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) : September 30, 2018 December 31, 2017 Real Estate Loans: Residential $ 233,768 28.5 % $ 235,759 30.8 % Commercial 363,358 44.4 342,934 44.9 Construction 16,217 2.0 17,228 2.3 Commercial, financial and agricultural 104,868 12.8 97,461 12.7 Consumer loans to individuals 101,068 12.3 70,953 9.3 Total loans 819,279 100.0 % 764,335 100.0 % Deferred fees, net (82) (243) Total loans receivable 819,197 764,092 Allowance for loan losses (8,280) (7,634) Net loans receivable $ 810,917 $ 756,458 The following table presents information regarding loans acquired and accounted for in accordance with ASC 310-30 (in thousands): September 30, 2018 December 31, 2017 Outstanding Balance $ 1,106 $ 1,444 Carrying Amount $ 925 $ 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 September 30 , 201 8 and December 31, 201 7 , foreclosed real estate owned totaled $1,209,000 and $1,661,000 , respectively. During the nine months ended September 30 , 201 8 , the Company acquired two properties via deed-in-lieu transactions with a carrying value of $202,000 , and disposed of five properties with a carrying value of $579,000 through the sale of the properties. As of September 30 , 201 8 , the Company has initiated formal foreclosure proceedings on four properties classified as c onsumer residential mortgages with a carrying value of $168,000 . 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, 2018 (In thousands) Individually evaluated for impairment $ 23 $ 1,198 $ - $ - $ - $ 1,221 Loans acquired with deteriorated credit quality 658 267 - - - 925 Collectively evaluated for impairment 233,087 361,893 16,217 104,868 101,068 817,133 Total Loans $ 233,768 $ 363,358 $ 16,217 $ 104,868 $ 101,068 $ 819,279 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 September 30, 2018 (in thousands) With no related allowance recorded: Real Estate Loans Residential $ 23 $ 28 $ - Commercial 1,198 1,534 - Subtotal 1,221 1,562 - Total: Real Estate Loans Residential 23 28 - Commercial 1,198 1,534 - Total Impaired Loans $ 1,221 $ 1,562 $ - 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 September 30, 2018 and 2017, respectively (in thousands): Average Recorded Interest Income Investment Recognized 2018 2017 2018 2017 Real Estate Loans: Residential $ 23 $ 23 $ - $ - Commercial 1,217 1,423 15 12 Total $ 1,240 $ 1,446 $ 15 $ 12 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, 2018 and 2017, respectively (in thousands): Average Recorded Interest Income Investment Recognized 2018 2017 2018 2017 Real Estate Loans: Residential $ 23 $ 23 $ - $ - Commercial 1,195 1,465 45 41 Total $ 1,218 $ 1,488 $ 45 $ 41 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 , 201 8 and December 31, 2017, troubled debt restructured loans totaled $1.1 million with no specific reser ve. For the nine-month period ended September 30 , 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 nine-month period ended September 30 , 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 $175,000 as of September 30, 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 September 30 , 201 8 and December 31, 201 7 (in thousands): Special Doubtful Pass Mention Substandard or Loss Total September 30, 2018 Commercial real estate loans $ 349,486 $ 9,598 $ 4,274 $ - $ 363,358 Commercial loans 104,272 337 259 - 104,868 Total $ 453,758 $ 9,935 $ 4,533 $ - $ 468,226 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 September 30, 2018 and December 31, 2017 (in thousands): Performing Nonperforming Total September 30, 2018 Residential real estate loans $ 232,870 $ 898 $ 233,768 Construction 16,217 - 16,217 Consumer loans 101,068 - 101,068 Total $ 350,155 $ 898 $ 351,053 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 September 30 , 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 September 30, 2018 Real Estate loans Residential $ 232,068 $ 631 $ 171 $ - $ 898 $ 1,700 $ 233,768 Commercial 362,845 238 58 - 217 513 363,358 Construction 16,217 - - - - - 16,217 Commercial loans 104,794 50 24 - - 74 104,868 Consumer loans 100,888 168 12 - - 180 101,068 Total $ 816,812 $ 1,087 $ 265 $ - $ 1,115 $ 2,467 $ 819,279 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. As of September 30, 2018, the allocation of the allowance pertaining to commercial real estate loans is slightly lower than the allocation as of December 31, 2017 despite an increase in loan balances of $20.4 million. This decrease is due to a reduction in the quantitative factor for historical losses which decreased from 0.74% as of December 31, 2017 to 0.45% at September 30, 2018. The decrease was partially offset by the addition of a qualitative factor for potential risk in large balance loans. 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 (85) (244) - (246) (189) (764) Recoveries 2 33 - - 25 60 Provision for loan losses 185 205 4 497 459 1,350 Ending balance, September 30, 2018 $ 1,374 $ 5,259 $ 94 $ 714 $ 839 $ 8,280 Ending balance individually evaluated for impairment $ - $ - $ - $ - $ - $ - Ending balance collectively evaluated for impairment $ 1,374 $ 5,259 $ 94 $ 714 $ 839 $ 8,280 (In thousands) Residential Real Estate Commercial Real Estate Construction Commercial Consumer Total Beginning balance, June 30, 2018 $ 1,455 $ 5,247 $ 128 $ 690 $ 806 $ 8,326 Charge Offs (10) (110) - (241) (72) (433) Recoveries - 2 - - 10 12 Provision for loan losses (71) 120 (34) 265 95 375 Ending balance, September 30, 2018 $ 1,374 $ 5,259 $ 94 $ 714 $ 839 $ 8,280 (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 The Company’s primary business activity as of September 30 , 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 September 30 , 201 8 , the Company considered its concentration of credit risk to be acceptable. The highest concentrations are in commercial rentals with $66.8 mi llion of loans outstanding, or 8.2% of total loans outstanding, and the hospitality/lodging industry with loans outstanding of $60.2 million, or 7.4% of loans outstanding. During 201 8 , the Company recognize d charge offs totaling $380,000 in the named concentrations. |