	2	$	2
Home equity and lines of credit							7		—		—
Commercial real estate							—		—		—
Commercial business							—		—		—
Consumer							—		—		—

Total							$	82	$	2	$	2



	Impaired Loans with No Specific Allowance
	As of June 30, 2018				For the three months ended June 30, 2018
	Unpaid Principal Balance		Recorded Investment		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	446	$	334	$	339	$	2	$	2
Home equity and lines of credit	—		—		—		—		—
Commercial real estate	43		43		190		73		73
Commercial business	39		39		297		41		41
Consumer	—		—		—		—		—

Total	$	528	$	416	$	826	$	116	$	116

					For the six months ended June 30, 2018
					Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages					$	343	$	2	$	2
Home equity and lines of credit					—		—		—
Commercial real estate					431		73		73
Commercial business					387		42		42
Consumer					—		—		—

Total					$	1,161	$	117	$	117


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, 2017:



(Dollar amounts in thousands)
	Impaired Loans with Specific Allowance
	As of December 31, 2017						For the year ended 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



	Impaired Loans with No Specific Allowance
	As of December 31, 2017				For the year ended 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


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 June 30, 2017:



(Dollar amounts in thousands)
	Impaired Loans with Specific Allowance
	As of June 30, 2017						For the three months ended June 30, 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	$	76	$	76	$	8	$	76	$	1	$	1
Home equity and lines of credit	—		—		—		—		—		—
Commercial real estate	—		—		—		—		—		—
Commercial business	—		—		—		—		—		—
Consumer	—		—		—		—		—		—

Total	$	76	$	76	$	8	$	76	$	1	$	1

							For the six months ended June 30, 2017
							Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages							$	96	$	2	$	2
Home equity and lines of credit							—		—		—
Commercial real estate							186		—		—
Commercial business							196		—		—
Consumer							—		—		—

Total							$	478	$	2	$	2



	Impaired Loans with No Specific Allowance
	As of June 30, 2017				For the three months ended June 30, 2017
	Unpaid Principal Balance		Recorded Investment		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	478	$	366	$	369	$	3	$	3
Home equity and lines of credit	—		—		—		—		—
Commercial real estate	1,149		975		983		—		—
Commercial business	600		600		620		—		—
Consumer	—		—		—		—		—

Total	$	2,227	$	1,941	$	1,972	$	3	$	3

					For the six months ended June 30, 2017
					Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages					$	246	$	4	$	4
Home equity and lines of credit					—		—		—
Commercial real estate					807		1		1
Commercial business					446		1		1
Consumer					—		—		—

Total					$	1,499	$	6	$	6


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

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 June 30, 2018 and December 31, 2017, the Corporation had $415,000 and $433,000, respectively, of loans classified as TDRs, which are included in impaired loans above. The Corporation had allocated $7,000 and $7,000 of specific allowance for these loans at June 30, 2018 and December 31, 2017, respectively.

During the three and six month periods ended June 30, 2018 , the Corporation did not modify any loans as TDRs. During the three and six month periods ended June 30, 2017, the Corporation modified one residential mortgage loan with a recorded investment of $323,000 due to a bankruptcy order. At June 30, 2017, the Corporation did not have any specific allowance for loan losses allocated to this specific loan.

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. During the three and six month periods ended June 30, 2018 and 2017, 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.


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

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 June 30, 2018 and December 31, 2017:



(Dollar amounts in thousands)
	Not Rated		Pass		Special Mention		Substandard		Doubtful		Total
June 30, 2018:
Residential first mortgages	$	229,401	$	—	$	—	$	1,103	$	—	$	230,504
Home equity and lines of credit	99,474		—		—		980		—		100,454
Commercial real estate	—		187,762		3,831		7,009		—		198,602
Commercial business	—		53,355		234		1,104		—		54,693
Consumer	9,037		—		—		86		—		9,123

Total	$	337,912	$	241,117	$	4,065	$	10,282	$	—	$	593,376

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


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 June 30, 2018 and December 31, 2017:



(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
June 30, 2018:
Residential first mortgages	$	227,774	$	1,264	$	440	$	59	$	967	$	230,504
Home equity and lines of credit	98,592		753		244		323		542		100,454
Commercial real estate	196,655		1,111		343		184		309		198,602
Commercial business	54,654		—		—		—		39		54,693
Consumer	8,660		354		46		—		63		9,123

Total loans	$	586,335	$	3,482	$	1,073	$	566	$	1,920	$	593,376

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


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

The following table presents the Corporation’s nonaccrual loans by aging category as of June 30, 2018 and December 31, 2017:



(Dollar amounts in thousands)
	Not Past Due		30-59 Days Past Due		60-89 Days Past Due		90 Days + Past Due		Total
June 30, 2018:
Residential first mortgages	$	353	$	—	$	74	$	540	$	967
Home equity and lines of credit	7		—		9		526		542
Commercial real estate	205		—		—		104		309
Commercial business	39		—		—		—		39
Consumer	—		—		—		63		63

Total loans	$	604	$	—	$	83	$	1,233	$	1,920

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