The following table summarizes the Corporation’s loans receivable as of December 31:

 

(Dollar amounts in thousands)		2013			2012
Mortgage loans on real estate:
Residential first mortgages		$	105,541		$	97,246
Home equity loans and lines of credit			87,928			85,615
Commercial real estate			101,499			98,823
			294,968			281,684
Other loans:
Commercial business			53,214			45,581
Consumer			9,117			11,886
			62,331			57,467
Total loans, gross			357,299			339,151
Less allowance for loan losses			4,869			5,350
Total loans, net		$	352,430		$	333,801

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:

 

(Dollar amounts in thousands)
		Impaired Loans with
		Specific Allowance
											For the year ended
		As of December 31, 2013									December 31, 2013
																	Cash Basis
		Unpaid									Average			Interest Income			Interest
		Principal			Recorded			Related			Recorded			Recognized			Recognized
		Balance			Investment			Allowance			Investment			in Period			in Period
Residential first mortgages		$	82		$	82		$	21		$	49		$	5		$	4
Home equity and lines of credit			-			-			-			-			-			-
Commercial real estate			3,462			2,521			181			3,202			13			13
Commercial business			-			-			-			-			-			-
Consumer			-			-			-			-			-			-
Total		$	3,544		$	2,603		$	202		$	3,251		$	18		$	17

		Impaired Loans with
		No Specific Allowance
										For the year ended
		As of December 31, 2013								December 31, 2013
																Cash Basis
		Unpaid								Average			Interest Income			Interest
		Principal			Recorded					Recorded			Recognized			Recognized
		Balance			Investment					Investment			in Period			in Period
Residential first mortgages		$	20		$	20				$	4		$	1		$	-
Home equity and lines of credit			-			-					-			-			-
Commercial real estate			1,074			675					584			5			5
Commercial business			336			336					354			-			-
Consumer			1,348			1,348					1,457			-			-
Total		$	2,778		$	2,379				$	2,399		$	6		$	5

		Impaired Loans with
		Specific Allowance
											For the year ended
		As of December 31, 2012									December 31, 2012
																	Cash Basis
		Unpaid									Average			Interest Income			Interest
		Principal			Recorded			Related			Recorded			Recognized			Recognized
		Balance			Investment			Allowance			Investment			in Period			in Period
Residential first mortgages		$	-		$	-		$	-		$	-		$	-		$	-
Home equity and lines of credit			-			-			-			-			-			-
Commercial real estate			4,242			4,068			1,448			2,075			186			16
Commercial business			-			-			-			-			-			-
Consumer			-			-			-			-			-			-
Total		$	4,242		$	4,068		$	1,448		$	2,075		$	186		$	16

		Impaired Loans with
		No Specific Allowance
										For the year ended
		As of December 31, 2012								December 31, 2012
																Cash Basis
		Unpaid								Average			Interest Income			Interest
		Principal			Recorded					Recorded			Recognized			Recognized
		Balance			Investment					Investment			in Period			in Period
Residential first mortgages		$	-		$	-				$	-		$	-		$	-
Home equity and lines of credit			-			-					-			-			-
Commercial real estate			730			505					690			12			12
Commercial business			394			369					368			5			5
Consumer			1,650			1,650					1,774			-			-
Total		$	2,774		$	2,524				$	2,832		$	17		$	17

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 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 December 31, 2013 and 2012, the Corporation had $2.5 million and $2.3 million, respectively, of loans classified as TDR’s, which are included in impaired loans above.  At December 31, 2013 and 2012, the Corporation had $56,000 and $36,000, respectively, of the allowance for loan losses allocated to these specific loans.

 

During the year ended December 31, 2013, the Corporation modified a residential mortgage loan with a pre- and post-modification recorded investment of $83,000 as a TDR due to financial difficulties experienced by the borrower.  The modification included a reduction in the interest rate from 6.75% to 4.00% and a 65 month extension of the original term.  At December 31, 2013, the Corporation had $21,000 of the allowance for loan losses allocated to this specific loan.

 

Also during 2013, the Corporation recognized four loans to one borrower with a combined pre- and post-modification recorded investment of $474,000 as TDRs due to the discharge of the debtor in bankruptcy.  Two of the loans are commercial real estate loans and two are commercial business loans and are secured by residential and commercial rental properties.  The loans are collateral dependent for repayment.  Due to the estimated fair value of the collateral on these loans, at December 31, 2013, the Corporation did not have any of the allowance for loan losses allocated to these specific loans.

During the year ended December 31, 2012, the Corporation recognized a consumer installment loan to one borrower with a pre- and post-modification recorded investment of $1.6 million as a TDR due to the discharge of the debtor in bankruptcy.  The loan is secured by a lien on the primary residence of a separate borrower.  Due to the estimated value of the underlying collateral secured by the lien, at December 31, 2013 and 2012, the Corporation did not have any of the 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.  There were defaults on three loans classified as TDRs during the years ended December 31, 2013 and no defaults in 2012.  The Corporation is working with these borrowers to return these loans to current status.

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. 

Management uses the following definitions for risk ratings:

 

 

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, 2013 and 2012:

(Dollar amounts in thousands)
								Special
		Not Rated			Pass			Mention			Substandard			Doubtful			Total
December 31, 2013:
Residential first mortgages		$	104,983		$	-		$	-		$	558		$	-		$	105,541
Home equity and lines of credit			87,868			-			-			60			-			87,928
Commercial real estate			-			93,973			256			7,270			-			101,499
Commercial business			-			50,008			674			2,532			-			53,214
Consumer			7,769			-			-			1,348			-			9,117
Total		$	200,620		$	143,981		$	930		$	11,768		$	-		$	357,299
December 31, 2012:
Residential first mortgages		$	96,713		$	-		$	-		$	533		$	-		$	97,246
Home equity and lines of credit			85,443			-			-			172			-			85,615
Commercial real estate			-			88,944			1,658			6,870			1,351			98,823
Commercial business			-			42,417			2,157			1,007			-			45,581
Consumer			10,236			-			-			1,650			-			11,886
Total		$	192,392		$	131,361		$	3,815		$	10,232		$	1,351		$	339,151

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 December 31, 2013 and 2012:

 

(Dollar amounts in thousands)
		Performing									Nonperforming
		Accruing			Accruing			Accruing			Acccruing
		Loans Not			30-59 Days			60-89 Days			90 Days +						Total
		Past Due			Past Due			Past Due			Past Due			Nonaccrual			Loans
December 31, 2013:
Residential first mortgages		$	103,821		$	884		$	278		$	38		$	520		$	105,541
Home equity and lines of credit			87,302			394			172			-			60			87,928
Commercial real estate			98,095			516			22			-			2,866			101,499
Commercial business			52,581			258			-			24			351			53,214
Consumer			7,682			61			26			-			1,348			9,117
Total loans		$	349,481		$	2,113		$	498		$	62		$	5,145		$	357,299
December 31, 2012:
Residential first mortgages		$	95,001		$	1,272		$	440		$	-		$	533		$	97,246
Home equity and lines of credit			84,592			669			157			-			197			85,615
Commercial real estate			94,485			50			49			21			4,218			98,823
Commercial business			44,915			297			-			-			369			45,581
Consumer			10,172			41			23			-			1,650			11,886
Total loans		$	329,165		$	2,329		$	669		$	21		$	6,967		$	339,151

The following table presents the Corporation’s nonaccrual loans by aging category as of December 31, 2013 and 2012:

 

(Dollar amounts in thousands)
		Not			30-59 Days			60-89 Days			90 Days +			Total
		Past Due			Past Due			Past Due			Past Due			Loans
December 31, 2013:
Residential first mortgages		$	88		$	-		$	82		$	350		$	520
Home equity and lines of credit			-			-			-			60			60
Commercial real estate			412			2,148			-			306			2,866
Commercial business			65			-			-			286			351
Consumer			1,348			-			-			-			1,348
Total loans		$	1,913		$	2,148		$	82		$	1,002		$	5,145
December 31, 2012:
Residential first mortgages		$	-		$	-		$	-		$	533		$	533
Home equity and lines of credit			-			25			-			172			197
Commercial real estate			469			3,386			10			353			4,218
Commercial business			78			-			-			291			369
Consumer			1,650			-			-			-			1,650
Total loans		$	2,197		$	3,411		$	10		$	1,349		$	6,967

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)		2013			2012
Balance at the beginning of the year		$	5,350		$	3,536
Provision for loan losses			580			2,154
Charge-offs			(1,130)			(498)
Recoveries			69			158
Balance at the end of the year		$	4,869		$	5,350

 

 

(Dollar amounts in thousands)
					Home Equity
		Residential			& Lines			Commercial			Commercial
		Mortgages			of Credit			Real Estate			Business			Consumer			Total
December 31, 2013:
Beginning Balance		$	828		$	730		$	3,090		$	636		$	66		$	5,350
Charge-offs			(36)			(68)			(941)			-			(85)			(1,130)
Recoveries			1			-			8			18			42			69
Provision			130			(37)			293			168			26			580
Ending Balance		$	923		$	625		$	2,450		$	822		$	49		$	4,869
Ending ALL balance attributable to loans:
Individually evaluated for impairment			21			-			181			-			-			202
Collectively evaluated for impairment			902			625			2,269			822			49			4,667
Total loans:
Individually evaluated for impairment			102			-			3,196			336			1,348			4,982
Collectively evaluated for impairment			105,439			87,928			98,303			52,878			7,769			352,317
December 31, 2012:
Beginning Balance		$	832		$	320		$	1,737		$	590		$	57		$	3,536
Charge-offs			(90)			(222)			(35)			(50)			(101)			(498)
Recoveries			84			27			8			15			24			158
Provision			2			605			1,380			81			86			2,154
Ending Balance		$	828		$	730		$	3,090		$	636		$	66		$	5,350
Ending ALL balance attributable to loans:
Individually evaluated for impairment			-			-			1,448			-			-			1,448
Collectively evaluated for impairment			828			730			1,642			636			66			3,902
Total loans:
Individually evaluated for impairment			-			-			4,573			369			1,650			6,592
Collectively evaluated for impairment			97,246			85,615			94,250			45,212			10,236			332,559

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.