HVBC 2016 Annual Report

13 When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances in an amount deemed prudent by management to cover losses that were both probable and reasonable to estimate. General allowances represent allowances which have been established to cover accrued losses associated with lending activities that were both probable and reasonable to estimate, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory authorities, which may require the establishment of additional general or specific allowances. In connection with the filing of our periodic regulatory reports and in accordance with our classification of assets policy, we regularly review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable regulations. Loans are listed on the “watch list” initially because of emerging financial weaknesses even though the loan is currently performing as agreed. Management reviews the status of each loan on our watch list on a quarterly basis with the full board of directors. If a loan deteriorates in asset quality, the classification is changed to “special mention,” “substandard,” “doubtful” or “loss” depending on the circumstances and the evaluation. Generally, loans 90 days or more past due are placed on nonaccrual status and classified “substandard.” The following table sets forth our amounts of classified assets and assets designated as special mention as of June 30, 2017, 2016 or 2015. The classified assets total at June 30, 2017 includes $1.4 million of non-performing loans. At June 30, 2017 2016 2015 (In thousands) Classified assets: Substandard $ 2,204 $ 1,891 $ 2,809 Doubtful — — — Loss — — — Total classified assets $ 2,204 $ 1,891 $ 2,809 Special Mention $ 552 $ 598 $ 412 The increase in classified assets was due to a $313,000 increase in substandard assets primarily due to an $373,000 increase in substandard one- to four-family residential real estate loans partially offset by decreases of $31,000 in substandard home equity and HELOCs and $9,000 in substandard commercial real estate and $20,000 in substandard commercial business. Substandard assets at June 30, 2017 consisted of $1.4 million in non-accrual loans and $1.3 million in loans that were performing. Allowance for Loan Losses Analysis and Determination of the Allowance for Loan Losses . The allowance for loan losses is established through a provision for loan losses. We maintain the allowance at a level believed, to the best of management’s knowledge, to cover all known and inherent losses in the portfolio that are both probable and reasonable to estimate at each reporting date. Management reviews the allowance for loan losses on no less than a quarterly basis in order to identify those inherent losses and to assess the overall collection probability for the loan portfolio. The evaluation process includes, among other things, an analysis of delinquency trends, non-performing loan trends, the level of charge-offs and recoveries, prior loss experience, total loans outstanding, the volume of loan originations, the type, size and geographic concentration of the loans, the value of collateral securing the loan, the borrower’s ability to repay and repayment performance, the number of loans requiring heightened management oversight, local economic conditions and industry experience. Such risk factors are periodically reviewed by management and revised as deemed appropriate. The establishment of the allowance for loan losses is significantly affected by management’s judgment and uncertainties, and there is likelihood that different amounts would be reported under different conditions or assumptions. The Pennsylvania Department of Banking and the FDIC, as an integral part of their