Loans Receivable and Related Allowance for Loan Losses | 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) September 30, December 31, Mortgage loans on real estate: Residential first mortgages $ 226,946 $ 198,167 Home equity loans and lines of credit 91,602 91,359 Commercial real estate 192,123 166,994 510,671 456,520 Other loans: Commercial business 60,394 57,788 Consumer 9,611 6,672 70,005 64,460 Total loans, gross 580,676 520,980 Less allowance for loan losses 5,940 5,545 Total loans, net $ 574,736 $ 515,435 During the nine months ended September 30, 2017, the Corporation sold $1.1 million of residential mortgage loans and a $590,000 commercial mortgage loan that were previously classified as held for investment. Included in total loans above are net deferred costs of $1.5 million and $1.3 million at September 30, 2017 and December 31, 2016 , respectively. 5. Loans Receivable and Related Allowance for Loan Losses (continued) 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 September 30, 2017 , 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. 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 Home Commercial Commercial Consumer Total Three months ended September 30, 2017: Allowance for loan losses: Beginning Balance $ 1,994 $ 639 $ 2,460 $ 621 $ 53 $ 5,767 Charge-offs (2 ) (33 ) (36 ) (4 ) (26 ) (101 ) Recoveries — 1 2 — 1 4 Provision 46 20 200 (21 ) 25 270 Ending Balance $ 2,038 $ 627 $ 2,626 $ 596 $ 53 $ 5,940 Nine months ended September 30, 2017: Allowance for loan losses: Beginning Balance $ 1,846 $ 633 $ 2,314 $ 700 $ 52 $ 5,545 Charge-offs (38 ) (44 ) (126 ) (14 ) (53 ) (275 ) Recoveries — 21 6 — 10 37 Provision 230 17 432 (90 ) 44 633 Ending Balance $ 2,038 $ 627 $ 2,626 $ 596 $ 53 $ 5,940 At September 30, 2017: Ending ALL balance attributable to loans: Individually evaluated for impairment $ 8 $ — $ — $ — $ — $ 8 Acquired loans collectively evaluated for impairment — — — — — — Originated loans collectively evaluated for impairment 2,030 627 2,626 596 53 5,932 Total $ 2,038 $ 627 $ 2,626 $ 596 $ 53 $ 5,940 Total loans: Individually evaluated for impairment $ 433 $ — $ 939 $ 585 $ — $ 1,957 Acquired loans collectively evaluated for impairment 28,792 3,697 28,916 2,390 2,382 66,177 Originated loans collectively evaluated for impairment 197,721 87,905 162,268 57,419 7,229 512,542 Total $ 226,946 $ 91,602 $ 192,123 $ 60,394 $ 9,611 $ 580,676 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 Three months ended September 30, 2016: Allowance for loan losses: Beginning Balance $ 1,696 $ 645 $ 2,118 $ 920 $ 52 $ 5,431 Charge-offs (22 ) (19 ) (11 ) (11 ) (31 ) (94 ) Recoveries — 1 2 — 6 9 Provision 58 (1 ) 10 75 26 168 Ending Balance $ 1,732 $ 626 $ 2,119 $ 984 $ 53 $ 5,514 Nine months ended September 30, 2016: Allowance for loan losses: Beginning Balance $ 1,429 $ 586 $ 2,185 $ 960 $ 45 $ 5,205 Charge-offs (63 ) (52 ) (11 ) (11 ) (45 ) (182 ) Recoveries — 2 9 — 10 21 Provision 366 90 (64 ) 35 43 470 Ending Balance $ 1,732 $ 626 $ 2,119 $ 984 $ 53 $ 5,514 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 September 30, 2017 : (Dollar amounts in thousands) Impaired Loans with Specific Allowance As of September 30, 2017 For the three months ended September 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 $ — $ — Home equity and lines of credit — — — — — — Commercial real estate — — — — — — Commercial business — — — — — — Consumer — — — — — — Total $ 76 $ 76 $ 8 $ 76 $ — $ — For the nine months ended September 30, 2017 Average Recorded Investment Interest Income Recognized in Period Cash Basis Interest Recognized in Period Residential first mortgages $ 91 $ 2 $ 2 Home equity and lines of credit — — — Commercial real estate 139 — — Commercial business 147 — — Consumer — — — Total $ 377 $ 2 $ 2 Impaired Loans with No Specific Allowance As of September 30, 2017 For the three months ended September 30, 2017 Unpaid Principal Balance Recorded Investment Average Recorded Investment Interest Income Recognized in Period Cash Basis Interest Recognized in Period Residential first mortgages $ 469 $ 357 $ 362 $ 1 $ 1 Home equity and lines of credit — — — — — Commercial real estate 1,113 939 957 1 1 Commercial business 585 585 592 1 1 Consumer — — — — — Total $ 2,167 $ 1,881 $ 1,911 $ 3 $ 3 For the nine months ended September 30, 2017 Average Interest Income Cash Basis Residential first mortgages $ 274 $ 5 $ 5 Home equity and lines of credit — — — Commercial real estate 840 2 2 Commercial business 481 2 2 Consumer — — — Total $ 1,595 $ 9 $ 9 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 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, For the year ended 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 September 30, 2016 : (Dollar amounts in thousands) Impaired Loans with Specific Allowance As of September 30, 2016 For the three months 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 $ 136 $ 20 $ 107 $ 3 $ 3 Home equity and lines of credit — — — — — — Commercial real estate — — — — — — Commercial business — — — — — — Consumer — — — — — — Total $ 169 $ 136 $ 20 $ 107 $ 3 $ 3 For the nine months ended September 30, 2016 Average Recorded Investment Interest Income Recognized in Period Cash Basis Interest Recognized in Period Residential first mortgages $ 115 $ 5 $ 5 Home equity and lines of credit — — — Commercial real estate 23 — — Commercial business 388 — — Consumer — — — Total $ 526 $ 5 $ 5 Impaired Loans with No Specific Allowance As of September 30, 2016 For the three months Unpaid Principal Balance Recorded Investment Average Recorded Investment Interest Income Recognized in Period Cash Basis Interest Recognized in Period Residential first mortgages $ — $ — $ 29 $ — $ — Home equity and lines of credit — — — — — Commercial real estate 1,190 791 807 1 1 Commercial business 675 675 682 — — Consumer — — — — — Total $ 1,865 $ 1,466 $ 1,518 $ 1 $ 1 For the nine months ended September 30, 2016 Average Interest Income Cash Basis Residential first mortgages $ 29 $ — $ — Home equity and lines of credit — — — Commercial real estate 804 2 2 Commercial business 379 1 1 Consumer — — — Total $ 1,212 $ 3 $ 3 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 September 30, 2017 and December 31, 2016 , the Corporation had $505,000 and $239,000 , respectively, of loans classified as TDRs, which are included in impaired loans above. The Corporation had allocated $8,000 and $19,000 of specific allowance for these loans at September 30, 2017 and December 31, 2016 , respectively. The Corporation did no t modify any loans as TDRs during the three month period ended September 30, 2017 . During the nine month period ended September 30, 2017 , the Corporation modified one residential mortgage loan with a recorded investment of $323,000 due to a bankruptcy order. At September 30, 2017 , the Corporation did no t 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 and nine month period ended September 30, 2016 , the Corporation modified one home equity loan with a recorded investment of $10,000 due to a bankruptcy order. At September 30, 2016 , the Corporation did no t 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 nine month periods ended September 30, 2017 and 2016, the Corporation did no t 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. 5. Loans Receivable and Related Allowance for Loan Losses (continued) 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. 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 September 30, 2017 and December 31, 2016 : (Dollar amounts in thousands) Not Rated Pass Special Mention Substandard Doubtful Total September 30, 2017: Residential first mortgages $ 224,759 $ — $ — $ 2,187 $ — $ 226,946 Home equity and lines of credit 91,172 — — 430 — 91,602 Commercial real estate — 181,561 3,049 7,513 — 192,123 Commercial business — 58,487 546 1,361 — 60,394 Consumer 9,525 — — 86 — 9,611 Total $ 325,456 $ 240,048 $ 3,595 $ 11,577 $ — $ 580,676 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 September 30, 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 September 30, 2017: Residential first mortgages $ 221,942 $ 2,400 $ 833 $ 900 $ 871 $ 226,946 Home equity and lines of credit 90,502 394 281 — 425 91,602 Commercial real estate 190,031 693 449 — 950 192,123 Commercial business 59,509 209 91 — 585 60,394 Consumer 9,201 262 148 — — 9,611 Total loans $ 571,185 $ 3,958 $ 1,802 $ 900 $ 2,831 $ 580,676 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 September 30, 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 September 30, 2017: Residential first mortgages $ 373 $ 76 $ — $ 422 $ 871 Home equity and lines of credit — — — 425 425 Commercial real estate 355 — — 595 950 Commercial business 585 — — — 585 Consumer — — — — — Total loans $ 1,313 $ 76 $ — $ 1,442 $ 2,831 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 |