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) September 30, 2016 December 31, 2015 Real Estate Loans: Residential $ 237,897 33.7 % $ 161,820 28.9 % Commercial 315,270 44.6 279,123 49.8 Construction 20,056 2.8 18,987 3.4 Commercial, financial and agricultural 85,145 12.1 71,090 12.7 Consumer loans to individuals 48,225 6.8 29,231 5.2 Total loans 706,593 100.0 % 560,251 100.0 % Deferred fees, net (394) (326) Total loans receivable 706,199 559,925 Allowance for loan losses (6,164) (7,298) Net loans receivable $ 700,035 $ 552,627 The following table presents the components of the purchase accounting adjustments related to the purchased impaired loans acquired: (In Thousands) Contractually required principal and interest $ 2,621 Non-accretable discount (1,014) Expected cash flows 1,607 Accretable discount (239) Estimated fair value $ 1,368 Changes in the amortizable yield for purchased credit-impaired loans were as follows for the nine month periods ended September 30: 2016 2015 Balance at beginning of period $ - $ 8 Additions 239 - Accretion (12) (1) Reclassification and other - - Balance at end of period $ 227 $ 7 The following table presents information regarding loans acquired and accounted for in accordance with ASC 310-30 (in thousands): September 30, 2016 December 31, 2015 Outstanding Balance $ 1,855 $ 498 Carrying Amount $ 1,368 $ 498 As a result of the acquisition of Delaware, the Company added $1,397,000 of loans that were accounted for in accordance with ASC 310-30. Based on a review of the loans acquired by senior lending management, which included an analysis of credit deterioration of the loans since origination, the Company recorded a specific credit fair value adjustment of $499,000 . For loans that were acquired with specific evidence of deterioration in credit quality, loan losses will be accounted for through a reduction of the specific reserve and will not impact the allowance for loan losses until actual losses exceed the allotted reserves. For loans acquired without a deterioration of credit quality, losses incurred will result in adjustments to the allowance for loan losses through the allowance for loan loss adequacy calculation. As of September 30, 2016, the outstanding balance of ASC 310-30 loans acquired from Delaware was $1,410,000 and the carrying value was $911,000 , while one loan with an outstanding balance and carrying value of $445,000 remained from a prior acquisition. 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 probable 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. 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 September 30, 2016 and December 31, 2015, foreclosed real estate owned totaled $5,386,000 and $2,847,000 , respectively. As of September 30, 2016, included within foreclosed real estate owned is $ 306,000 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of September 30, 2016, the Company has initiated formal foreclosure proceedings on $222,000 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 September 30, 2016 (In thousands) Individually evaluated for impairment $ 24 $ 2,791 $ - $ - $ - $ 2,815 Loans acquired with deteriorated credit quality 797 571 - - - 1,368 Collectively evaluated for impairment 237,076 311,908 20,056 85,145 48,225 702,410 Total Loans $ 237,897 $ 315,270 $ 20,056 $ 85,145 $ 48,225 $ 706,593 Real Estate Loans Commercial Consumer Residential Commercial Construction Loans Loans Total (In thousands) December 31, 2015 Individually evaluated for impairment $ 28 $ 8,660 $ - $ 43 $ - $ 8,731 Loans acquired with deteriorated credit quality 140 358 - - - 498 Collectively evaluated for impairment 161,652 270,105 18,987 71,047 29,231 551,022 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 September 30, 2016 (in thousands) With no related allowance recorded: Real Estate Loans Residential $ 1,003 $ 1,189 $ - Commercial 3,349 4,267 - Subtotal 4,352 5,456 - With an allowance recorded: Real Estate Loans Commercial 74 1,020 15 Subtotal 74 1,020 15 Total: Real Estate Loans Residential 1,003 1,189 - Commercial 3,423 5,287 15 Total Impaired Loans $ 4,426 $ 6,476 $ 15 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 nine months ended September 30, 2016 and 2015: Average Recorded Interest Income Investment Recognized 2016 2015 2016 2015 Real Estate Loans: Residential $ 372 $ 236 $ 3 $ 3 Commercial 3,249 10,477 90 510 Total $ 3,621 $ 10,713 $ 93 $ 513 The following information for impaired loans is presented (in thousands) for the three months ended September 30, 2016 and 2015: Average Recorded Interest Income Investment Recognized 2016 2015 2016 2015 Real Estate Loans: Residential $ 579 $ 249 $ 1 $ 1 Commercial 3,253 10,294 33 45 Total $ 3,832 $ 10,543 $ 34 $ 46 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 September 30, 2016, troubled debt restructured loans totaled $1.6 million and resulted in specific reserves of $15,000 . 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 September 30, 2016, there were no new loans identified as troubled debt restructurings. During 2016, the Company has recognized write-downs of $2,519,000 on loans that were previously identified as troubled debt restructurings. For the period ended September 30, 2015, there were no new loans identified as troubled debt restructurings. During the 2015 period, the Company recognized write-downs in the amount of $439,000 on three loans previously identified as troubled debt restructures with a carrying value of $2.5 million as of September 30, 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 September 30, 2016 and December 31, 2015 (in thousands): Special Doubtful Pass Mention Substandard or Loss Total September 30, 2016 Commercial real estate loans $ 306,177 $ 4,442 $ 4,651 $ - $ 315,270 Commercial loans 85,087 35 23 - 85,145 Total $ 391,264 $ 4,477 $ 4,674 $ - $ 400,415 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 September 30, 2016 and December 31, 2015 (in thousands): Performing Nonperforming Total September 30, 2016 Residential real estate loans $ 236,711 $ 1,186 $ 237,897 Construction 20,028 28 20,056 Consumer loans 48,225 - 48,225 Total $ 304,964 $ 1,214 $ 306,178 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 September 30, 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 September 30, 2016 Real Estate loans Residential $ 234,857 $ 1,548 $ 306 $ - $ 1,186 $ 3,040 $ 237,897 Commercial 313,916 198 131 49 976 1,354 315,270 Construction 20,028 - - - 28 28 20,056 Commercial loans 85,083 62 - - - 62 85,145 Consumer loans 48,118 96 11 - - 107 48,225 Total $ 702,002 $ 1,904 $ 448 $ 49 $ 2,190 $ 4,591 $ 706,593 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 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 allowance for loan losses. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the allowance. 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 (32) (2,670) - (15) (71) (2,788) Recoveries 4 11 - - 39 54 Provision for loan losses 15 1,516 (12) (46) 127 1,600 Ending balance, September 30, 2016 $ 1,056 $ 4,363 $ 78 $ 336 $ 331 $ 6,164 Ending balance individually evaluated for impairment $ - $ 15 $ - $ - $ - $ 15 Ending balance collectively evaluated for impairment $ 1,056 $ 4,348 $ 78 $ 336 $ 331 $ 6,149 (In thousands) Residential Real Estate Commercial Real Estate Construction Commercial Consumer Total Beginning balance, June 30, 2016 $ 976 $ 4,191 $ 59 $ 293 $ 279 $ 5,798 Charge Offs (15) (28) - (15) (41) (99) Recoveries 2 9 - - 4 15 Provision for loan losses 93 191 19 58 89 450 Ending balance, September 30, 2016 $ 1,056 $ 4,363 $ 78 $ 336 $ 331 $ 6,164 (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 (159) (1,692) - - (59) (1,910) Recoveries 4 - - - 18 22 Provision for loan losses (181) 1,980 (137) 28 70 1,760 Ending balance, September 30, 2015 $ 987 $ 4,178 $ 85 $ 284 $ 213 $ 5,747 Ending balance individually evaluated for impairment $ - $ 389 $ - $ - $ - $ 389 Ending balance collectively evaluated for impairment $ 987 $ 3,789 $ 85 $ 284 $ 213 $ 5,358 (In thousands) Residential Real Estate Commercial Real Estate Construction Commercial Consumer Total Beginning balance, June 30, 2015 $ 1,085 $ 4,152 $ 97 $ 405 $ 208 $ 5,947 Charge Offs (46) (865) - - (16) (927) Recoveries - - - - 7 7 Provision for loan losses (52) 891 (12) (121) 14 720 Ending balance, September 30, 2015 $ 987 $ 4,178 $ 85 $ 284 $ 213 $ 5,747 The Company’s primary business activity as of December 31, 2015 was with customers located in northeastern Pennsylvania. As of September 30, 2016, the Company has added the New York counties of Delaware and Sullivan to its market as a result of the acquisition of Delaware Bancshares, Inc. 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 September 30, 2016, the Company considered its concentration of credit risk to be acceptable. The highest concentrations are in commercial rentals with $64.8 million of loans outstanding, or 9.2% of total loans outstanding, and the hospitality/lodging industry with loans outstanding of $51.6 million, or 7.3% of loans outstanding. During 2016, the Company recognized a write down of $3,000 in the named concentrations. Gross realized gains and gross realized losses on sales of residential mortgage loans were $54,000 and $0 , respectively, in the first nine months of 201 6 compared to $56,000 and $0 , respectively, in the same period in 2015. The proceeds from the sales of residential mortgage loans totaled $1.7 million and $ 2.7 million for the nine months ended September 30, 2016 and 2015, respectively. There were no sales of residential mortgage loans during the three months ended September 30, 2016. Gross realized gains and gross realized losses on sales of residential mortgage loans were $16,000 and $0 , respectively, in the same period in 2015. The proceeds from the sales of residential mortgage loans totaled $ 818,000 for the three months ended September 30, 2015. |