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) March 31, December 31, Mortgage loans on real estate: Residential first mortgages $ 224,690 $ 221,823 Home equity loans and lines of credit 100,241 99,940 Commercial real estate 196,788 193,068 521,719 514,831 Other loans: Commercial business 59,200 58,941 Consumer 9,258 9,589 68,458 68,530 Total loans, gross 590,177 583,361 Less allowance for loan losses 5,935 6,127 Total loans, net $ 584,242 $ 577,234 Included in total loans above are net deferred costs of $1.6 million and $1.5 million at March 31, 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 March 31, 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. 4. 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 March 31, 2018: Allowance for loan losses: Beginning Balance $ 2,090 $ 646 $ 2,753 $ 585 $ 53 $ 6,127 Charge-offs (62 ) (19 ) (385 ) — (119 ) (585 ) Recoveries 3 1 2 1 6 13 Provision (112 ) 23 381 (26 ) 114 380 Ending Balance $ 1,919 $ 651 $ 2,751 $ 560 $ 54 $ 5,935 At March 31, 2018: Ending ALL balance attributable to loans: Individually evaluated for impairment $ 6 $ — $ — $ — $ — $ 6 Acquired loans collectively evaluated for impairment — — — — — — Originated loans collectively evaluated for impairment 1,913 651 2,751 560 54 5,929 Total $ 1,919 $ 651 $ 2,751 $ 560 $ 54 $ 5,935 Total loans: Individually evaluated for impairment $ 419 $ 8 $ 336 $ 555 $ — $ 1,318 Acquired loans collectively evaluated for impairment 19,418 10,429 25,716 2,342 1,570 59,475 Originated loans collectively evaluated for impairment 204,853 89,804 170,736 56,303 7,688 529,384 Total $ 224,690 $ 100,241 $ 196,788 $ 59,200 $ 9,258 $ 590,177 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 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 4. 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, 2018 : (Dollar amounts in thousands) Impaired Loans with Specific Allowance As of March 31, 2018 For the three months ended March 31, 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 $ 75 $ 75 $ 6 $ 75 $ 1 $ 1 Home equity and lines of credit 8 8 — 8 — — Commercial real estate — — — — — — Commercial business — — — — — — Consumer — — — — — — Total $ 83 $ 83 $ 6 $ 83 $ 1 $ 1 Impaired Loans with No Specific Allowance As of March 31, 2018 For the three months ended March 31, 2018 Unpaid Principal Balance Recorded Investment Average Recorded Investment Interest Income Recognized in Period Cash Basis Interest Recognized in Period Residential first mortgages $ 456 $ 344 $ 347 $ 1 $ 1 Home equity and lines of credit — — — — — Commercial real estate 336 336 625 — — Commercial business 555 555 562 1 1 Consumer — — — — — Total $ 1,347 $ 1,235 $ 1,534 $ 2 $ 2 4. 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 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, 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 $ 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 4. 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, 2017 : (Dollar amounts in thousands) Impaired Loans with Specific Allowance As of March 31, 2017 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 $ 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 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 $ 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 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, 2018 and December 31, 2017 , the Corporation had $427,000 and $433,000 , respectively, of loans classified as TDRs, which are included in impaired loans above. The Corporation had allocated $6,000 and $7,000 of specific allowance for these loans at March 31, 2018 and December 31, 2017 , respectively. During the three month period ended March 31, 2018 , the Corporation did no t modify any loans as TDRs. 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 no t have any specific allowance for loan losses allocated to this specific loan. 4. 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 the three month periods ended March 31, 2018 and 2017, 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. 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. 4. 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, 2018 and December 31, 2017 : (Dollar amounts in thousands) Not Rated Pass Special Mention Substandard Doubtful Total March 31, 2018: Residential first mortgages $ 223,500 $ — $ — $ 1,190 $ — $ 224,690 Home equity and lines of credit 99,447 — — 794 — 100,241 Commercial real estate — 185,187 4,193 7,408 — 196,788 Commercial business — 57,240 394 1,566 — 59,200 Consumer 9,184 — — 74 — 9,258 Total $ 332,131 $ 242,427 $ 4,587 $ 11,032 $ — $ 590,177 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 4. 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, 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 March 31, 2018: Residential first mortgages $ 221,330 $ 1,979 $ 268 $ 231 $ 882 $ 224,690 Home equity and lines of credit 98,455 923 182 — 681 100,241 Commercial real estate 194,368 1,465 199 255 501 196,788 Commercial business 58,399 41 198 — 562 59,200 Consumer 8,959 182 72 — 45 9,258 Total loans $ 581,511 $ 4,590 $ 919 $ 486 $ 2,671 $ 590,177 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 4. 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, 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 March 31, 2018: Residential first mortgages $ 361 $ 75 $ — $ 446 $ 882 Home equity and lines of credit 8 — — 673 681 Commercial real estate 330 96 — 75 501 Commercial business 555 — — 7 562 Consumer — — — 45 45 Total loans $ 1,254 $ 171 $ — $ 1,246 $ 2,671 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 |