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 (dollars in thousands) : September 30, 2017 December 31, 2016 Real Estate Loans: Residential $ 235,508 31.1 % $ 237,177 33.2 % Commercial 344,960 45.6 320,187 44.8 Construction 15,328 2.0 19,709 2.8 Commercial, financial and agricultural 92,979 12.3 85,508 12.0 Consumer loans to individuals 67,492 9.0 51,524 7.2 Total loans 756,267 100.0 % 714,105 100.0 % Deferred fees, net (253) (216) Total loans receivable 756,014 713,889 Allowance for loan losses (7,760) (6,463) Net loans receivable $ 748,254 $ 707,426 The following table presents the components of the purchase accounting adjustments related to the purchased credit- impaired loans acquired: (In Thousands) July 31, 2016 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 accretable yield for purchased credit-impaired loans were as follows for the nine- month period ended September 30 (in thousands) : 2017 Balance at beginning of period $ 208 Additions - Accretion (56) Reclassification and other (15) Balance at end of period $ 137 The following table presents information regarding loans acquired and accounted for in accordance with ASC 310-30 (in thousands): September 30, 2017 December 31, 2016 Outstanding Balance $ 1,555 $ 1,821 Carrying Amount $ 1,256 $ 1,386 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. 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 , 2017 and December 31, 2016, foreclosed real estate owned totaled $4,243,000 and $5,302,000 , respectively. During the nine months ended September 30 , 2017, there were no consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of September 30 , 2017, the Company has initiated formal foreclosure proceedings on eight properties classified as c onsumer residential mortgages with a carrying value of $494,000 . 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, 2017 (In thousands) Individually evaluated for impairment $ 23 $ 1,382 $ - $ - $ - $ 1,405 Loans acquired with deteriorated credit quality 831 425 - - - 1,256 Collectively evaluated for impairment 234,654 343,153 15,328 92,979 67,492 753,606 Total Loans $ 235,508 $ 344,960 $ 15,328 $ 92,979 $ 67,492 $ 756,267 Real Estate Loans Commercial Consumer Residential Commercial Construction Loans Loans Total (In thousands) December 31, 2016 Individually evaluated for impairment $ 23 $ 2,601 $ - $ - $ - $ 2,624 Loans acquired with deteriorated credit quality 821 565 - - - 1,386 Collectively evaluated for impairment 236,333 317,021 19,709 85,508 51,524 710,095 Total Loans $ 237,177 $ 320,187 $ 19,709 $ 85,508 $ 51,524 $ 714,105 The following table includes the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable. Unpaid Recorded Principal Associated Investment Balance Allowance September 30, 2017 (in thousands) With no related allowance recorded: Real Estate Loans Residential $ 23 $ 28 $ - Commercial 1,382 2,263 - Subtotal 1,405 2,291 - Total: Real Estate Loans Residential 23 28 - Commercial 1,382 2,263 - Total Impaired Loans $ 1,405 $ 2,291 $ - Unpaid Recorded Principal Associated Investment Balance Allowance December 31, 2016 (in thousands) With no related allowance recorded: Real Estate Loans Residential $ 23 $ 28 $ - Commercial 2,601 3,427 - Subtotal 2,624 3,455 - Total: Real Estate Loans Residential 23 28 - Commercial 2,601 3,427 - Total Impaired Loans $ 2,624 $ 3,455 $ - The following table presents the average recorded investment in impaired loans and the related amount of interest income recognized during the three-month periods ended September 30, 2017 and 2016 (in thousands): Average Recorded Interest Income Investment Recognized 2017 2016 2017 2016 Real Estate Loans: Residential $ 23 $ 579 $ - $ 1 Commercial 1,423 3,253 12 33 Total $ 1,446 $ 3,832 $ 12 $ 34 The following table presents the average recorded investment in impaired loans and the related amount of interest income recognized during the nine-month periods ended September 30, 2017 and 2016 (in thousands): Average Recorded Interest Income Investment Recognized 2017 2016 2017 2016 Real Estate Loans: Residential $ 23 $ 372 $ - $ 3 Commercial 1,465 3,249 41 90 Total $ 1,488 $ 3,621 $ 41 $ 93 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 , 2017, troubled debt restructured loans totaled $1.3 million with no specific reser ve. As of December 31, 2016, troubled debt restructured loans totaled $1.5 million with no specific reserv e. For the nine month period ended September 30 , 2017, there were no new loans identified as troubled debt restructurings. During 2017, the Company recognized a write-down of $55,000 on one loan that was previously identified as a troubled debt restructuring with a carrying value of $175,000 as of September 30, 2017 . For the nine-month period ended September 30 , 2016, there were no new loans identified as troubled debt restructurings. During the 2016 period, the Company recognized w rite-down s of $2,519,000 on loan s previously identified as a troubled debt restructur ing. 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 $1,500,000 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 , 2017 and December 31, 2016 (in thousands): Special Doubtful Pass Mention Substandard or Loss Total September 30, 2017 Commercial real estate loans $ 331,511 $ 9,542 $ 3,907 $ - $ 344,960 Commercial loans 92,879 20 80 - 92,979 Total $ 424,390 $ 9,562 $ 3,987 $ - $ 437,939 Special Doubtful Pass Mention Substandard or Loss Total December 31, 2016 Commercial real estate loans $ 310,432 $ 5,432 $ 4,323 $ - $ 320,187 Commercial loans 84,600 885 23 - 85,508 Total $ 395,032 $ 6,317 $ 4,346 $ - $ 405,695 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, 2017 and December 31, 2016 (in thousands): Performing Nonperforming Total September 30, 2017 Residential real estate loans $ 234,004 $ 1,504 $ 235,508 Construction 15,328 - 15,328 Consumer loans 67,492 - 67,492 Total $ 316,824 $ 1,504 $ 318,328 Performing Nonperforming Total December 31, 2016 Residential real estate loans $ 235,829 $ 1,137 $ 237,177 Construction 19,681 28 19,709 Consumer loans 51,524 - 51,524 Total $ 307,034 $ 1,165 $ 308,410 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 , 2017 and December 31, 2016 (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, 2017 Real Estate loans Residential $ 232,909 $ 909 $ 186 $ - $ 1,504 $ 2,599 $ 235,508 Commercial 343,754 703 - - 503 1,206 344,960 Construction 15,328 - - - - - 15,328 Commercial loans 92,897 40 42 - - 82 92,979 Consumer loans 67,457 29 6 - - 35 67,492 Total $ 752,345 $ 1,681 $ 234 $ - $ 2,007 $ 3,922 $ 756,267 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, 2016 Real Estate loans Residential $ 234,790 $ 986 $ 264 $ 1 $ 1,136 $ 2,387 $ 237,177 Commercial 318,979 445 1 - 762 1,208 320,187 Construction 19,681 - - - 28 28 19,709 Commercial loans 85,355 143 10 - - 153 85,508 Consumer loans 51,456 39 29 - - 68 51,524 Total $ 710,261 $ 1,613 $ 304 $ 1 $ 1,926 $ 3,844 $ 714,105 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, 2016 $ 1,092 $ 4,623 $ 78 $ 307 $ 363 $ 6,463 Charge Offs (83) (308) (28) - (127) (546) Recoveries 4 5 12 - 22 43 Provision for loan losses 340 979 35 165 281 1,800 Ending balance, September 30, 2017 $ 1,353 $ 5,299 $ 97 $ 472 $ 539 $ 7,760 Ending balance individually evaluated for impairment $ - $ - $ - $ - $ - $ - Ending balance collectively evaluated for impairment $ 1,353 $ 5,299 $ 97 $ 472 $ 539 $ 7,760 (In thousands) Residential Real Estate Commercial Real Estate Construction Commercial Consumer Total Beginning balance, June 30, 2017 $ 1,254 $ 5,228 $ 93 $ 360 $ 484 $ 7,419 Charge Offs - (212) (15) - (45) (272) Recoveries 1 1 - - 11 13 Provision for loan losses 98 282 19 112 89 600 Ending balance, September 30, 2017 $ 1,353 $ 5,299 $ 97 $ 472 $ 539 $ 7,760 (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 The Company’s primary business activity as of September 30 , 2017 was with customers located in northeastern Pennsylvania and the New York counties of Delaware and Sullivan. 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 , 2017, the Company considered its concentration of credit risk to be acceptable. The highest concentrations are in commercial rentals with $81.3 million of loans outstanding, or 10.8% of total loans outstanding, and the hospitality/lodging industry with loans outstanding of $53.8 million, or 7.1% of loans outstanding. During 2017, the Company recognize d a loss of $212,000 on one loan in the named concentrations which was paid off during the three month period ending September 30, 2017. The Company did no t sell any residential mortgage loans during the first nine months of 2017. 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. The proceeds from the sales of residential mortgage loans totaled $1.7 million for the nine months ended September 30 , 2016. During the nine months ended September 30, 2017, the Company sold $1.7 million of USDA guaranteed commercial real estate loans. The gross realized gain on the sale was $67,000 . The Company did no t sell any residential mortgage loans during the three months ended September 30, 2017 or 2016. |