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, 2021 September 30, 2021 Real estate loans: Residential $ 580,292 $ 580,313 Construction 18,003 14,013 Commercial 615,608 591,117 Commercial 56,548 63,500 Obligations of states and political subdivisions 37,804 56,164 Home equity loans and lines of credit 37,384 38,426 Auto loans 10,339 13,852 Other 1,533 1,581 1,357,511 1,358,966 Less allowance for loan losses 18,210 18,113 Net loans $ 1,339,301 $ 1,340,853 During 2020 and 2021 the Company participated in the Paycheck Protection Program (“PPP”), administered directly by the U.S. Small Business Administration (the “SBA”). The PPP provides loans to small businesses who were affected by economic conditions as a result of COVID-19 to provide cash-flow assistance to employers who maintain their payroll (including healthcare and certain related expenses), mortgage interest, rent, leases, utilities and interest on existing debt during the COVID-19 emergency. The PPP loans are fully guaranteed by the SBA and may be eligible for forgiveness by the SBA to the extent that the proceeds are used to cover eligible payroll costs, interest costs, rent, and utility costs over a period of up to 24 weeks after the loan is made as long as certain conditions are met regarding employee retention and compensation levels. PPP loans deemed eligible for forgiveness by the SBA will be repaid by the SBA to the Company. PPP loans are included in the Commercial loan category. In accordance with the SBA terms and conditions on these PPP loans, the Company received approximately $2.4 million in fees associated with the processing of these loans. Upon funding of the loan, these fees were deferred and will be amortized over the life of the loan as an adjustment to yield in accordance with FASB ASC 310-20-25-2. Included in commercial loans in the above table are 69 loans totaling $13.2 million originated by the Company under the Paycheck Protection Program through the quarter ended December 31, 2021 compared to 180 loans totaling $22.6 million at September 30, 2021. These loans mature in two or five years. 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, 2021 September 30, 2021 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 $ 695 $ 939 Carrying amount $ 646 $ 877 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, 2021 Real estate loans: Residential $ 580,292 $ 2,225 $ - $ 578,067 Construction 18,003 - - 18,003 Commercial 615,608 11,024 646 603,938 Commercial 56,548 1,247 - 55,301 Obligations of states and political subdivisions 37,804 - - 37,804 Home equity loans and lines of credit 37,384 297 - 37,087 Auto loans 10,339 44 - 10,295 Other 1,533 8 - 1,525 Total $ 1,357,511 $ 14,845 $ 646 $ 1,342,020 Total Loans Individually Evaluated for Impairment Loans Acquired with Deteriorated Credit Quality Collectively Evaluated for Impairment September 30, 2021 Real estate loans: Residential $ 580,313 $ 2,646 $ - $ 577,667 Construction 14,013 - - 14,013 Commercial 591,117 11,166 877 579,074 Commercial 63,500 1,355 - 62,145 Obligations of states and political sub divisions 56,164 - - 56,164 Home equity loans and lines of credit 38,426 336 - 38,090 Auto loans 13,852 39 - 13,813 Other 1,581 8 - 1,573 Total $ 1,358,966 $ 15,550 $ 877 $ 1,342,539 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 (“TDR”). A loan is considered to be a 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, 2021 With no specific allowance recorded: Real estate loans Residential $ 2,088 $ 3,004 $ - Construction - - - Commercial 11,011 12,634 - Commercial - 23 - Obligations of states and political subdivisions - - - Home equity loans and lines of credit 297 333 - Auto loans 26 40 - Other 8 20 - Total 13,430 16,054 - With an allowance recorded: Real estate loans Residential 137 142 16 Construction - - - Commercial 13 19 13 Commercial 1,247 1,368 472 Obligations of states and political subdivisions - - - Home equity loans and lines of credit - - - Auto loans 18 18 3 Other - - - Total 1,415 1,547 504 Total: Real estate loans Residential 2,225 3,146 16 Construction - - - Commercial 11,024 12,653 13 Commercial 1,247 1,391 472 Obligations of states and political subdivisions - - - Home equity loans and lines of credit 297 333 - Auto loans 44 58 3 Other 8 20 - Total Impaired Loans $ 14,845 $ 17,601 $ 504 Recorded Investment Unpaid Principal Balance Associated Allowance September 30, 2021 With no specific allowance recorded: Real Estate Loans Residential $ 2,538 $ 3,610 $ - Construction - - - Commercial 11,152 13,030 - Commercial 165 176 - Obligations of states and political subdivisions - - - Home equity loans and lines of credit 336 368 - Auto Loans 39 60 - Other 8 21 - Total 14,238 17,265 - With an allowance recorded: Real Estate Loans Residential 108 112 17 Construction - - - Commercial 14 19 14 Commercial 1,190 1,298 397 Obligations of states and political subdivisions - - - Home equity loans and lines of credit - - - Auto Loans - - - Other - - - Total 1,312 1,429 428 Total: Real Estate Loans Residential 2,646 3,722 17 Construction - - - Commercial 11,166 13,049 14 Commercial 1,355 1,474 397 Obligations of states and political subdivisions - - - Home equity loans and lines of credit 336 368 - Auto Loans 39 60 - Other 8 21 - Total Impaired Loans $ 15,550 $ 18,694 $ 428 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, 2021 2020 2021 2020 Average Recorded Investment Average Recorded Investment Interest Income Recognized Interest Income Recognized With no specific allowance recorded: Real estate loans Residential $ 2,292 $ 1,436 $ 2 $ 1 Construction - - - - Commercial 11,049 11,131 - - Commercial 109 1,313 - - Obligations of states and political subdivisions - - - - Home equity loans and lines of credit 310 109 - - Auto loans 23 55 - - Other - 11 - - Total 13,783 14,055 2 1 With an allowance recorded: Real estate loans Residential 118 221 - - Construction - - - - Commercial 13 2,581 - - Commercial 1,173 37 - - Obligations of states and political subdivisions - - - - Home equity loans and lines of credit - - - - Auto loans 10 40 - - Other - - - - Total 1,314 2,879 - - Total: Real estate loans Residential 2,410 1,657 2 1 Construction - - - - Commercial 11,062 13,712 - - Commercial 1,282 1,350 - Obligations of states and political subdivisions - - - - Home equity loans and lines of credit 310 109 - - Auto loans 33 95 - - Other - 11 - - Total Impaired Loans $ 15,097 $ 16,934 $ 2 $ 1 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, 2021 and September 30, 2021 (in thousands): Pass Special Mention Substandard Doubtful or Loss Total December 31, 2021 Commercial real estate loans $ 577,343 $ 12,686 $ 25,579 $ - $ 615,608 Commercial 52,540 2,114 1,894 - 56,548 Obligations of states and political subdivisions 37,804 - - - 37,804 Total $ 667,687 $ 14,800 $ 27,473 $ - $ 709,960 Pass Special Mention Substandard Doubtful or Loss Total September 30, 2021 Commercial real estate loans $ 549,360 $ 20,184 $ 21,573 $ - $ 591,117 Commercial 61,657 141 1,702 - 63,500 Obligations of states and political subdivisions 56,164 - - - 56,164 Total $ 667,181 $ 20,325 $ 23,275 $ - $ 710,781 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, 2021 and September 30, 2021 (in thousands): Performing Non- performing Total December 31, 2021 Real estate loans: Residential $ 578,016 $ 2,276 $ 580,292 Construction 18,003 - 18,003 Home equity loans and lines of credit 36,968 416 37,384 Auto loans 10,278 61 10,339 Other 1,521 12 1,533 Total $ 644,786 $ 2,765 $ 647,551 Performing Non- performing Total September 30, 2021 Real estate loans: Residential $ 577,448 $ 2,865 $ 580,313 Construction 14,013 - 14,013 Home equity loans and lines of credit 37,963 463 38,426 Auto loans 13,809 43 13,852 Other 1,567 14 1,581 Total $ 644,800 $ 3,385 $ 648,185 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, purchased credit impaired loans and nonaccrual loans as of December 31, 2021 and September 30, 2021 (in thousands): 31-60 Days 61-89 Days 90 + Days Total Purchased Total Current Past Due Past Due Past Due Past Due Credit Impaired Loans December 31, 2021 Real estate loans: Residential $ 577,525 $ 1,021 $ 510 $ 1,236 $ 2,767 $ - $ 580,292 Construction 18,003 - - - - - 18,003 Commercial 608,498 202 - 6,262 6,464 646 615,608 Commercial 55,359 - 32 1,157 1,189 - 56,548 Obligations of states and political subdivisions 37,804 - - - - - 37,804 Home equity loans and lines of credit 37,174 41 49 120 210 - 37,384 Auto loans 10,145 183 11 - 194 - 10,339 Other 1,453 53 27 - 80 - 1,533 Total $ 1,345,961 $ 1,500 $ 629 $ 8,775 $ 10,904 $ 646 $ 1,357,511 31-60 Days 61-89 Days 90 + Days Total Purchased Total Current Past Due Past Due Past Due Past Due Credit Impaired Loans September 30, 2021 Real estate loans: Residential $ 576,960 $ 1,029 $ 580 $ 1,744 $ 3,353 $ - $ 580,313 Construction 14,013 - - - $ - - 14,013 Commercial 587,779 111 - 2,350 $ 2,461 877 591,117 Commercial 62,243 - - 1,257 $ 1,257 - 63,500 Obligations of states and political subdivisions 56,164 - - - $ - - 56,164 Home equity loans and lines of credit 38,223 44 - 159 $ 203 - 38,426 Auto loans 13,576 271 5 - $ 276 - 13,852 Other 1,513 59 - 9 $ 68 - 1,581 Total $ 1,350,471 $ 1,514 $ 585 $ 5,519 $ 7,618 $ 877 $ 1,358,966 Non-Accrual Loans December 31, 2021 September 30, 2021 Real estate loans: Residential $ 2,276 $ 2,865 Construction - - Commercial 14,909 11,124 Commercial 1,250 1,358 Obligations of states and political subdivisions - - Home equity loans and lines of credit 416 463 Auto loans 61 43 Other 12 14 Total $ 18,924 $ 15,867 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 unallocated 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. In addition, for the three months ended December 31, 2021, consideration was given and a credit provision was recorded for loans granted short term payment relief due to the COVID pandemic. 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 , 2021 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, 2021 and 2020 (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, 2021 $ 4,114 $ 187 $ 10,470 $ 1,041 $ 393 $ 318 $ 232 $ 21 $ 1,337 $ 18,113 Charge-offs (6 ) - - - - - (6 ) - - (12 ) Recoveries 72 - 1 - - 2 34 - - 109 Provision (82 ) 54 136 183 (128 ) (23 ) (64 ) - (76 ) - ALL balance at December 31, 2021 $ 4,098 $ 241 $ 10,607 $ 1,224 $ 265 $ 297 $ 196 $ 21 $ 1,261 $ 18,210 ALL balance at September 30, 2020 $ 4,301 $ 127 $ 7,209 $ 874 $ 555 $ 337 $ 780 $ 25 $ 1,192 $ 15,400 Charge-offs - - (76 ) (9 ) - (8 ) (155 ) (1 ) - (249 ) Recoveries - - 17 - - 1 72 - - 90 Provision 206 8 712 39 (47 ) 20 (77 ) (2 ) 41 900 ALL balance at December 31, 2020 $ 4,507 $ 135 $ 7,862 $ 904 $ 508 $ 350 $ 620 $ 22 $ 1,233 $ 16,141 During the three months ended December 31, 2021, the Company recorded provision expense for the construction real estate loans, commercial real estate loans and commercial loans segments, due to either increased loan balances, changes in the loan mix within the pool, and/or charge-off activity in those segments. Provision expense was also recorded for possible loan losses due to the economic slowdown caused by COVID-19 restrictions. Credit provisions were recorded for loan loss for the residential real estate loans, obligations of states and political subdivisions, home equity loans and lines of credit and auto loans segments due to either decreased loan balances, changes in the loan mix within the pool, and/or decreased charge-off activity in those segments. During the three months ended December 31, 2020, the Company recorded provision expense for the residential real estate loans, construction real estate loans, commercial real estate loans, commercial loans, construction loans and home equity loans and lines of credit segments, due to either increased loan balances, changes in the loan mix within the pool, and/or charge-off activity in those segments. Provision expense was also recorded for possible loan losses due to the economic slowdown caused by COVID-19 restrictions. Credit provisions were recorded for loan loss for the obligations of states and political subdivisions, auto loan and other loan segments due to either decreased loan balances, changes in the loan mix within the pool, and/or decreased charge-off activity in those segments. The Company is closely monitoring all customer credit positions, particularly loans requesting payment relief. Such loans, as of December 31, 2021, amounted to approximately 1.4% of total loans outstanding, including $18.8 million in commercial real estate loans and $369,000 in commercial loans. As the economic impact of the COVID-19 pandemic continues to evolve, our customers may experience decreased cash flows, which may correlate to an inability to make timely loan payments. This, in turn, may require increases in our allowance for loan losses and increases in the level of charge-offs in our loan portfolio. 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, 2021 and September 30, 2021 (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 $ 16 $ - $ 13 $ 472 $ - $ - $ 3 $ - $ - $ 504 Collectively evaluated for impairment 4,082 241 10,594 752 265 297 193 21 1,261 17,706 ALL balance at December 31, 2021 $ 4,098 $ 241 $ 10,607 $ 1,224 $ 265 $ 297 $ 196 $ 21 $ 1,261 $ 18,210 Individually evaluated for impairment $ 17 $ - $ 14 $ 397 $ - $ - $ - $ - $ - $ 428 Collectively evaluated for impairment 4,097 187 10,456 644 393 318 232 21 1,337 17,685 ALL balance at September 30, 2021 $ 4,114 $ 187 $ 10,470 $ 1,041 $ 393 $ 318 $ 232 $ 21 $ 1,337 $ 18,113 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. There were no new troubled debt restructurings granted for the three months ended December 31, 2021 and 2020. For the three months ended December 31, 2021 and 2020, no loans defaulted on a restructuring agreement within one year of modification. The Company continues to closely monitor all customer credit positions, particularly loans requesting payment relief. As of December 31, 2021, eight of our commercial clients had requested loan payment deferrals or payments of interest only on loans totaling $19.2 million. In accordance with interagency guidance issued in March 2020, these short-term deferrals are not considered troubled debt restructurings unless the borrower was previously experiencing financial difficulty. As the economic impact of the COVID-19 pandemic continues to evolve, our customers may experience decreased cash flows, which may correlate to an inability to make timely loan payments. This, in turn may require increases in our allowance for loan losses and increases in the level of chargeoffs in our loan portfolio. There can be no assurance that our non-performing assets will not increase in the future due to the impact of COVID-19 or otherwise. We will continue to closely monitor credit risk and our exposure to increased loan losses resulting from the impact of COVID-19 on our commercial and consumer clients. |