Loans Receivable and Allowance for Loan Losses | 7. Loans Receivable and Allowance for Loan Losses Set forth below is selected data relating to the composition of the loan portfolio at the dates indicated: Types of loans (dollars in thousands) March 31, 2016 December 31, 2015 Real Estate Loans: Residential $ 160,013 28.3 % $ 161,820 28.9 % Commercial 281,667 49.7 279,123 49.8 Construction 18,999 3.4 18,987 3.4 Commercial, financial and agricultural 72,970 12.9 71,090 12.7 Consumer loans to individuals 32,443 5.7 29,231 5.2 Total loans 566,092 100.0 % 560,251 100.0 % Deferred fees, net (305) (326) Total loans receivable 565,787 559,925 Allowance for loan losses (7,642) (7,298) Net loans receivable $ 558,145 $ 552,627 The following table presents information regarding loans acquired and accounted for in accordance with ASC 310-30 (in thousands): March 31, 2016 December 31, 2015 Outstanding Balance $ 482 $ 498 Carrying Amount $ 482 $ 498 There were no material increases or decreases in the expected cash flows of these loans since the acquisition date. Since December 31, 2014, for loans that were acquired with or without specific evidence of deterioration in credit quality, adjustments to the allowance for loan losses have been accounted for through the allowance for loan loss adequacy calculation. The Company maintains a loan review system, which allows for a periodic review of our loan portfolio and the early identification of potential impaired loans. Such system takes into consideration, among other things, delinquency status, size of loans, type and market value of collateral and financial condition of the borrowers. Specific loan loss allowances are established for identified losses based on a review of such information. A loan evaluated for impairment is considered to be impaired when, based on current information and events, it is probably that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. All loans identified as impaired are evaluated independently. We do not aggregate such loans for evaluation purposes. Impairment is measured on a loan-by-loan basis for commercial and construction loans by the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral-dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential mortgage loans for impairment disclosures, unless such loans are part of a larger relationship that is impaired, or are classified as a troubled debt restructuring. A loan is considered to be a troubled debt restructuring (“TDR”) loan when the Company grants a concession to the borrower because of the borrower’s financial condition that it would not otherwise consider. Such concessions include the reduction of interest rates, forgiveness of principal or interest, or other modifications of interest rates that are less than the current market rate for new obligations with similar risk. Foreclosed assets acquired in settlement of loans are carried at fair value less estimated costs to sell and are included in foreclosed real estate owned on the Consolidated Balance Sheets. As of March 31, 2016 and December 31, 2015, foreclosed real estate owned totaled $2,855,000 and $2,847,000 , respectively. As of March 31, 2016, included within foreclosed real estate owned is $ 345,000 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of March 31, 2016, the Company has initiated formal foreclosure proceedings on $95,000 of consumer residential mortgages. The following table shows the amount of loans in each category that were individually and collectively evaluated for impairment at the dates indicated: Real Estate Loans Commercial Consumer Residential Commercial Construction Loans Loans Total March 31, 2016 (In thousands) Individually evaluated for impairment $ 26 $ 8,124 $ - $ - $ - $ 8,150 Loans acquired with deteriorated credit quality 133 349 - - - 482 Collectively evaluated for impairment 159,854 273,194 18,999 72,970 32,443 557,460 Total Loans $ 160,013 $ 281,667 $ 18,999 $ 72,970 $ 32,443 $ 566,092 Real Estate Loans Commercial Consumer Residential Commercial Construction Loans Loans Total (In thousands) December 31, 2015 Individually evaluated for impairment $ 28 $ 8,660 $ - $ 42 $ - $ 8,730 Loans acquired with deteriorated credit quality 140 358 - - - 498 Collectively evaluated for impairment 161,652 270,105 18,987 71,048 29,231 551,023 Total Loans $ 161,820 $ 279,123 $ 18,987 $ 71,090 $ 29,231 $ 560,251 The following table includes the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable. Also presented are the average recorded investments in the impaired loans and the related amount of interest recognized during the time within the period that the impaired loans were impaired. Unpaid Recorded Principal Associated Investment Balance Allowance March 31, 2016 (in thousands) With no related allowance recorded: Real Estate Loans Residential $ 159 $ 165 $ - Commercial 2,775 3,169 - Subtotal 2,934 3,334 - With an allowance recorded: Real Estate Loans Commercial 5,698 7,199 1,644 Subtotal 5,698 7,199 1,644 Total: Real Estate Loans Residential 159 165 - Commercial 8,473 10,368 1,644 Total Impaired Loans $ 8,632 $ 10,533 $ 1,644 Unpaid Recorded Principal Associated Investment Balance Allowance December 31, 2015 (in thousands) With no related allowance recorded: Real Estate Loans Residential $ 168 $ 173 $ - Commercial 2,644 4,610 - Commercial, financial and agriculture 43 43 - Subtotal 2,855 4,826 - With an allowance recorded: Real Estate Loans Commercial 6,373 6,446 1,613 Subtotal 6,373 6,446 1,613 Total: Real Estate Loans Residential 168 173 - Commercial 9,017 11,056 1,613 Commercial, financial and agriculture 43 43 - Total Impaired Loans $ 9,228 $ 11,272 $ 1,613 The following information for impaired loans is presented (in thousands) for the three months ended March 31, 2016 and 2015: Average Recorded Interest Income Investment Recognized 2016 2015 2016 2015 Real Estate Loans: Residential $ 164 $ 223 $ 1 $ 1 Commercial 8,640 11,210 32 396 Total $ 8,804 $ 11,433 $ 33 $ 397 Troubled debt restructured loans are those loans whose terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of financial difficulties experienced by the borrower, who could not obtain comparable terms from alternate financing sources. As of March 31, 2016, troubled debt restructured loans totaled $6.5 million and resulted in specific reserves of $1,641,000 . As of December 31, 2015, troubled debt restructured loans totaled $6.8 million and resulted in specific reserves of $ 1,613,000 . For the period ended March 31, 2016, there were no new loans identified as troubled debt restructurings. During 2016, the Company recognized a write-down of $100,000 on a loan that was previously identified as troubled debt restructurings with a carrying value of $432,000 as of March 31, 2016. For the period ended March 31, 2015, there were no new loans identified as troubled debt restructures. During the 2015 period, the Company recognized write-downs in the amount of $373,000 on two loans previously identified as troubled debt restructures with a carrying value of $2.4 million as of March 31, 2015. Management uses an eight point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first four categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are considered Substandard. Any portion of a loan that has been charged off is placed in the Loss category. To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as non performance, repossession, or death occurs to raise awareness of a possible credit event. The Company’s Loan Review Department is responsible for the timely and accurate risk rating of the loans on an ongoing basis. Every credit which must be approved by Loan Committee or the Board of Directors is assigned a risk rating at time of consideration. Loan Review also annually reviews relationships of $1,000,000 and over to assign or re-affirm risk ratings. Loans in the Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance. The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard, Doubtful and Loss within the internal risk rating system as of March 31, 2016 and December 31, 2015 (in thousands): Special Doubtful Pass Mention Substandard or Loss Total March 31, 2016 Commercial real estate loans $ 269,575 $ 3,161 $ 8,931 $ - $ 281,667 Commercial loans 72,970 - - - 72,970 Total $ 342,545 $ 3,161 $ 8,931 $ - $ 354,637 Special Doubtful Pass Mention Substandard or Loss Total December 31, 2015 Commercial real estate loans $ 267,892 $ 1,837 $ 9,394 $ - $ 279,123 Commercial loans 71,047 - 43 - 71,090 Total $ 338,939 $ 1,837 $ 9,437 $ - $ 350,213 For residential real estate loans, construction loans and consumer loans, the Company evaluates credit quality based on the performance of the individual credits. The following table presents the recorded investment in the loan classes based on payment activity as of March 31, 2016 and December 31, 2015 (in thousands): Performing Nonperforming Total March 31, 2016 Residential real estate loans $ 159,540 $ 473 $ 160,013 Construction 18,999 - 18,999 Consumer loans 32,443 - 32,443 Total $ 210,982 $ 473 $ 211,455 Performing Nonperforming Total December 31, 2015 Residential real estate loans $ 161,380 $ 440 $ 161,820 Construction 18,987 - 18,987 Consumer loans 29,231 - 29,231 Total $ 209,598 $ 440 $ 210,038 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 nonaccrual loans as of March 31, 2016 and December 31, 2015 (in thousands): Current 31-60 Days Past Due 61-90 Days Past Due Greater than 90 Days Past Due and still accruing Non-Accrual Total Past Due and Non-Accrual Total Loans March 31, 2016 Real Estate loans Residential $ 159,082 $ 428 $ 30 $ - $ 473 $ 931 $ 160,013 Commercial 275,062 211 - - 6,394 6,605 281,667 Construction 18,999 - - - - - 18,999 Commercial loans 72,970 - - - - - 72,970 Consumer loans 32,391 38 14 - - 52 32,443 Total $ 558,504 $ 677 $ 44 $ - $ 6,867 $ 7,588 $ 566,092 Current 31-60 Days Past Due 61-90 Days Past Due Greater than 90 Days Past Due and still accruing Non-Accrual Total Past Due and Non-Accrual Total Loans December 31, 2015 Real Estate loans Residential $ 160,683 $ 646 $ 51 $ - $ 440 $ 1,137 $ 161,820 Commercial 272,125 310 39 - 6,649 6,998 279,123 Construction 18,959 28 - - - 28 18,987 Commercial loans 71,043 4 - - 43 47 71,090 Consumer loans 29,179 41 11 - - 52 29,231 Total $ 551,989 $ 1,029 $ 101 $ - $ 7,132 $ 8,262 $ 560,251 The following table presents the allowance for loan losses by the classes of the loan portfolio: (In thousands) Residential Real Estate Commercial Real Estate Construction Commercial Consumer Total Beginning balance, December 31, 2015 $ 1,069 $ 5,506 $ 90 $ 397 $ 236 $ 7,298 Charge Offs - (129) - - (7) (136) Recoveries 1 2 - - 27 30 Provision for loan losses 7 379 19 49 (4) 450 Ending balance, March 31, 2016 $ 1,077 $ 5,758 $ 109 $ 446 $ 252 $ 7,642 Ending balance individually evaluated for impairment $ - $ 1,644 $ - $ - $ - $ 1,644 Ending balance collectively evaluated for impairment $ 1,077 $ 4,114 $ 109 $ 446 $ 252 $ 5,998 (In thousands) Residential Real Estate Commercial Real Estate Construction Commercial Consumer Total Beginning balance, December 31, 2014 $ 1,323 $ 3,890 $ 222 $ 256 $ 184 $ 5,875 Charge Offs (87) (393) - - (15) (495) Recoveries 2 - - - 5 7 Provision for loan losses 115 497 (107) 97 18 620 Ending balance, March 31, 2015 $ 1,353 $ 3,994 $ 115 $ 353 $ 192 $ 6,007 Ending balance individually evaluated for impairment $ - $ 284 $ - $ - $ - $ 284 Ending balance collectively evaluated for impairment $ 1,353 $ 3,710 $ 115 $ 353 $ 192 $ 5,723 The Company’s primary business activity as of March 31, 2016 and December 31, 2015 is with customers located in northeastern Pennsylvania. Accordingly, the Company has extended credit primarily to commercial entities and individuals in this area whose ability to honor their contracts is influenced by the region’s economy. As of March 31, 2016, the Company considered its concentration of credit risk to be acceptable. The highest concentrations are in the hospitality/lodging industry with loans outstanding of $66.5 million, or 11.7% of loans outstanding. During the three-month period ended March 31, 2016, there were no write downs in the named concentrations. Gross realized gains and gross realized losses on sales of residential mortgage loans were $32,000 and $0 , respectively, in the first three months of 201 6 compared to $24,000 and $0 , respectively, in the same period in 2015. The proceeds from the sales of residential mortgage loans totaled $1.0 million and $804,000 for the three months ended March 31, 2016 and 2015, respectively. |