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): June 30, 2019 December 31, 2018 Real Estate Loans: Residential $ 230,405 26.0 % $ 235,523 27.7 % Commercial 381,915 43.0 374,790 44.1 Construction 19,784 2.2 17,445 2.0 Commercial, financial and agricultural 120,732 13.6 110,542 13.0 Consumer loans to individuals 134,968 15.2 112,002 13.2 Total loans 887,804 100.0 % 850,302 100.0 % Deferred fees, net (131) (120) Total loans receivable 887,673 850,182 Allowance for loan losses (8,228) (8,452) Net loans receivable $ 879,445 $ 841,730 The following table presents information regarding loans acquired and accounted for in accordance with ASC 310-30 (in thousands): June 30, 2019 December 31, 2018 Outstanding Balance $ 965 $ 1,055 Carrying Amount $ 822 $ 886 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 June 30, 2019 and December 31, 2018, foreclosed real estate owned totaled $1,677,000 and $1,115,000, respectively. During the six months ended June 30, 2019, the Company acquired three properties via deed-in-lieu transactions which have subsequently been sold, and foreclosed on one commercial property with a carrying value of $608,000. The Co m pany also disposed of two properties that were previously transferred to foreclosed real estate owned with a carrying value of $46,000 through the sale of the properties. As of June 30, 2019, the Company has initiated formal foreclosure proceedings on three properties classified as consumer residential mortgages with an aggregate carrying value of $306,000 . 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 June 30, 2019 (In thousands) Individually evaluated for impairment $ - $ 752 $ - $ - $ - $ 752 Loans acquired with deteriorated credit quality 583 239 - - - 822 Collectively evaluated for impairment 229,822 380,924 19,784 120,732 134,968 886,230 Total Loans $ 230,405 $ 381,915 $ 19,784 $ 120,732 $ 134,968 $ 887,804 Real Estate Loans Commercial Consumer Residential Commercial Construction Loans Loans Total (In thousands) December 31, 2018 Individually evaluated for impairment $ - $ 1,319 $ - $ - $ - $ 1,319 Loans acquired with deteriorated credit quality 630 256 - - - 886 Collectively evaluated for impairment 234,893 373,215 17,445 110,542 112,002 848,097 Total Loans $ 235,523 $ 374,790 $ 17,445 $ 110,542 $ 112,002 $ 850,302 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 June 30, 2019 (in thousands) With no related allowance recorded: Real Estate Loans: Commercial $ 752 $ 1,338 $ - Subtotal 752 1,338 - Total: Real Estate Loans: Commercial 752 1,338 - Total Impaired Loans $ 752 $ 1,338 $ - Unpaid Recorded Principal Associated Investment Balance Allowance December 31, 2018 (in thousands) With no related allowance recorded: Real Estate Loans: Commercial $ 1,319 $ 1,747 $ - Subtotal 1,319 1,747 - Total: Real Estate Loans: Commercial 1,319 1,747 - Total Impaired Loans $ 1,319 $ 1,747 $ - 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 June 30, 2019 and 2018, respectively (in thousands): Average Recorded Interest Income Investment Recognized 2019 2018 2019 2018 Real Estate Loans: Residential $ - $ 23 $ - $ - Commercial 601 1,202 24 16 Total $ 601 $ 1,225 $ 24 $ 16 The following table presents the average recorded investment in impaired loans and the related amount of interest income recognized during the six-month periods ended June 30, 2019 and 2018, respectively (in thousands): Average Recorded Interest Income Investment Recognized 2019 2018 2019 2018 Real Estate Loans: Residential $ - $ 23 $ - $ - Commercial 840 1,194 24 30 Total $ 840 $ 1,217 $ 24 $ 30 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 June 30, 2019 and December 31, 2018, troubled debt restructured loans totaled $104,000 and $1.1 million, respectively , with no specific reserve. For the six-month period ended June 30, 2019, there were no new loans identified as troubled debt restructurings. During 2019, the Company recognized a charge-off of $451,000 on a loan that was previously identified as a troubled debt restructuring. The loan was transferred to foreclosed real estate during the first quarter of 2019 with a carrying value of $608,000 . For the six-month period ended June 30, 2018, there were no new loans identified as troubled debt restructurings nor did the Company recognize any write-down on loans that were previously identified as a troubled debt restructuring. 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 June 30, 2019 and December 31, 2018 (in thousands): Special Doubtful Pass Mention Substandard or Loss Total June 30, 2019 Commercial real estate loans $ 365,739 $ 12,629 $ 3,547 $ - $ 381,915 Commercial loans 120,445 59 228 - 120,732 Total $ 486,184 $ 12,688 $ 3,775 $ - $ 502,647 Special Doubtful Pass Mention Substandard or Loss Total December 31, 2018 Commercial real estate loans $ 360,838 $ 7,918 $ 6,034 $ - $ 374,790 Commercial loans 109,966 82 494 - 110,542 Total $ 470,804 $ 8,000 $ 6,528 $ - $ 485,332 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 June 30, 2019 and December 31, 2018 (in thousands): Performing Nonperforming Total June 30, 2019 Residential real estate loans $ 229,831 $ 574 $ 230,405 Construction 19,784 - 19,784 Consumer loans 134,968 - 134,968 Total $ 384,583 $ 574 $ 385,157 Performing Nonperforming Total December 31, 2018 Residential real estate loans $ 234,725 $ 798 $ 235,523 Construction 17,445 - 17,445 Consumer loans 112,002 - 112,002 Total $ 364,172 $ 798 $ 364,970 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 June 30, 2019 and December 31, 2018 (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 June 30, 2019 Real Estate loans Residential $ 229,382 $ 377 $ 72 $ - $ 574 $ 1,023 $ 230,405 Commercial 380,828 271 64 - 752 1,087 381,915 Construction 19,784 - - - - - 19,784 Commercial loans 120,646 57 - - 29 86 120,732 Consumer loans 134,811 157 - - - 157 134,968 Total $ 885,451 $ 862 $ 136 $ - $ 1,355 $ 2,353 $ 887,804 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, 2018 Real Estate loans Residential $ 234,201 $ 373 $ 151 $ - $ 798 $ 1,322 $ 235,523 Commercial 372,617 1,043 788 - 342 2,173 374,790 Construction 17,445 - - - - - 17,445 Commercial loans 110,191 320 31 - - 351 110,542 Consumer loans 111,796 171 35 - - 206 112,002 Total $ 846,250 $ 1,907 $ 1,005 $ - $ 1,140 $ 4,052 $ 850,302 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 June 30, 2019, the allocation of the allowance pertaining to commercial real estate loans is $761,000 lower than the allocation as of December 31, 2018. This decrease is due primarily to a reduction in the historical factor which decreased from 0.42% as of December 31, 2018 to 0.29% at June 30, 2019. Also contributing to the reduced reserve balance is a decrease in the qualitative factor related to the annualized growth rate. 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, 2018 $ 1,328 $ 5,455 $ 93 $ 712 $ 864 $ 8,452 Charge Offs (75) (615) - (234) (135) (1,059) Recoveries 15 14 - 21 35 85 Provision for loan losses 179 (160) 19 397 315 750 Ending balance, June 30, 2019 $ 1,447 $ 4,694 $ 112 $ 896 $ 1,079 $ 8,228 Ending balance individually evaluated for impairment $ - $ - $ - $ - $ - $ - Ending balance collectively evaluated for impairment $ 1,447 $ 4,694 $ 112 $ 896 $ 1,079 $ 8,228 (In thousands) Residential Real Estate Commercial Real Estate Construction Commercial Consumer Total Beginning balance, March 31, 2019 $ 1,455 $ 4,947 $ 108 $ 811 $ 1,028 $ 8,349 Charge Offs (10) (146) - (233) (72) (461) Recoveries 4 4 - 11 21 40 Provision for loan losses (2) (111) 4 307 102 300 Ending balance, June 30, 2019 $ 1,447 $ 4,694 $ 112 $ 896 $ 1,079 $ 8,228 (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 (75) (134) - (5) (117) (331) Recoveries 2 31 - - 15 48 Provision for loan losses 256 85 38 232 364 975 Ending balance, June 30, 2018 $ 1,455 $ 5,247 $ 128 $ 690 $ 806 $ 8,326 Ending balance individually evaluated for impairment $ - $ - $ - $ - $ - $ - Ending balance collectively evaluated for impairment $ 1,455 $ 5,247 $ 128 $ 690 $ 806 $ 8,326 (In thousands) Residential Real Estate Commercial Real Estate Construction Commercial Consumer Total Beginning balance, March 31, 2018 $ 1,525 $ 5,129 $ 120 $ 638 $ 687 $ 8,099 Charge Offs (24) (134) - (5) (69) (232) Recoveries 1 25 - - 8 34 Provision for loan losses (47) 227 8 57 180 425 Ending balance, June 30, 2018 $ 1,455 $ 5,247 $ 128 $ 690 $ 806 $ 8,326 The Company’s primary business activity as of June 30, 2019 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 June 30, 2019, the Company considered its concentration of credit risk to be acceptable. The highest concentrations are in commercial rentals with $75.9 million of loans outstanding, or 8.6% of total loans outstanding, and the hospitality/lodging industry with loans outstanding of $67.5 million, or 7.6% of loans outstanding. During 2019, the Company did not recognize any charge offs in the named concentrations. |