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, 2019 September 30, 2019 Real estate loans: Residential $ 601,425 $ 597,514 Construction 8,761 5,672 Commercial 483,520 480,647 Commercial 71,256 55,559 Obligations of states and political subdivisions 75,932 71,828 Home equity loans and lines of credit 45,020 45,156 Auto loans 69,576 81,983 Other 2,568 2,924 1,358,058 1,341,283 Less allowance for loan losses 12,747 12,630 Net loans $ 1,345,311 $ 1,328,653 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, 2019 September 30, 2019 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 $ 1,302 $ 1,392 Carrying amount $ 1,211 $ 1,299 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, 2019 Real estate loans: Residential $ 601,425 $ 4,176 $ — $ 597,249 Construction 8,761 — — 8,761 Commercial 483,520 2,451 1,211 479,858 Commercial 71,256 432 — 70,824 Obligations of states and political subdivisions 75,932 — — 75,932 Home equity loans and lines of credit 45,020 304 — 44,716 Auto loans 69,576 364 — 69,212 Other 2,568 29 — 2,539 Total $ 1,358,058 $ 7,756 $ 1,211 $ 1,349,091 Total Loans Individually Evaluated for Impairment Loans Acquired with Deteriorated Credit Quality Collectively Evaluated for Impairment September 30, 2019 Real estate loans: Residential $ 597,514 $ 4,281 $ — $ 593,233 Construction 5,672 — — 5,672 Commercial 480,647 2,633 1,299 476,715 Commercial 55,559 448 — 55,111 Obligations of states and political sub divisions 71,828 — — 71,828 Home equity loans and lines of credit 45,156 400 — 44,756 Auto loans 81,983 583 — 81,400 Other 2,924 31 — 2,893 Total $ 1,341,283 $ 8,376 $ 1,299 $ 1,331,608 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, 2019 With no specific allowance recorded: Real estate loans Residential $ 3,975 $ 5,432 $ — Construction — — — Commercial 2,272 4,193 — Commercial 432 471 — Obligations of states and political subdivisions — — — Home equity loans and lines of credit 304 331 — Auto loans 119 233 — Other 14 23 — Total 7,116 10,683 — With an allowance recorded: Real estate loans Residential 201 226 31 Construction — — — Commercial 179 215 55 Commercial — — — Obligations of states and political subdivisions — — — Home equity loans and lines of credit — — — Auto loans 245 276 116 Other 15 16 8 Total 640 733 210 Total: Real estate loans Residential 4,176 5,658 31 Construction — — — Commercial 2,451 4,408 55 Commercial 432 471 — Obligations of states and political subdivisions — — — Home equity loans and lines of credit 304 331 — Auto loans 364 509 116 Other 29 39 8 Total Impaired Loans $ 7,756 $ 11,416 $ 210 Recorded Investment Unpaid Principal Balance Associated Allowance September 30, 2019 With no specific allowance recorded: Real Estate Loans Residential $ 3,935 $ 5,309 $ — Construction — — — Commercial 2,385 4,269 — Commercial 354 475 — Obligations of states and political subdivisions — — — Home equity loans and lines of credit 400 465 — Auto Loans 161 248 — Other 15 22 — Total 7,250 10,788 — With an allowance recorded: Real Estate Loans Residential 346 398 36 Construction — — — Commercial 248 294 56 Commercial 94 223 6 Obligations of states and political subdivisions — — — Home equity loans and lines of credit — — — Auto Loans 422 426 144 Other 16 17 6 Total 1,126 1,358 248 Total: Real Estate Loans Residential 4,281 5,707 36 Construction — — — Commercial 2,633 4,563 56 Commercial 448 698 6 Obligations of states and political subdivisions — — — Home equity loans and lines of credit 400 465 — Auto Loans 583 674 144 Other 31 39 6 Total Impaired Loans $ 8,376 $ 12,146 $ 248 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): For the Three Months Ended December 31, 2019 2018 2019 2018 Average Recorded Investment Average Recorded Investment Interest Income Recognized Interest Income Recognized With no specific allowance recorded: Real estate loans Residential $ 3,933 $ 4,167 $ 1 $ 3 Construction — — — — Commercial 2,398 4,484 — 45 Commercial 392 84 — — Obligations of states and political subdivisions — — — — Home equity loans and lines of credit 322 151 — — Auto loans 116 87 1 1 Other 19 17 — — Total 7,180 8,990 2 49 With an allowance recorded: Real estate loans Residential 297 815 — — Construction — — — — Commercial 333 — — — Commercial 65 — — — Obligations of states and political subdivisions — — — — Home equity loans and lines of credit — 13 — — Auto loans 212 204 — — Other 5 — — — Total 912 1,032 — — Total: Real estate loans Residential 4,230 4,982 1 3 Construction — — — — Commercial 2,731 4,484 — 45 Commercial 457 84 — — Obligations of states and political subdivisions — — — — Home equity loans and lines of credit 322 164 — — Auto loans 328 291 1 1 Other 24 17 — — Total Impaired Loans $ 8,092 $ 10,022 $ 2 $ 49 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, 2019 and September 30, 2019 (in thousands): Pass Special Mention Substandard Doubtful or Loss Total December 31, 2019 Commercial real estate loans $ 465,560 $ 10,180 $ 7,780 $ — $ 483,520 Commercial 68,505 2,751 — 71,256 Obligations of states and political subdivisions 75,932 — — — 75,932 Total $ 609,997 $ 10,180 $ 10,531 $ — $ 630,708 Pass Special Mention Substandard Doubtful or Loss Total September 30, 2019 Commercial real estate loans $ 461,701 $ 7,492 $ 11,454 $ — $ 480,647 Commercial 52,486 — 3,073 — 55,559 Obligations of states and political subdivisions 71,828 — — — 71,828 Total $ 586,015 $ 7,492 $ 14,527 $ — $ 608,034 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, 2019 and September 30, 2019 (in thousands): Performing Non- performing Total December 31, 2019 Real estate loans: Residential $ 597,010 $ 4,415 $ 601,425 Construction 8,761 — 8,761 Home equity loans and lines of credit 44,449 571 45,020 Auto loans 69,132 443 69,575 Other 2,536 32 2,568 Total $ 721,888 $ 5,461 $ 727,349 Performing Non- performing Total September 30, 2019 Real estate loans: Residential $ 592,907 $ 4,607 $ 597,514 Construction 5,672 — 5,672 Home equity loans and lines of credit 44,534 622 45,156 Auto loans 81,317 666 81,983 Other 2,883 41 2,924 Total $ 727,313 $ 5,936 $ 733,249 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, 2019 and September 30, 2019 (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, 2019 Real estate loans: Residential $ 594,814 $ 1,682 $ 514 $ — $ 4,415 $ 6,611 $ — $ — $ 601,425 Construction 8,761 — — — — — — — 8,761 Commercial 478,794 713 — — 2,802 3,515 240 971 483,520 Commercial 68,922 99 1,664 — 571 2,334 — — 71,256 Obligations of states and political subdivisions 75,932 — — — — — — — 75,932 Home equity loans and lines of credit 44,255 98 96 — 571 765 — — 45,020 Auto loans 67,278 1,855 — — 443 2,298 — — 69,576 Other 2,526 — 10 — 32 42 — — 2,568 Total $ 1,341,282 $ 4,447 $ 2,284 $ — $ 8,834 $ 15,565 $ 240 $ 971 $ 1,358,058 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, 2019 Real estate loans: Residential $ 590,457 $ 2,187 $ 263 $ — $ 4,607 $ 7,057 $ — $ — $ 597,514 Construction 5,672 — — — — — — — 5,672 Commercial 476,644 236 — — 2,468 2,704 243 1,056 480,647 Commercial 54,899 20 37 — 603 660 — — 55,559 Obligations of states and political subdivisions 71,828 — — — — — — — 71,828 Home equity loans and lines of credit 44,319 47 168 — 622 837 — — 45,156 Auto loans 80,090 1,227 — — 666 1,893 — — 81,983 Other 2,883 — — — 41 41 — — 2,924 Total $ 1,326,792 $ 3,717 $ 468 $ — $ 9,007 $ 13,192 $ 243 $ 1,056 $ 1,341,283 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, 2019 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 ended December 31, 2019 and 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 ALL balance at September 30, 2019 $ 4,243 $ 53 $ 3,806 $ 1,870 $ 343 $ 329 $ 1,384 $ 28 $ 574 $ 12,630 Charge-offs (22 ) — (40 ) — — (29 ) (372 ) (2 ) — (465 ) Recoveries 1 — 42 1 — 1 161 1 — 207 Provision (61 ) 29 (204 ) 370 (3 ) 68 59 (3 ) 120 375 ALL balance at December 31, 2019 $ 4,161 $ 82 $ 3,604 $ 2,241 $ 340 $ 369 $ 1,232 $ 24 $ 694 $ 12,747 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 During the three months ended December 31, 2019 the Company recorded provision expense for the construction real estate loans, commercial, home equity loans and lines of credit and auto 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, commercial real estate, obligations of states and political subdivisions and other loan segments. 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. 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, 2019 and September 30, 2019 (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 $ 31 $ — $ 55 $ — $ — $ — $ 116 $ 8 $ — $ 210 Collectively evaluated for impairment 4,130 82 3,549 2,241 340 369 1,116 16 694 12,537 ALL balance at December 31, 2019 $ 4,161 $ 82 $ 3,604 $ 2,241 $ 340 $ 369 $ 1,232 $ 24 $ 694 $ 12,747 Individually evaluated for impairment $ 36 $ — $ 56 $ 6 $ — $ — $ 144 $ 6 $ — $ 248 Collectively evaluated for impairment 4,207 53 3,750 1,864 343 329 1,240 22 574 12,382 ALL balance at September 30, 2019 $ 4,243 $ 53 $ 3,806 $ 1,870 $ 343 $ 329 $ 1,384 $ 28 $ 574 $ 12,630 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, 2019 and 2018 (dollars in thousands): For the Three Months Ended December 31, 2019 Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Troubled Debt Restructurings Real estate loans: Residential 1 $ 540 $ 540 Construction — — — Commercial — — — Commercial — — — Obligations of states and political subdivisions — — — Home equity loans and lines of credit — — — Auto loans — — — Other — — — Total 1 $ 540 $ 540 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 The one new troubled debt restructuring granted for the three months ended December 31, 2019, totaled $540,000 and was granted an interest rate concession. 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. For the three months ended December 31, 2019 and 2018, no loans defaulted on a restructuring agreement within one year of modification. |