Loans Receivable and Allowance for Loan Losses | 8 . 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) : March 31, 2018 December 31, 2017 Real Estate Loans: Residential $ 232,771 30.0 % $ 235,759 30.8 % Commercial 348,507 44.9 342,934 44.9 Construction 17,831 2.3 17,228 2.3 Commercial, financial and agricultural 100,840 13.0 97,461 12.7 Consumer loans to individuals 75,964 9.8 70,953 9.3 Total loans 775,913 100.0 % 764,335 100.0 % Deferred fees, net (232) (243) Total loans receivable 775,681 764,092 Allowance for loan losses (8,099) (7,634) Net loans receivable $ 767,582 $ 756,458 The following table presents information regarding loans acquired and accounted for in accordance with ASC 310-30 (in thousands): March 31, 2018 December 31, 2017 Outstanding Balance $ 1,411 $ 1,444 Carrying Amount $ 1,157 $ 1,174 As a result of the acquisition of Delaware Bancshares, Inc. (“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 March 31 , 201 8 and December 31, 201 7 , foreclosed real estate owned totaled $1,436,000 and $1,661,000 , respectively. During the three months ended March 31 , 201 8 , there was one consumer residential mortgage with a balance of $191,000 that w as received via a deed in lieu transaction prior to the period end. The property was disposed of during the current period. As of March 31 , 201 8 , the Company has initiated formal foreclosure proceedings on eight properties classified as c onsumer residential mortgages with a carrying value of $702,000 . 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 March 31, 2018 (In thousands) Individually evaluated for impairment $ 23 $ 1,215 $ - $ - $ - $ 1,238 Loans acquired with deteriorated credit quality 823 334 - - - 1,157 Collectively evaluated for impairment 231,925 346,958 17,831 100,840 75,964 773,518 Total Loans $ 232,771 $ 348,507 $ 17,831 $ 100,840 $ 75,964 $ 775,913 Real Estate Loans Commercial Consumer Residential Commercial Construction Loans Loans Total (In thousands) December 31, 2017 Individually evaluated for impairment $ 23 $ 1,224 $ - $ - $ - $ 1,247 Loans acquired with deteriorated credit quality 833 341 - - - 1,174 Collectively evaluated for impairment 234,903 341,369 17,228 97,461 70,953 761,914 Total Loans $ 235,759 $ 342,934 $ 17,228 $ 97,461 $ 70,953 $ 764,335 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 March 31, 2018 (in thousands) With no related allowance recorded: Real Estate Loans Residential $ 23 $ 28 $ - Commercial 1,215 1,487 - Subtotal 1,238 1,515 - Total: Real Estate Loans Residential 23 28 - Commercial 1,215 1,487 - Total Impaired Loans $ 1,238 $ 1,515 $ - Unpaid Recorded Principal Associated Investment Balance Allowance December 31, 2017 (in thousands) With no related allowance recorded: Real Estate Loans Residential $ 23 $ 28 $ - Commercial 1,224 1,496 - Subtotal 1,247 1,524 - Total: Real Estate Loans Residential 23 28 - Commercial 1,224 1,496 - Total Impaired Loans $ 1,247 $ 1,524 $ - 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 March 31, 2018 and 2017, respectively (in thousands): Average Recorded Interest Income Investment Recognized 2018 2017 2018 2017 Real Estate Loans: Residential $ 23 $ 83 $ - $ - Commercial 1,219 2,559 14 22 Total $ 1,242 $ 2,642 $ 14 $ 22 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 , 201 8 and December 31, 2017, troubled debt restructured loans totaled $1.1 million with no specific reser ve. For the three-month period ended March 31 , 201 8 , there were no new loans identified as troubled debt restructurings. During 201 8 , the Company did no t recognize a ny losses on loan s that w ere previously identified as a troubled debt restructuring . For the three-month period ended March 31 , 201 7 , there were no new loans identified as troubled debt restructurings. During the 201 7 period, the Company recognized a w rite-down of $55,000 on one loan that was previously identified as a troubled debt restructur ing with a carrying value of $262,000 as of March 31, 2017. 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 nonperformance, 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 March 31 , 201 8 and December 31, 201 7 (in thousands): Special Doubtful Pass Mention Substandard or Loss Total March 31, 2018 Commercial real estate loans $ 335,523 $ 8,484 $ 4,500 $ - $ 348,507 Commercial loans 100,776 12 52 - 100,840 Total $ 436,299 $ 8,496 $ 4,552 $ - $ 449,347 Special Doubtful Pass Mention Substandard or Loss Total December 31, 2017 Commercial real estate loans $ 329,617 $ 9,680 $ 3,637 $ - $ 342,934 Commercial loans 97,389 16 56 - 97,461 Total $ 427,006 $ 9,696 $ 3,693 $ - $ 440,395 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 , 201 8 and December 31, 201 7 (in thousands): Performing Nonperforming Total March 31, 2018 Residential real estate loans $ 231,363 $ 1,408 $ 232,771 Construction 17,831 - 17,831 Consumer loans 75,964 - 75,964 Total $ 325,158 $ 1,408 $ 326,566 Performing Nonperforming Total December 31, 2017 Residential real estate loans $ 233,966 $ 1,793 $ 235,759 Construction 17,228 - 17,228 Consumer loans 70,953 - 70,953 Total $ 322,147 $ 1,793 $ 323,940 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 , 201 8 and December 31, 201 7 (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, 2018 Real Estate loans Residential $ 230,742 $ 516 $ 105 $ - $ 1,408 $ 2,029 $ 232,771 Commercial 347,526 685 24 - 272 981 348,507 Construction 17,831 - - - - - 17,831 Commercial loans 100,786 54 - - - 54 100,840 Consumer loans 75,865 84 15 - - 99 75,964 Total $ 772,750 $ 1,339 $ 144 $ - $ 1,680 $ 3,163 $ 775,913 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, 2017 Real Estate loans Residential $ 233,291 $ 594 $ 81 $ 87 $ 1,706 $ 2,468 $ 235,759 Commercial 341,602 646 - 409 277 1,332 342,934 Construction 17,228 - - - - - 17,228 Commercial loans 97,424 10 27 - - 37 97,461 Consumer loans 70,869 60 24 - - 84 70,953 Total $ 760,414 $ 1,310 $ 132 $ 496 $ 1,983 $ 3,921 $ 764,335 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, 2017 $ 1,272 $ 5,265 $ 90 $ 463 $ 544 $ 7,634 Charge Offs (51) - - - (48) (99) Recoveries 1 6 - - 7 14 Provision for loan losses 303 (142) 30 175 184 550 Ending balance, March 31, 2018 $ 1,525 $ 5,129 $ 120 $ 638 $ 687 $ 8,099 Ending balance individually evaluated for impairment $ - $ - $ - $ - $ - $ - Ending balance collectively evaluated for impairment $ 1,525 $ 5,129 $ 120 $ 638 $ 687 $ 8,099 (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 (39) (85) (8) - (52) (184) Recoveries 1 2 12 - 7 22 Provision for loan losses 125 291 13 62 109 600 Ending balance, March 31, 2017 $ 1,179 $ 4,831 $ 95 $ 369 $ 427 $ 6,901 Ending balance individually evaluated for impairment $ - $ - $ - $ - $ - $ - Ending balance collectively evaluated for impairment $ 1,179 $ 4,831 $ 95 $ 369 $ 427 $ 6,901 The Company’s primary business activity as of March 31 , 201 8 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 March 31 , 201 8 , the Company considered its concentration of credit risk to be acceptable. The highest concentrations are in commercial rentals with $68.5 million of loans outstanding, or 8.8% of total loans outstanding, and the hospitality/lodging industry with loans outstanding of $58.6 million, or 7.6% of loans outstanding. During 201 8 , the Company did not recognize any losses in the named concentrations. The Company did no t sell any residential mortgage loans during the first three months of 201 8 or 2017 . |