Loans Receivable | 4. LOANS RECEIVABLE Loans receivable consist of the following (in thousands): 2017 2016 Real estate loans: Residential $ 586,708 $ 596,645 Construction 3,097 1,733 Commercial 318,323 288,447 Commercial 44,129 39,978 Obligations of states and political subdivisions 58,079 56,923 Home equity loans and lines of credit 46,219 48,163 Auto loans 186,646 193,078 Other 2,845 3,302 1,246,046 1,228,269 Less allowance for loan losses 9,365 9,056 Net loans $ 1,236,681 $ 1,219,213 Included in the September 30, 2017 balances are loans acquired from Eagle National Bank in 2015, First National Community Bank and Franklin Security Bank in 2014 and First Star Bank in 2012. Upon acquisition, the Company evaluated whether each acquired loan (regardless of size) was within the scope of ASC 310-30, Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality Changes in the accretable yield for purchased credit-impaired loans were as follows, since acquisition, for the periods ended September 30, 2017 and 2016 (in thousands): September 30, September 30, Balance at beginning of period $ 478 $ 258 Acquisition of ENB - 240 Reclassification and other 215 163 Accretion (222 ) (183 ) Balance at end of period $ 471 $ 478 Included in reclassification and other for loans acquired without specific evidence of deterioration in credit quality were $215,000 and $163,000 of reclassifications from nonaccretable discounts to accretable discounts in 2017 and 2016 respectively. The following table presents additional information regarding loans acquired and accounted for in accordance with ASC 310-30 (in thousands): September 30, 2017 September 30, 2016 Acquired Loans with Evidence or Deterioration in Credit Quality (ASC 310-30) Acquired Loans with Specific Evidence or Deterioration in Credit Quality (ASC 310-30) Outstanding balance $ 5,490 $ 6,893 Carrying amount 4,388 5,563 There has been $155,000 in allowance for loan losses recorded for acquired loans with or without specific evidence of deterioration in credit quality as of September 30, 2017. There has been $236,000 in allowance for loan losses recorded for acquired loans with or without specific evidence of deterioration in credit quality as of September 30, 2016. In addition, no allowance for loan losses has been reversed. Loans serviced by the Company for others amounted to $61,167,000 and $78,497,000 at September 30, 2017 and 2016, respectively. The Company’s primary business activity is with customers located in counties where its branch offices are located and to a lesser extent, the contiguous counties in the Commonwealth of Pennsylvania. Commercial, residential, and consumer loans are granted. The Company also funds commercial and residential loans originated outside its immediate trade area provided such loans meet the Company’s credit policy guidelines. Although the Company has a diversified loan portfolio at September 30, 2017 and 2016, loans outstanding to individuals and businesses are dependent upon the local economic conditions in its immediate trade area. At September 30, 2017, 2016, and 2015, the Company had nonaccrual loans of $14,263,000, $19,315,000, and $20,105,000,respectively. Additional interest income that would have been recorded under the original terms of the loan agreements amounted to $449,000, $782,000, and $188,000, for the years ended September 30, 2017, 2016, and 2015, respectively. The following table shows the amount of loans in each category that was individually and collectively evaluated for impairment at the dates indicated (in thousands): Total Loans Individually Evaluated for Impairment Loans Acquired with Deteriorated Credit Quality Collectively Evaluated for Impairment September 30, 2017 Real estate loans: Residential $ 586,708 $ 6,202 $ - $ 580,506 Construction 3,097 - - 3,097 Commercial 318,323 7,211 3,775 307,337 Commercial 44,129 1,385 283 42,461 Obligations of states and political subdivisions 58,079 - - 58,079 Home equity loans and lines of credit 46,219 176 330 45,713 Auto Loans 186,646 572 - 186,074 Other 2,845 30 - 2,815 Total $ 1,246,046 $ 15,576 $ 4,388 $ 1,226,082 Total Loans Individually Evaluated for Loans Acquired with Deteriorated Credit Quality Collectively Evaluated for Impairment September 30, 2016 Real estate loans: Residential $ 596,645 $ 8,721 $ - $ 587,924 Construction 1,733 - - 1,733 Commercial 288,447 11,237 4,615 272,595 Commercial 39,978 1,698 411 37,869 Obligations of states and political subdivisions 56,923 - - 56,923 Home equity loans and lines of credit 48,163 361 537 47,265 Auto Loans 193,078 526 - 192,552 Other 3,302 22 - 3,280 Total $ 1,228,269 $ 22,565 $ 5,563 $ 1,200,141 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 the Company 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. The Company does 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. The following table includes the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable, excluding purchased impaired credit loans. Also presented are 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). Recorded Investment Unpaid Principal Balance Associated Allowance Average Recorded Investment Interest Income Recognized September 30, 2017 With no specific allowance recorded: Real estate loans: Residential $ 4,392 $ 5,730 $ - $ 5,373 $ 39 Construction - - - - - Commercial 7,191 9,396 - 8,816 297 Commercial 1,385 1,575 - 1,579 120 Obligations of states and political subdivisions - - - - - Home equity loans and lines of credit 176 258 - 231 - Auto loans 123 237 - 116 1 Other 30 36 - 8 - Subtotal 13,297 17,232 - 16,123 457 With an allowance recorded: Real estate loans: Residential 1,810 2,264 154 1,814 - Construction - - - - - Commercial 20 1,193 19 360 - Commercial - - - 30 - Obligations of states and political subdivisions - - - - - Home equity loans and lines of credit - - - 3 - Auto loans 449 468 172 263 7 Other - - - - - Subtotal 2,279 3,925 345 2,470 7 Total: Real estate loans: Residential 6,202 7,994 154 7,187 39 Construction - - - - - Commercial 7,211 10,589 19 9,176 297 Commercial 1,385 1,575 - 1,609 120 Obligations of states and political subdivisions - - - - - Home equity loans and lines of credit 176 258 - 234 - Auto loans 572 705 172 379 8 Other 30 36 - 8 - Total $ 15,576 $ 21,157 $ 345 $ 18,593 $ 464 Recorded Investment Unpaid Principal Balance Associated Allowance Average Recorded Investment Interest Income Recognized September 30, 2016 With no specific allowance recorded: Real estate loans: Residential $ 6,721 $ 9,016 $ - $ 7,560 $ 82 Construction - - - - - Commercial 10,939 12,928 - 12,490 496 Commercial 1,698 1,725 - 1,556 124 Obligations of states and political subdivisions - - - - - Home equity loans and lines of credit 361 432 - 553 2 Auto loans 253 365 - 295 2 Other 22 22 - 6 - Subtotal 19,994 24,488 - 22,460 706 With an allowance recorded: Real estate loans: Residential 2,000 2,151 198 2,314 12 Construction - - - - - Commercial 298 303 36 1,118 - Commercial - - - 2 - Obligations of states and political subdivisions - - - - - Home equity loans and lines of credit - - - 90 - Auto loans 273 273 113 241 10 Other - - - - - Subtotal 2,571 2,727 347 3,765 22 Total: Real estate loans: Residential 8,721 11,167 198 9,874 94 Construction - - - - - Commercial 11,237 13,231 36 13,608 496 Commercial 1,698 1,725 - 1,558 124 Obligations of states and political subdivisions - - - - - Home equity loans and lines of credit 361 432 - 643 2 Auto loans 526 638 113 536 12 Other 22 22 - 6 - Total $ 22,565 $ 27,215 $ 347 $ 26,225 $ 728 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. To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company 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 Company’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 Company’s Commercial Loan Officers perform an annual review of all commercial relationships $750,000 or greater. Confirmation of the appropriate risk grade is included in the review on an ongoing basis. The Company engages an external consultant to conduct loan reviews on at least a semiannual 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 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, and Doubtful within the internal risk rating system as of September 30, 2017 and 2016 (in thousands): Pass Special Mention Substandard Doubtful Total September 30, 2017 Commercial real estate loans $ 300,554 $ 3,376 $ 14,393 $ - $ 318,323 Commercial 40,996 32 3,101 - 44,129 Obligations of states and political subdivisions 58,079 - - - 58,079 Total $ 399,629 $ 3,408 $ 17,494 $ - $ 420,531 Pass Special Mention Substandard Doubtful Total September 30, 2016 Commercial real estate loans $ 260,088 $ 8,886 $ 19,473 $ - $ 288,447 Commercial 36,684 180 3,114 - 39,978 Obligations of states and political subdivisions 56,923 - - - 56,923 Total $ 353,695 $ 9,066 $ 22,587 $ - $ 385,348 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 nonperforming. For residential real estate loans, construction real estate loans, home equity loans and lines of credit, auto loans, and other 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 2016 (in thousands): Performing Nonperforming Purchased Credit Impaired Total September 30, 2017 Real estate loans: Residential $ 580,116 $ 6,592 $ - $ 586,708 Construction 3,097 - - 3,097 Home equity loans and lines of credit 45,576 313 330 46,219 Auto Loans 185,910 736 - 186,646 Other 2,807 38 - 2,845 Total $ 817,506 $ 7,679 $ 330 $ 825,515 Performing Nonperforming Purchased Credit Impaired Total September 30, 2016 Real estate loans: Residential $ 587,673 $ 8,972 $ - $ 596,645 Construction 1,733 - - 1,733 Home equity loans and lines of credit 47,213 413 537 48,163 Auto Loans 192,734 344 - 193,078 Other 3,271 31 - 3,302 Total $ 832,624 $ 9,760 $ 537 $ 842,921 The Company 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 2016 (in thousands): 31-60 Days 61-90 Days Greater than 90 Days Past Due and Total Purchased Credit Total Current Past Past Accruing Nonaccrual Past Accruing Nonaccrual Loans September 30, 2017 Real estate loans: Residential $ 577,034 $ 2,661 $ 421 $ - $ 6,592 $ 9,674 $ - $ - $ 586,708 Construction 3,097 - - - - - - - 3,097 Commercial 312,098 172 - - 2,278 2,450 612 3,163 318,323 Commercial 43,298 18 - - 530 548 - 283 44,129 Obligations of states and political subdivisions 58,079 - - - - - - - 58,079 Home equity loans and lines of credit 45,460 101 15 - 313 429 - 330 46,219 Auto loans 185,247 631 32 - 736 1,399 - - 186,646 Other 2,789 14 4 - 38 56 - - 2,845 Total $ 1,227,102 $ 3,597 $ 472 $ - $ 10,487 $ 14,556 $ 612 $ 3,776 $ 1,246,046 31-60 Days 61-90 Days Greater than 90 Days Past Due and Total Purchased Credit Total Current Past Past Accruing Nonaccrual Past Accruing Nonaccrual Loans September 30, 2016 Real estate loans: Residential $ 585,517 $ 1,496 $ 660 $ - $ 8,972 $ 11,128 $ - $ - $ 596,645 Construction 1,733 - - - - - - - 1,733 Commercial 279,019 1,093 191 - 3,529 4,813 - 4,615 288,447 Commercial 38,862 185 57 - 463 705 - 411 39,978 Obligations of states and political subdivisions 56,923 - - - - - - - 56,923 Home equity loans and lines of credit 47,026 40 147 - 413 600 - 537 48,163 Auto loans 191,785 717 232 - 344 1,293 - - 193,078 Other 3,264 7 - - 31 38 - - 3,302 Total $ 1,204,129 $ 3,538 $ 1,287 $ - $ 13,752 $ 18,577 $ - $ 5,563 $ 1,228,269 The allowance for loan losses (“ALL”) 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. The 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, (2) an allocated allowance based on general economic conditions and other risk factors in our markets and portfolios, and (3) an unallocated allowance not to exceed 10% of total reserves which acts as a contingency against unforeseen future events which may negatively impact the Company’s loan portfolio. 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 September 30, 2017, 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, as an integral part of their examination process, have periodically reviewed the Company’s allowance for loan losses. The banking regulators may require that the Company recognize additions to the allowance based on their analysis and review of information available to it at the time of their 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 table summarizes the primary segments of the ALL, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of September 30, 2017, 2016 and 2015 (in thousands): Real Estate Loans Obligations of States and Political Home Loans and Lines of Residential Construction Commercial Commercial Subdivisions Credit Auto Other Unallocated Total ALL balance at September 30, 2014 $ 5,573 $ 11 $ 663 $ 528 $ 163 $ 470 $ 459 $ 32 $ 735 $ 8,634 Charge-offs (1,359 ) - (65 ) (30 ) - (27 ) (596 ) (6 ) - (2,083 ) Recoveries 76 - 84 23 - 15 87 8 - 293 Provision 850 (4 ) (11 ) 172 26 3 1,620 (7 ) (574 ) 2,075 ALL balance at September 30, 2015 $ 5,140 $ 7 $ 671 $ 693 $ 189 $ 461 $ 1,570 $ 27 $ 161 $ 8,919 ALL balance at September 30, 2015 $ 5,140 $ 7 $ 671 $ 693 $ 189 $ 461 $ 1,570 $ 27 $ 161 $ 8,919 Charge-offs (1,040 ) - (266 ) (18 ) - (209 ) (1,262 ) - - (2,795 ) Recoveries 59 - 52 7 - 9 246 9 - 382 Provision 267 6 395 200 26 194 1,326 (11 ) 147 2,550 ALL balance at September 30, 2016 $ 4,426 $ 13 $ 852 $ 882 $ 215 $ 455 $ 1,880 $ 25 $ 308 $ 9,056 ALL balance at September 30, 2016 $ 4,426 $ 13 $ 852 $ 882 $ 215 $ 455 $ 1,880 $ 25 $ 308 $ 9,056 Charge-offs (504 ) - (1,352 ) (31 ) - (18 ) (2,009 ) (9 ) - (3,923 ) Recoveries 22 - 27 1 - 8 815 9 - 882 Provision (66 ) 10 2,231 135 33 25 1,150 (4 ) (164 ) 3,350 ALL balance at September 30, 2017 $ 3,878 $ 23 $ 1,758 $ 987 $ 248 $ 470 $ 1,836 $ 21 $ 144 $ 9,365 Individually evaluated for impairment $ 154 $ - $ 19 $ - $ - $ - $ 172 $ - $ - $ 345 Collectively evaluated for impairment 3,724 23 1,739 987 248 470 1,664 21 144 9,020 ALL balance at September 30, 2017 $ 3,878 $ 23 $ 1,758 $ 987 $ 248 $ 470 $ 1,836 $ 21 $ 144 $ 9,365 Individually evaluated for impairment $ 198 $ - $ 36 $ - $ - $ - $ 113 $ - $ - $ 347 Collectively evaluated for impairment 4,228 13 816 882 215 455 1,767 25 308 8,709 ALL balance at September 30, 2016 $ 4,426 $ 13 $ 852 $ 882 $ 215 $ 455 $ 1,880 $ 25 $ 308 $ 9,056 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 increased provisions to the construction loan, commercial real estate, commercial, obligations of states and political subdivisions, home equity loans and lines of credit, and auto loan segments for the year ended September 30, 2017, due to either increased loan balances, changes in the loan mix within the pool, and/or charge-off activity in those segments. Commercial real estate loans, which had charge offs of $1.4 million and balance increases of $29.9 million for the year ended September 30, 2017, had the largest increase in provisions. The Company allocated decreased allowance for loan loss provisions to the residential real estate and other loan segments due to either declining loan balances and/or actual loss experience being less than previously estimated. The provision for auto loans declined from $1.3 million to $1.2 million due to declining balances offsetting net (of recoveries) charge off activity. The Company allocated increased provisions to the construction loan, commercial real estate, commercial, obligations of states and political subdivisions, residential real estate, and indirect auto loan segments for the year ended September 30, 2016, due to either increased loan balances, changes in the loan mix within the pool, and/or charge-off activity in those segments. Auto loans, which had charge offs of $1.3 million and balance increases of $30.9 million for the year ended September 30, 2016, had the largest increase in provisions. The Company allocated decreased allowance for loan loss provisions to the other loan segments due to declining loan balances and actual loss experience being less than previously estimated. The Company allocated increased provisions to the residential real estate, commercial, obligations of states and political subdivisions, home equity loans and lines of credit, and auto loans segments for the year ended September 30, 2015, due to either increased loans balances and/or charge-off activity in those segments. Outstanding loan balances of auto loans, which increased $61.6 million from September 30, 2014 to September 30, 2015, had the largest increase in provisions. 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 restructurings granted during the periods indicated (in thousands). For the Year Ended September 30, 2017 Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Troubled debt restructurings Real estate loans: Residential 6 $ 1,154 $ 1,167 Construction - - - Commercial 2 1,208 1,163 Commercial - - - Obligations of states and political subdivisions - - - Home equity loans and lines of credit - - - Auto loans 2 37 37 Other 1 22 22 Total 11 $ 2,421 $ 2,389 For the Year Ended September 30, 2016 Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Troubled debt restructurings Real estate loans: Residential 12 $ 1,701 $ 1,701 Construction - - - Commercial 4 2,139 2,139 Commercial - - - Obligations of states and political subdivisions - - - Home equity loans and lines of credit 1 5 5 Auto loans - - - Other - - - Total 17 $ 3,845 $ 3,845 Of the eleven new troubled debt restructurings granted for the year ended September 30, 2017, three loans totaling $1.2 million were granted terms concessions, six loans totaling $832,000 were granted terms and rate concessions and two loans totaling $368,000 were granted rate concessions. Of the seventeen new troubled debt restructurings granted for the year ended September 30, 2016, eight loans totaling $2.4 million were granted terms and rate concessions and seven loans totaling $1.5 million were granted terms concessions and two loans totaling $29,000 was granted an interest rate concession. For the year ended September 30, 2017 there were no loan modifications classified as troubled debt restructurings that subsequently defaulted within one year of modification. For the year ended September 30, 2016 there were no loan modifications classified as troubled debt restructurings that subsequently defaulted within one year of modification. Foreclosed assets acquired in settlement of loans are carried at fair value, less estimated costs to sell, and are included on the Consolidated Balance Sheet. As of September 30, 2017, included within the foreclosed assets is $819,000 |