Loans Receivable, Net and Allowance for Loan Losses | 7. Loans Receivable, Net and Allowance for Loan Losses Loans receivable consist of the following (in thousands): June 30, September 30, Real estate loans: Residential $ 618,198 $ 654,152 Construction 1,151 1,367 Commercial 195,503 190,536 Commercial 35,035 25,807 Obligations of states and political subdivisions 56,868 49,177 Home equity loans and lines of credit 40,975 41,387 Auto Loans 150,370 100,571 Other 3,194 3,904 1,101,294 1,066,901 Less allowance for loan losses 8,767 8,634 Net loans $ 1,092,527 $ 1,058,267 Total Loans Individually Evaluated for Impairment Loans Acquired with Deteriorated Credit Quality Collectively Evaluated for Impairment June 30, 2015 Real estate loans: Residential $ 618,198 $ 12,671 $ — $ 605,527 Construction 1,151 — — 1,151 Commercial 195,503 15,627 4,365 175,511 Commercial 35,035 219 74 34,742 Obligations of states and political subdivisions 56,868 — — 56,868 Home equity loans and lines of credit 40,975 607 — 40,368 Auto loans 150,370 340 — 150,030 Other 3,194 — — 3,194 Total $ 1,101,294 $ 29,464 $ 4,439 $ 1,067,391 Total Loans Individually Evaluated for Impairment Loans Acquired with Deteriorated Credit Quality Collectively Evaluated for Impairment September 30, 2014 Real estate loans: Residential $ 654,152 $ 13,528 $ 110 $ 640,514 Construction 1,367 — — 1,367 Commercial 190,536 17,517 4,727 168,292 Commercial 25,807 456 263 25,088 Obligations of states and political subdivisions 49,177 — — 49,177 Home equity loans and lines of credit 41,387 266 (3 ) 41,124 Auto loans 100,571 101 — 100,470 Other 3,904 — — 3,904 Total $ 1,066,901 $ 31,868 $ 5,097 $ 1,029,936 We maintain a loan review system that 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. A loan is considered to be a troubled debt restructuring (“TDR”) loan when the Company grants a concession to the borrower because of the borrower’s financial condition that it would not otherwise consider. Such concessions include the reduction of interest rates, forgiveness of principal or interest, or other modifications of interest rates that are less than the current market rate for new obligations with similar risk. TDR loans that are in compliance with their modified terms and that yield a market rate may be removed from the TDR status after one year of performance. The following table includes the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable (in thousands). Recorded Unpaid Associated June 30, 2015 With no specific allowance recorded: Real estate loans Residential $ 9,378 $ 11,231 $ — Construction — — — Commercial 19,847 20,789 — Commercial 293 305 — Obligations of states and political subdivisions — — — Home equity loans and lines of credit 529 533 — Auto loans 159 237 — Other — — — Total 30,206 33,095 — With an allowance recorded: Real estate loans Residential 3,293 3,761 432 Construction — — — Commercial 145 174 1 Commercial — — — Obligations of states and political subdivisions — — — Home equity loans and lines of credit 78 106 69 Auto loans 181 181 76 Other — — — Total 3,697 4,222 578 Total: Real estate loans Residential 12,671 14,992 432 Construction — — — Commercial 19,992 20,963 1 Commercial 293 305 — Obligations of states and political subdivisions — — — Home equity loans and lines of credit 607 639 69 Auto loans 340 418 76 Other — — — Total Impaired Loans $ 33,903 $ 37,317 $ 578 September 30, 2014 With no specific allowance recorded: Real Estate Loans Residential $ 11,030 $ 13,225 $ — Construction — — — Commercial 21,587 22,428 — Commercial 719 777 — Obligations of states and political subdivisions — — — Home equity loans and lines of credit 210 377 — Auto Loans 101 101 — Other — — — Total 33,647 36,908 — With an allowance recorded: Real Estate Loans Residential 2,608 2,997 334 Construction — — — Commercial 657 677 84 Commercial — — — Obligations of states and political subdivisions — — — Home equity loans and lines of credit 53 76 50 Auto Loans — — — Other — — — Total 3,318 3,750 468 Total: Real Estate Loans Residential 13,638 16,222 334 Construction — — — Commercial 22,244 23,105 84 Commercial 719 777 — Obligations of states and political subdivisions — — — Home equity loans and lines of credit 263 453 50 Auto Loans 101 101 — Other — — — Total Impaired Loans $ 36,965 $ 40,658 $ 468 The following table represents 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 (in thousands). Three months ended June 30, 2015 2014 2015 2014 Average Average Interest Interest With no specific allowance recorded: Real estate loans Residential $ 9,522 $ 8,989 $ 59 $ 92 Construction — — — — Commercial 20,152 20,640 222 179 Commercial 306 3,289 2 43 Obligations of states and political subdivisions — — — — Home equity loans and lines of credit 433 215 2 2 Auto loans 116 — — — Other — — — — Total 30,529 33,133 285 316 With an allowance recorded: Real estate loans Residential 2,697 3,806 3 21 Construction — — — — Commercial 146 978 — — Commercial — — — — Obligations of states and political subdivisions — — — — Home equity loans and lines of credit 51 37 — — Auto loans 60 — 2 — Other — — — — Total 2,954 4,821 5 21 Total: Real estate loans Residential 12,219 12,795 62 113 Construction — — — — Commercial 20,298 21,618 222 179 Commercial 306 3,289 2 43 Obligations of states and political subdivisions — — — — Home equity loans and lines of credit 484 252 2 2 Auto loans 176 — 2 — Other — — — — Total Impaired Loans $ 33,483 $ 37,954 $ 290 $ 337 Nine months ended June 30, 2015 2014 2015 2014 Average Average Interest Interest With no specific allowance recorded: Real estate loans Residential $ 10,334 $ 9,556 $ 222 $ 242 Construction — — — — Commercial 20,729 20,241 606 553 Commercial 550 1,764 6 49 Obligations of states and political subdivisions — — — — Home equity loans and lines of credit 307 285 4 4 Auto loans 74 — 1 — Other — — — — Total 31,994 31,846 839 848 With an allowance recorded: Real estate loans Residential 2,535 3,425 45 79 Construction — — — — Commercial 343 1,896 — — Commercial — — — — Obligations of states and political subdivisions — — — — Home equity loans and lines of credit 34 17 — — Auto loans 83 — 5 — Other — — — — Total 2,995 5,338 50 79 Total: Real estate loans Residential 12,869 12,981 267 321 Construction — — — — Commercial 21,072 22,137 606 553 Commercial 550 1,764 6 49 Obligations of states and political subdivisions — — — — Home equity loans and lines of credit 341 302 4 4 Auto loans 157 — 6 — Other — — — — Total Impaired Loans $ 34,989 $ 37,184 $ 889 $ 927 The Company uses a ten-point internal risk-rating system to monitor the credit quality of the overall loan portfolio. The first six 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 fundamentally sound yet, exhibit potentially unacceptable credit risk or deteriorating trends or characteristics which if left uncorrected, may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. 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. Loans in the Doubtful category have all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loans in the Loss category are considered uncollectible and of little value that their continuance as bankable assets is not warranted. Certain residential real estate loans, construction loans, home equity loans and lines of credit, auto loans and other consumer loans are underwritten and structured using standardized criteria and characteristics, primarily payment performance, and are normally risk rated and monitored collectively on a monthly basis. These are typically loans to individuals in the consumer categories and are delineated as either performing or non-performing. 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 bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. The Bank’s Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. The Bank’s Commercial Loan Officers perform an annual review of all commercial relationships $500,000 or greater. Confirmation of the appropriate risk grade is included in the review on an ongoing basis. The Bank engages an external consultant to conduct loan reviews on at least a semi-annual basis. Generally, the external consultant reviews commercial relationships greater than $1,000,000 and/or all criticized relationships. Detailed reviews, including plans for resolution, are performed on loans classified as Substandard on a quarterly basis. Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance. The following tables present the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system as of June 30, 2015 and September 30, 2014 (in thousands): June 30, 2015 Pass Special Substandard Doubtful Total Commercial real estate loans $ 169,502 $ 3,382 $ 22,619 $ — $ 195,503 Commercial 32,325 2,295 415 — 35,035 Obligations of states and political subdivisions 56,868 — — — 56,868 Total $ 258,695 $ 5,677 $ 23,034 $ — $ 287,406 September 30, 2014 Pass Special Substandard Doubtful Total Commercial real estate loans $ 160,749 $ 8,020 $ 21,469 $ 298 $ 190,536 Commercial 24,874 345 588 — 25,807 Obligations of states and political subdivisions 49,177 — — — 49,177 Total $ 234,800 $ 8,365 $ 22,057 $ 298 $ 265,520 All other loans are underwritten and structured using standardized criteria and characteristics, primarily payment performance, and are normally risk rated and monitored collectively on a monthly basis. These are typically loans to individuals in the consumer categories and are delineated as either performing or non-performing. The following tables present the risk ratings in the consumer categories of performing and non-performing loans at June 30, 2015 and September 30, 2014 (in thousands): Performing Non-performing Total June 30, 2015 Real estate loans: Residential $ 608,002 $ 10,196 $ 618,198 Construction 1,151 — 1,151 Home equity loans and lines of credit 40,281 694 40,975 Auto loans 150,263 107 150,370 Other 3,156 38 3,194 Total $ 802,853 $ 11,035 $ 813,888 Performing Non-performing Total September 30, 2014 Real estate loans: Residential $ 644,374 $ 9,778 $ 654,152 Construction 1,367 — 1,367 Home equity loans and lines of credit 41,128 259 41,387 Auto loans 100,571 — 100,571 Other 3,884 20 3,904 Total $ 791,324 $ 10,057 $ 801,381 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 tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of June 30, 2015 and September 30, 2014 (in thousands): Current 31-60 Days 61-90 Days Greater than Non-Accrual Total Past Total June 30, 2015 Real estate loans Residential $ 604,655 $ 1,930 $ 1,417 $ — $ 10,196 $ 13,543 $ 618,198 Construction 1,151 — — — — — 1,151 Commercial 185,696 300 — — 9,507 9,807 195,503 Commercial 34,496 370 11 — 158 539 35,035 Obligations of states and political subdivisions 56,868 — — — — — 56,868 Home equity loans and lines of credit 40,148 63 70 — 694 827 40,975 Auto loans 148,588 1,549 126 — 107 1,782 150,370 Other 3,147 — 9 — 38 47 3,194 Total $ 1,074,749 $ 4,212 $ 1,633 $ — $ 20,700 $ 26,545 $ 1,101,294 Current 31-60 Days 61-90 Days Greater than Non-Accrual Total Past Total September 30, 2014 Real estate loans Residential $ 640,583 $ 2,398 $ 1,393 $ — $ 9,778 $ 13,569 $ 654,152 Construction 1,367 — — — — — 1,367 Commercial 179,319 516 89 — 10,612 11,217 190,536 Commercial 24,424 110 30 — 1,243 1,383 25,807 Obligations of states and political subdivisions 49,159 18 — — — 18 49,177 Home equity loans and lines of credit 40,870 225 33 — 259 517 41,387 Auto loans 100,112 426 33 — — 459 100,571 Other 3,884 — — — 20 20 3,904 Total $ 1,039,718 $ 3,693 $ 1,578 $ — $ 21,912 $ 27,183 $ 1,066,901 Our allowance for loan losses is maintained at a level necessary to absorb loan losses that are both probable and reasonably estimable. Management, in determining the allowance for loan losses, considers the losses inherent in its loan portfolio and changes in the nature and volume of loan activities, along with the general economic and real estate market conditions. Our allowance for loan losses consists of two elements: (1) an allocated allowance, which comprises allowances established on specific loans and class allowances based on historical loss experience and current trends, and (2) an allocated allowance based on general economic conditions and other risk factors in our markets and portfolios. We maintain 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. General loan loss allowances are based upon a combination of factors including, but not limited to, actual loan loss experience, composition of the loan portfolio, current economic conditions, management’s judgment and losses which are probable and reasonably estimable. The allowance is increased through provisions charged against current earnings and recoveries of previously charged-off loans. Loans that are determined to be uncollectible are charged against the allowance. While management uses available information to recognize probable and reasonably estimable loan losses, future loss provisions may be necessary, based on changing economic conditions. Payments received on impaired loans generally are either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. The allowance for loan losses as of June 30, 2015 is maintained at a level that represents management’s best estimate of losses inherent in the loan portfolio, and such losses were both probable and reasonably estimable. In addition, the FDIC and the Pennsylvania Department of Banking and Securities, as an integral part of their examination process, have periodically reviewed our allowance for loan losses. The banking regulators may require that we recognize additions to the allowance based on its analysis and review of information available to it at the time of its examination. 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 ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL. The following tables summarize changes in the primary segments of the ALL for the three and nine month periods ending June 30, 2015 and 2014 (in thousands): Real Estate Loans Residential Construction Commercial Commercial Obligations of Home Auto Loans Other Unallocated Total ALL balance at March 31, 2015 $ 5,289 $ 17 $ 843 $ 635 $ 87 $ 468 $ 1,023 $ 30 $ 276 $ 8,668 Charge-offs (390 ) — — (3 ) — (3 ) (136 ) (5 ) — (537 ) Recoveries — — 54 11 — — 40 6 — 111 Provision 359 (8 ) (189 ) (2 ) 112 10 406 (3 ) (160 ) 525 ALL balance at June 30, 2015 $ 5,258 $ 9 $ 708 $ 641 $ 199 $ 475 $ 1,333 $ 28 $ 116 $ 8,767 March 31, 2014 $ 5,920 $ 26 $ 1,003 $ 369 $ 106 $ 500 $ — $ 26 $ 712 $ 8,662 Charge-offs (332 ) — (23 ) — — (10 ) — — — (365 ) Recoveries 34 — — 2 — — — 3 — 39 Provision 312 (2 ) (399 ) 222 10 (17 ) 56 (3 ) 321 500 ALL balance at June 30, 2014 $ 5,934 $ 24 $ 581 $ 593 $ 116 $ 473 $ 56 $ 26 $ 1,033 $ 8,836 Real Estate Loans Residential Construction Commercial Commercial Obligations of Home Auto Loans Other Unallocated Total ALL balance at September 30, 2014 $ 5,573 $ 11 $ 663 $ 528 $ 163 $ 470 $ 459 $ 32 $ 735 $ 8,634 Charge-offs (1,150 ) — (53 ) (30 ) — (22 ) (301 ) (5 ) — (1,561 ) Recoveries 22 — 85 20 — 12 49 6 — 194 Provision 813 (2 ) 13 123 36 15 1,126 (5 ) (619 ) 1,500 ALL balance at June 30, 2015 $ 5,258 $ 9 $ 708 $ 641 $ 199 $ 475 $ 1,333 $ 28 $ 116 $ 8,767 September 30, 2013 $ 5,787 $ 20 $ 946 $ 337 $ 130 $ 430 $ — $ 21 $ 393 $ 8,064 Charge-offs (1,255 ) — (73 ) (48 ) — (73 ) — — — (1,449 ) Recoveries 112 — 83 14 — — — 12 — 221 Provision 1,290 4 (375 ) 290 (14 ) 116 56 (7 ) 640 2,000 ALL balance at June 30, 2014 $ 5,934 $ 24 $ 581 $ 593 $ 116 $ 473 $ 56 $ 26 $ 1,033 $ 8,836 Acquired loans are recorded at fair value on their purchase date without a carryover of the related allowance for loan losses. The following table summarizes the primary segments of the ALL, segregated into amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of June 30, 2015 and September 30, 2014 (in thousands): Real Estate Loans Residential Construction Commercial Commercial Obligations of Home Auto Loans Other Unallocated Total Individually evaluated for impairment $ 432 $ — $ 1 $ — $ — $ 69 $ 76 $ — $ — $ 578 Collectively evaluated for impairment 4,826 9 707 641 199 406 1,257 28 116 8,189 ALL Balance at June 30, 2015 $ 5,258 $ 9 $ 708 $ 641 $ 199 $ 475 $ 1,333 $ 28 $ 116 $ 8,767 Individually evaluated for impairment $ 334 $ — $ 84 $ — $ — $ 50 $ — $ — $ — $ 468 Collectively evaluated for impairment 5,239 11 579 528 163 420 459 32 735 8,166 ALL balance at September 30, 2014 $ 5,573 $ 11 $ 663 $ 528 $ 163 $ 470 $ 459 $ 32 $ 735 $ 8,634 The allowance for loan losses is based on estimates, and actual losses will vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date. The Company allocated decreased provisions to residential real estate for the nine month period ending June 30, 2015 due to declining loan balances and impairment evaluations in those segments. The Company allocated increased provisions to commercial real estate, commercial loans and obligations of states and political subdivisions for the nine month period ending June 30, 2015 due primarily to increased loan balances. The Company allocated increased provisions in auto loans due to increased loan balances and increased charge off activity. Despite the above allocations, the allowance for loan losses is general in nature and is available to absorb losses from any loan segment. The following is a summary of troubled debt restructuring granted during the three and nine months ended June 30, 2015 and 2014 (dollars in thousands). For the Three Months Ended June 30, 2015 Dollars in thousands Number of Pre-Modification Post-Modification Troubled Debt Restructurings Real estate loans: Residential 3 $ 695 $ 695 Construction — — — Commercial — — — Commercial — — — Obligations of states and political subdivisions — — — Home equity loans and lines of credit 1 25 25 Auto loans — — — Other — — — Total 4 $ 720 $ 720 All four new troubled debt restructurings, granted for the three months ended June 30, 2015, were granted terms and rate concessions. For the Three Months Ended June 30, 2014 Dollars in thousands Number of Pre-Modification Post-Modification Recorded Troubled Debt Restructurings Real estate loans: Residential 2 $ 236 $ 236 Construction — — — Commercial — — — Commercial — — — Obligations of states and political subdivisions — — — Home equity loans and lines of credit — — — Auto loans — — — Other — — — Total 2 $ 236 $ 236 Of the two new troubled debt restructurings granted for the three months ended June 30, 2014, one loan totaling $208,000 was granted terms and rate concessions and one loan totaling $28,000 was granted terms concessions. For the Nine Months Ended June 30, 2015 Dollars in thousands Number of Pre-Modification Post-Modification Troubled Debt Restructurings Real estate loans: Residential 12 $ 2,115 $ 2,115 Construction — — — Commercial — — — Commercial — — — Obligations of states and political subdivisions — — — Home equity loans and lines of credit 2 175 175 Auto loans — — — Other — — — Total 14 $ 2,290 $ 2,290 Of the fourteen new troubled debt restructurings granted for the nine months ended June 30, 2015, ten loans totaling $1.6 million were granted terms and rate concessions and four loans totaling $607,000 were granted terms concessions. For the Nine Months Ended June 30, 2014 Dollars in thousands Number of Pre-Modification Post-Modification Troubled Debt Restructurings Real estate loans: Residential 9 $ 1,293 $ 1,293 Construction — — — Commercial 1 197 197 Commercial — — — Obligations of states and political subdivisions — — — Home equity loans and lines of credit — — — Other — — — Total 10 $ 1,490 $ 1,490 Of the ten new troubled debt restructurings granted for the nine months ended June 30, 2014, six loans totaling $883,000 were granted terms and rate concessions and four loans totaling $607,000 were granted terms concessions. For the three months ended June 30, 2015, one residential real estate loan totaling $68,000 defaulted on a restructuring agreement within one year of modification. For the nine months ended June 30, 2015, five residential real estate loans totaling $712,000 defaulted on a restructuring agreement within one year of modification. There were no troubled debt restructurings that have subsequently defaulted within one year of modification for the three and nine months ended June 30, 2014. |