Loans Receivable, Net and Allowance for Loan Losses | 6. Loans Receivable, Net and Allowance for Loan Losses Loans receivable consist of the following (in thousands): December 31, 2018 September 30, 2018 Real estate loans: Residential $ 600,564 $ 580,561 Construction 4,755 3,920 Commercial 434,427 416,573 Commercial 57,381 49,479 Obligations of states and political subdivisions 75,041 73,362 Home equity loans and lines of credit 43,271 43,962 Auto Loans 128,216 146,220 Other 2,870 2,682 1,346,525 1,316,759 Less allowance for loan losses 12,221 11,688 Net loans $ 1,334,304 $ 1,305,071 Purchased loans acquired in a business combination are recorded at fair value on their purchase date without a carryover of the related allowance for loan losses. The following table presents additional information regarding loans acquired and accounted for in accordance with ASC 310-30 (in thousands): December 31, 2018 September 30, 2018 Acquired Loans with Specific Evidence or Deterioration in Credit Quality (ASC 310-30) Acquired Loans with Specific Evidence or Deterioration in Credit Quality (ASC 310-30) Outstanding balance $ 1,653 $ 2,497 Carrying amount $ 1,526 $ 1,802 The following tables show the amount of loans in each category that were 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 December 31, 2018 Real estate loans: Residential $ 600,564 $ 4,961 $ — $ 595,603 Construction 4,755 — — 4,755 Commercial 434,427 2,110 1,526 430,791 Commercial 57,381 82 — 57,299 Obligations of states and political subdivisions 75,041 — — 75,041 Home equity loans and lines of credit 43,271 268 — 43,003 Auto loans 128,216 458 — 127,758 Other 2,870 17 — 2,853 Total $ 1,346,525 $ 7,896 $ 1,526 $ 1,337,103 Total Loans Individually Evaluated for Impairment Loans Acquired with Deteriorated Credit Quality Collectively Evaluated for Impairment September 30, 2018 Real estate loans: Residential $ 580,561 $ 5,317 $ — $ 575,244 Construction 3,920 — — 3,920 Commercial 416,573 5,892 1,801 408,880 Commercial 49,479 85 1 49,393 Obligations of states and political sub divisions 73,362 — — 73,362 Home equity loans and lines of credit 43,962 114 — 43,848 Auto loans 146,220 445 — 145,775 Other 2,682 17 — 2,665 Total $ 1,316,759 $ 11,870 $ 1,802 $ 1,303,087 The Company maintains 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. 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. 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 that it would not otherwise consider because of the borrower’s financial condition. 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 at the time of modification may be removed from TDR status after one year of performance. The following tables include the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount at the dates indicated, if applicable (in thousands): Recorded Investment Unpaid Principal Balance Associated Allowance December 31, 2018 With no specific allowance recorded: Real estate loans Residential $ 3,732 $ 5,305 $ — Construction — — — Commercial 2,110 2,824 — Commercial 82 348 — Obligations of states and political subdivisions — — — Home equity loans and lines of credit 227 247 — Auto loans 97 225 — Other 17 24 — Total 6,265 8,973 — With an allowance recorded: Real estate loans Residential 1,229 1,467 154 Construction — — — Commercial — — — Commercial — — — Obligations of states and political subdivisions — — — Home equity loans and lines of credit 41 49 8 Auto loans 361 372 164 Other — — — Total 1,631 1,888 326 Total: Real estate loans Residential 4,961 6,772 154 Construction — — — Commercial 2,110 2,824 — Commercial 82 348 — Obligations of states and political subdivisions — — — Home equity loans and lines of credit 268 296 8 Auto loans 458 597 164 Other 17 24 — Total Impaired Loans $ 7,896 $ 10,861 $ 326 Recorded Investment Unpaid Principal Balance Associated Allowance September 30, 2018 With no specific allowance recorded: Real Estate Loans Residential $ 4,449 $ 6,176 $ — Construction — — — Commercial 5,892 6,790 — Commercial 85 349 — Obligations of states and political subdivisions — — — Home equity loans and lines of credit 114 138 — Auto Loans 87 223 — Other 17 25 — Total 10,644 13,701 — With an allowance recorded: Real Estate Loans Residential 868 938 149 Construction — — — Commercial — — — Commercial — — — Obligations of states and political subdivisions — — — Home equity loans and lines of credit — — — Auto Loans 358 375 164 Other — — — Total 1,226 1,313 313 Total: Real Estate Loans Residential 5,317 7,114 149 Construction — — — Commercial 5,892 6,790 — Commercial 85 349 — Obligations of states and political subdivisions — — — Home equity loans and lines of credit 114 138 — Auto Loans 445 598 164 Other 17 25 — Total Impaired Loans $ 11,870 $ 15,014 $ 313 The following tables represent 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): For the Three Months Ended December 31, 2018 2017 2018 2017 Average Recorded Investment Average Recorded Investment Interest Income Recognized Interest Income Recognized With no specific allowance recorded: Real estate loans Residential $ 4,167 $ 4,429 $ 3 $ 10 Construction — — — — Commercial 4,484 7,006 45 72 Commercial 84 1,289 — 27 Obligations of states and political subdivisions — — — — Home equity loans and lines of credit 151 206 — — Auto loans 87 137 1 1 Other 17 10 — — Total 8,990 13,077 49 110 With an allowance recorded: Real estate loans Residential 815 1,527 — — Construction — — — — Commercial — 20 — — Commercial — — — — Obligations of states and political subdivisions — — — — Home equity loans and lines of credit 13 2 — — Auto loans 204 262 — — Other — — — — Total 1,032 1,811 — — Total: Real estate loans Residential 4,982 5,956 3 10 Construction — — — — Commercial 4,484 7,026 45 72 Commercial 84 1,289 — 27 Obligations of states and political subdivisions — — — — Home equity loans and lines of credit 164 208 — — Auto loans 291 399 1 1 Other 17 10 — — Total Impaired Loans $ 10,022 $ 14,888 $ 49 $ 110 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 that are 90 or more days past due are considered Substandard. Loans in the Doubtful category have all the weaknesses inherent in loans classified as Substandard with the added characteristic that their 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 recommendation for 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 $750,000 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 or Loss within the internal risk rating system at December 31, 2018 and September 30, 2018 (in thousands): Pass Special Mention Substandard Doubtful or Loss Total December 31, 2018 Commercial real estate loans $ 414,214 $ 9,408 $ 10,805 $ — $ 434,427 Commercial 56,347 6 1,028 — 57,381 Obligations of states and political subdivisions 75,041 — — — 75,041 Total $ 545,602 $ 9,414 $ 11,833 $ — $ 566,849 Pass Special Mention Substandard Doubtful or Loss Total September 30, 2018 Commercial real estate loans $ 392,915 $ 8,960 $ 14,698 $ — $ 416,573 Commercial 48,137 8 1,334 — 49,479 Obligations of states and political subdivisions 73,362 — — — 73,362 Total $ 514,414 $ 8,968 $ 16,032 $ — $ 539,414 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 December 31, 2018 and September 30, 2018 (in thousands): Performing Non- performing Purchased Credit Impaired Total December 31, 2018 Real estate loans: Residential $ 594,896 $ 5,668 $ — $ 600,564 Construction 4,755 — — 4,755 Home equity loans and lines of credit 42,733 538 — 43,271 Auto loans 127,632 584 — 128,216 Other 2,853 17 — 2,870 Total $ 772,869 $ 6,807 $ — $ 779,676 Performing Non- performing Purchased Impaired Credit Total September 30, 2018 Real estate loans: Residential $ 575,244 $ 5,317 $ — $ 580,561 Construction 3,920 — — 3,920 Home equity loans and lines of credit 43,746 216 — 43,962 Auto loans 145,633 587 — 146,220 Other 2,664 18 — 2,682 Total $ 771,207 $ 6,138 $ — $ 777,345 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 tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of December 31, 2018 and September 30, 2018 (in thousands): 31-60 Days 61-89 Days 90 + Days Past Due and Total Purchased Credit Impaired Total Current Past Due Past Due Accruing Nonaccrual Past Due Accruing Nonaccrual Loans December 31, 2018 Real estate loans: Residential $ 592,486 $ 1,485 $ 925 $ — $ 5,668 $ 8,078 $ — $ — $ 600,564 Construction 4,755 — — — — — — — 4,755 Commercial 431,140 — — — 1,977 1,977 253 1,057 434,427 Commercial 56,504 13 16 — 632 661 — 216 57,381 Obligations of states and political subdivisions 75,041 — — — — — — — 75,041 Home equity loans and lines of credit 42,621 65 47 — 538 650 — — 43,271 Auto loans 125,573 1,981 78 — 584 2,643 — — 128,216 Other 2,812 30 11 — 17 58 — — 2,870 Total $ 1,330,932 $ 3,574 $ 1,077 $ — $ 9,416 $ 14,067 $ 253 $ 1,273 $ 1,346,525 31-60 Days 61-89 Days 90 + Days Past Due and Total Purchased Credit Impaired Total Current Past Due Past Due Accruing Nonaccrual Past Due Accruing Nonaccrual Loans September 30, 2018 Real estate loans: Residential $ 572,236 $ 2,088 $ 920 $ — $ 5,317 $ 8,325 $ — $ — $ 580,561 Construction 3,920 — — — — — — — 3,920 Commercial 412,636 185 — — 1,951 2,136 255 1,546 416,573 Commercial 48,567 25 11 — 875 911 — 1 49,479 Obligations of states and political subdivisions 73,362 — — — — — — — 73,362 Home equity loans and lines of credit 43,716 30 — — 216 246 — — 43,962 Auto loans 144,140 1,473 20 — 587 2,080 — — 146,220 Other 2,647 17 — — 18 35 — — 2,682 Total $ 1,301,224 $ 3,818 $ 951 $ — $ 8,964 $ 13,733 $ 255 $ 1,547 $ 1,316,759 The 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. 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, 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 December 31, 2018 was 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 allowance for loan losses (“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 changes in the primary segments of the ALL for the three months period ended December 31, 2018 and 2017 (in thousands): Home Obligations of Equity States and Loans and Real Estate Loans Commercial Political Lines of Other Residential Construction Commercial Loans Subdivisions Credit Auto Loans Loans Unallocated Total ALL balance at September 30, 2018 $ 3,605 $ 35 $ 3,458 $ 1,462 $ 323 $ 296 $ 1,859 $ 23 $ 627 $ 11,688 Charge-offs (142 ) — — (22 ) — — (368 ) — — (532 ) Recoveries 6 — — — — 1 181 1 — 189 Provision 276 8 38 264 (28 ) 1 22 2 293 876 ALL balance at December 31, 2018 $ 3,745 $ 43 $ 3,496 $ 1,704 $ 295 $ 298 $ 1,694 $ 26 $ 920 $ 12,221 ALL balance at September 30, 2017 $ 3,878 $ 23 $ 1,758 $ 987 $ 248 $ 470 $ 1,836 $ 21 $ 144 $ 9,365 Charge-offs (43 ) — (1 ) (133 ) — - (536 ) (6 ) — (719 ) Recoveries 3 — 2 10 — 1 170 1 — 187 Provision (69 ) 10 560 190 (35 ) (22 ) 492 5 (131 ) 1,000 ALL balance at December 31, 2017 $ 3,769 $ 33 $ 2,319 $ 1,054 $ 213 $ 449 $ 1,962 $ 21 $ 13 $ 9,833 Acquired loans are recorded at fair value on their purchase date without a carryover of the related allowance for loan losses. During the three months ended December 31, 2018 the Company recorded provision expense for the residential real estate, construction loans, commercial real estate, commercial, home equity loans and lines of credit, auto and other loan segments, due to either increased loan balances, changes in the loan mix within the pool, and/or charge-off activity in those segments. Credit provisions were recorded for loan loss for the obligations of states and political subdivisions segment. During the three months ended December 31, 2017 the Company recorded provision expense for the construction loans, commercial real estate, commercial, auto and other loan segments, due to either increased loan balances, changes in the loan mix within the pool, and/or charge-off activity in those segments. Credit provisions were recorded for loan loss for the residential real estate, obligations of states and political subdivisions and home equity loans and lines of credit segments. The following table summarizes the primary segments of the ALL, segregated into two categories, the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of December 31, 2018 and September 30, 2018 (in thousands): Home Obligations of Equity States and Loans and Real Estate Loans Commercial Political Lines of Other Residential Construction Commercial Loans Subdivisions Credit Auto Loans Loans Unallocated Total Individually evaluated for impairment $ 154 $ — $ — $ — $ — $ 8 $ 164 $ — $ — $ 326 Collectively evaluated for impairment 3,591 43 3,496 1,704 295 290 1,530 26 920 11,895 ALL balance at December 31, 2018 $ 3,745 $ 43 $ 3,496 $ 1,704 $ 295 $ 298 $ 1,694 $ 26 $ 920 $ 12,221 Individually evaluated for impairment $ 149 $ — $ — $ — $ — $ — $ 164 $ — $ — $ 313 Collectively evaluated for impairment 3,456 35 3,458 1,462 323 296 1,695 23 627 11,375 ALL balance at September 30, 2018 $ 3,605 $ 35 $ 3,458 $ 1,462 $ 323 $ 296 $ 1,859 $ 23 $ 627 $ 11,688 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. 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 months ended December 31, 2018 and 2017 (dollars in thousands): For the Three Months Ended December 31, 2018 Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Troubled Debt Restructurings Real estate loans: Residential 2 $ 95 $ 95 Construction — — — Commercial — — — Commercial — — — Obligations of states and political subdivisions — — — Home equity loans and lines of credit 2 159 159 Auto loans 1 21 21 Other — — — Total 5 $ 275 $ 275 For the Three Months Ended December 31, 2017 Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Troubled Debt Restructurings Real estate loans: Residential 2 $ 243 $ 240 Construction — — — Commercial — — — Commercial — — — Obligations of states and political subdivisions — — — Home equity loans and lines of credit — — — Auto loans — — — Other — — — Total 2 $ 243 $ 240 Of the five new troubled debt restructurings granted for the three months ended December 31, 2018, one loan totaling $14,000 was granted terms concessions, one loan totaling $81,000 was granted an interest rate concession, and three loans totaling $180,000 were granted term and rate concessions. The two new troubled debt restructurings granted for the three months ended December 31, 2017, totaled $240,000 and were granted interest rate and principal concessions. For the three months ended December 31, 2018, no loans defaulted on a restructuring agreement within one year of modification. For the three months ended December 31, 2017, two loans totaling $95,000 defaulted on a restructuring agreement 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 in the Consolidated Balance Sheet. As of December 31, 2018, included within the foreclosed assets is $795,000 of consumer residential mortgages that were foreclosed on or received via a deed in lieu of foreclosure transaction prior to the period end. As of December 31, 2018, the Company has initiated formal foreclosure proceedings on $2.5 million of consumer residential mortgages which have not yet been transferred into foreclosed assets. |