Credit Quality and Related Allowance for Loan Losses | 9 Months Ended |
Sep. 30, 2014 |
Loans and Leases Receivable Disclosure [Abstract] | ' |
Credit Quality and Related Allowance for Loan Losses | ' |
Credit Quality and Related Allowance for Loan Losses |
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Management segments the Bank’s loan portfolio to a level that enables risk and performance monitoring according to similar risk characteristics. Loans are segmented based on the underlying collateral characteristics. Categories include commercial and agricultural, real estate, and installment loans to individuals. Real estate loans are further segmented into three categories: residential, commercial and construction. |
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The following table presents the related aging categories of loans, by segment, as of September 30, 2014 and December 31, 2013: |
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| | 30-Sep-14 | | | | | | | | |
| | | | Past Due | | Past Due 90 | | | | | | | | | | | | |
| | | | 30 To 89 | | Days Or More | | Non- | | | | | | | | | | |
(In Thousands) | | Current | | Days | | & Still Accruing | | Accrual | | Total | | | | | | | | |
Commercial and agricultural | | $ | 123,317 | | | $ | 142 | | | $ | — | | | $ | 820 | | | $ | 124,279 | | | | | | | | | |
| | | | | | | |
Real estate mortgage: | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
Residential | | 432,722 | | | 1,742 | | | 202 | | | 808 | | | 435,474 | | | | | | | | | |
| | | | | | | |
Commercial | | 277,696 | | | 2,235 | | | — | | | 9,452 | | | 289,383 | | | | | | | | | |
| | | | | | | |
Construction | | 21,132 | | | 10 | | | — | | | 1,012 | | | 22,154 | | | | | | | | | |
| | | | | | | |
Installment loans to individuals | | 20,408 | | | 311 | | | — | | | — | | | 20,719 | | | | | | | | | |
| | | | | | | |
| | 875,275 | | | $ | 4,440 | | | $ | 202 | | | $ | 12,092 | | | 892,009 | | | | | | | | | |
| | | | | | | |
Net deferred loan fees and discounts | | (1,282 | ) | | | | | | | | | | | (1,282 | ) | | | | | | | | |
| | | | | | | |
Allowance for loan losses | | (9,250 | ) | | | | | | | | | | | (9,250 | ) | | | | | | | | |
| | | | | | | |
Loans, net | | $ | 864,743 | | | | | | | | | | | | $ | 881,477 | | | | | | | | | |
| | | | | | | |
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| | December 31, 2013 | | | | | | | | |
| | | | Past Due | | Past Due 90 | | | | | | | | | | | | |
| | | | 30 To 89 | | Days Or More | | Non- | | | | | | | | | | |
(In Thousands) | | Current | | Days | | & Still Accruing | | Accrual | | Total | | | | | | | | |
Commercial and agricultural | | $ | 104,419 | | | $ | 502 | | | $ | — | | | $ | 108 | | | $ | 105,029 | | | | | | | | | |
| | | | | | | |
Real estate mortgage: | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
Residential | | 392,300 | | | 6,424 | | | 531 | | | 526 | | | 399,781 | | | | | | | | | |
| | | | | | | |
Commercial | | 272,745 | | | 2,533 | | | — | | | 7,198 | | | 282,476 | | | | | | | | | |
| | | | | | | |
Construction | | 15,967 | | | — | | | 73 | | | 1,242 | | | 17,282 | | | | | | | | | |
| | | | | | | |
Installment loans to individuals | | 14,170 | | | 477 | | | — | | | — | | | 14,647 | | | | | | | | | |
| | | | | | | |
| | 799,601 | | | $ | 9,936 | | | $ | 604 | | | $ | 9,074 | | | 819,215 | | | | | | | | | |
| | | | | | | |
Net deferred loan fees and discounts | | (871 | ) | | | | | | | | | | | (871 | ) | | | | | | | | |
| | | | | | | |
Allowance for loan losses | | (10,144 | ) | | | | | | | | | | | (10,144 | ) | | | | | | | | |
| | | | | | | |
Loans, net | | $ | 788,586 | | | | | | | | | | | | $ | 808,200 | | | | | | | | | |
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Purchased loans acquired are recorded at fair value on their purchase date without a carryover of the related allowance for loan losses. |
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Upon the acquisition of Luzerne Bank on June 1, 2013, 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. Purchased credit-impaired loans are loans that have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. There were no material increases or decreases in the expected cash flows of these loans between June 1, 2013 (the “acquisition date”) and September 30, 2014. The fair value of purchased credit-impaired loans, on the acquisition date, was determined, primarily based on the fair value of loan collateral. The carrying value of purchased loans acquired with deteriorated credit quality was $655,000 at September 30, 2014. |
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On the acquisition date, the preliminary estimate of the unpaid principal balance for all loans evidencing credit impairment acquired in the Luzerne Bank acquisition was $1,211,000 and the estimated fair value of the loans was $878,000. Total contractually required payments on these loans, including interest, at the acquisition date was $1,783,000. However, the Company’s preliminary estimate of expected cash flows was $941,000. At such date, the Company established a credit risk related non-accretable discount (a discount representing amounts which are not expected to be collected from either the customer or liquidation of collateral) of $842,000 relating to these impaired loans, reflected in the recorded net fair value. Such amount is reflected as a non-accretable fair value adjustment to loans. The Company further estimated the timing and amount of expected cash flows in excess of the estimated fair value and established an accretable discount of $63,000 on the acquisition date relating to these impaired loans. |
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The carrying value of the loans acquired in the Luzerne Bank transaction with specific evidence of deterioration in credit quality was determined by projecting discounted contractual cash flows. The table below presents the components of the purchase accounting adjustments related to the purchased impaired loans acquired in the Luzerne Bank acquisition as of June 1, 2013: |
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Changes in the amortizable yield for purchased credit-impaired loans were as follows for the nine months ended September 30, 2014 and 2013: |
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(In Thousands) | | September 30, 2014 | | September 30, 2013 | | | | | | | | | | | | | | | | | | | | |
Balance at beginning of period or at acquisition | | $ | 35 | | | $ | 63 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Accretion | | (12 | ) | | (17 | ) | | | | | | | | | | | | | | | | | | | | |
Balance at end of period | | $ | 23 | | | $ | 46 | | | | | | | | | | | | | | | | | | | | | |
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The following table presents additional information regarding loans acquired in the Luzerne Bank transaction with specific evidence of deterioration in credit quality: |
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(In Thousands) | | 30-Sep-14 | | 31-Dec-13 | | | | | | | | | | | | | | | | | | | | |
Outstanding balance | | $ | 755 | | | $ | 1,224 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Carrying amount | | 655 | | | 868 | | | | | | | | | | | | | | | | | | | | | |
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There were no material increases or decreases in the expected cash flows of these loans between June 1, 2013 (the “acquisition date”) and September 30, 2014. There has been no allowance for loan losses recorded for acquired loans with or without specific evidence of deterioration in credit quality as of September 30, 2014. |
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The following table presents interest income the Bank would have recorded if interest had been recorded based on the original loan agreement terms and rate of interest for non-accrual loans and interest income recognized on a cash basis for non-accrual loans for the three and nine months ended September 30, 2014 and 2013: |
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| | Three Months Ended September 30, | | | | | | | | | | | | |
| | 2014 | | 2013 | | | | | | | | | | | | |
(In Thousands) | | Interest Income That | | Interest | | Interest Income That | | Interest | | | | | | | | | | | | |
Would Have Been | Income | Would Have Been | Income | | | | | | | | | | | | |
Recorded Based on | Recorded on | Recorded Based on | Recorded on | | | | | | | | | | | | |
Original Term and Rate | a Cash Basis | Original Term and Rate | a Cash Basis | | | | | | | | | | | | |
Commercial and agricultural | | $ | 17 | | | $ | 20 | | | $ | — | | | $ | — | | | | | | | | | | | | | |
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Real estate mortgage: | | | | | | | | | | | | | | | | | | | | | | | | |
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Residential | | 31 | | | 8 | | | 13 | | | 10 | | | | | | | | | | | | | |
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Commercial | | 147 | | | 66 | | | 49 | | | 5 | | | | | | | | | | | | | |
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Construction | | 18 | | | — | | | 16 | | | 8 | | | | | | | | | | | | | |
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| | $ | 213 | | | $ | 94 | | | $ | 78 | | | $ | 23 | | | | | | | | | | | | | |
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| | Nine Months Ended September 30, | | | | | | | | | | | | |
| | 2014 | | 2013 | | | | | | | | | | | | |
(In Thousands) | | Interest Income That | | Interest | | Interest Income That | | Interest | | | | | | | | | | | | |
Would Have Been | Income | Would Have Been | Income | | | | | | | | | | | | |
Recorded Based on | Recorded on | Recorded Based on | Recorded on | | | | | | | | | | | | |
Original Term and Rate | a Cash Basis | Original Term and Rate | a Cash Basis | | | | | | | | | | | | |
Commercial and agricultural | | $ | 34 | | | $ | 21 | | | $ | 4 | | | $ | — | | | | | | | | | | | | | |
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Real estate mortgage: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
Residential | | 38 | | | 17 | | | 67 | | | 22 | | | | | | | | | | | | | |
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Commercial | | 422 | | | 152 | | | 165 | | | 89 | | | | | | | | | | | | | |
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Construction | | 53 | | | — | | | 97 | | | 33 | | | | | | | | | | | | | |
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| | $ | 547 | | | $ | 190 | | | $ | 333 | | | $ | 144 | | | | | | | | | | | | | |
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Impaired Loans |
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Impaired loans are loans for which it is probable the Bank will not be able to collect all amounts due according to the contractual terms of the loan agreement. The Bank evaluates such loans for impairment individually and does not aggregate loans by major risk classifications. The definition of “impaired loans” is not the same as the definition of “non-accrual loans,” although the two categories overlap. The Bank may choose to place a loan on non-accrual status due to payment delinquency or uncertain collectability, while not classifying the loan as impaired. 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. Factors considered by management in determining impairment include payment status and collateral value. The amount of impairment for these types of loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original interest rate, and its recorded value, or as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loan. When foreclosure is probable, impairment is measured based on the fair value of the collateral. |
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Management evaluates individual loans in all of the commercial segments for possible impairment if the loan is greater than $100,000 and if the loan is either on non-accrual status or has a risk rating of substandard. Management may also elect to measure an individual loan for impairment if less than $100,000 on a case-by-case basis. |
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Mortgage loans on one-to-four family properties and all consumer loans are large groups of smaller-balance homogeneous loans and are measured for impairment collectively. Loans that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified as impaired. Management determines the significance of payment delays on a case-by-case basis taking into consideration all circumstances surrounding the loan and the borrower including the length of the delay, the borrower’s prior payment record, and the amount of shortfall in relation to the principal and interest owed. Interest income for impaired loans is recorded consistent with the Bank’s policy on nonaccrual loans. |
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The following table presents the recorded investment, unpaid principal balance, and related allowance of impaired loans by segment as of September 30, 2014 and December 31, 2013: |
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| | 30-Sep-14 | | | | | | | | | | | | | | | | |
| | Recorded | | Unpaid Principal | | Related | | | | | | | | | | | | | | | | |
(In Thousands) | | Investment | | Balance | | Allowance | | | | | | | | | | | | | | | | |
With no related allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Commercial and agricultural | | $ | 620 | | | $ | 620 | | | $ | — | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Real estate mortgage: | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Residential | | 613 | | | 713 | | | — | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Commercial | | 2,601 | | | 2,601 | | | — | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Construction | | 510 | | | 510 | | | — | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | 4,344 | | | 4,444 | | | — | | | | | | | | | | | | | | | | | |
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With an allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | | |
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Commercial and agricultural | | 516 | | | 516 | | | 150 | | | | | | | | | | | | | | | | | |
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Real estate mortgage: | | | | | | | | | | | | | | | | | | | | | | | | | |
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Residential | | 741 | | | 764 | | | 80 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Commercial | | 8,335 | | | 8,834 | | | 1,079 | | | | | | | | | | | | | | | | | |
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Construction | | 805 | | | 1,660 | | | 171 | | | | | | | | | | | | | | | | | |
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| | 10,397 | | | 11,774 | | | 1,480 | | | | | | | | | | | | | | | | | |
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Total: | | | | | | | | | | | | | | | | | | | | | | | | | |
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Commercial and agricultural | | 1,136 | | | 1,136 | | | 150 | | | | | | | | | | | | | | | | | |
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Real estate mortgage: | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Residential | | 1,354 | | | 1,477 | | | 80 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Commercial | | 10,936 | | | 11,435 | | | 1,079 | | | | | | | | | | | | | | | | | |
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Construction | | 1,315 | | | 2,170 | | | 171 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | $ | 14,741 | | | $ | 16,218 | | | $ | 1,480 | | | | | | | | | | | | | | | | | |
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| | December 31, 2013 | | | | | | | | | | | | | | | | |
| | Recorded | | Unpaid Principal | | Related | | | | | | | | | | | | | | | | |
(In Thousands) | | Investment | | Balance | | Allowance | | | | | | | | | | | | | | | | |
With no related allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Commercial and agricultural | | $ | — | | | $ | — | | | $ | — | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Real estate mortgage: | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Residential | | 916 | | | 1,173 | | | — | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Commercial | | 623 | | | 879 | | | — | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Construction | | 528 | | | 528 | | | — | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | 2,067 | | | 2,580 | | | — | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
With an allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Commercial and agricultural | | 532 | | | 532 | | | 224 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Real estate mortgage: | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Residential | | 319 | | | 342 | | | 65 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Commercial | | 7,598 | | | 7,742 | | | 2,153 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Construction | | 512 | | | 1,367 | | | 113 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | 8,961 | | | 9,983 | | | 2,555 | | | | | | | | | | | | | | | | | |
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Total: | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Commercial and agricultural | | 532 | | | 532 | | | 224 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Real estate mortgage: | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Residential | | 1,235 | | | 1,515 | | | 65 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Commercial | | 8,221 | | | 8,621 | | | 2,153 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Construction | | 1,040 | | | 1,895 | | | 113 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | $ | 11,028 | | | $ | 12,563 | | | $ | 2,555 | | | | | | | | | | | | | | | | | |
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The following table presents the average recorded investment in impaired loans and related interest income recognized for the three and nine months ended for September 30, 2014 and 2013: |
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| | Three Months Ended September 30, | | | | |
| | 2014 | | 2013 | | | | |
(In Thousands) | | Average | | Interest Income | | Interest Income | | Average | | Interest Income | | Interest Income | | | | |
Investment in | Recognized on an | Recognized on a | Investment in | Recognized on an | Recognized on a | | | | |
Impaired Loans | Accrual Basis on | Cash Basis on | Impaired Loans | Accrual Basis on | Cash Basis on | | | | |
| Impaired Loans | Impaired Loans | | Impaired Loans | Impaired Loans | | | | |
Commercial and agricultural | | $ | 824 | | | $ | 5 | | | $ | 20 | | | $ | 786 | | | $ | 7 | | | $ | — | | | | | |
| | | |
Real estate mortgage: | | | | | | | | | | | | | | | | | | | | | | |
| | | |
Residential | | 1,219 | | | 18 | | | 7 | | | 1,652 | | | 28 | | | 10 | | | | | |
| | | |
Commercial | | 10,901 | | | 34 | | | 65 | | | 8,277 | | | 45 | | | 5 | | | | | |
| | | |
Construction | | 1,169 | | | 8 | | | — | | | 1,119 | | | 1 | | | 8 | | | | | |
| | | |
| | $ | 14,113 | | | $ | 65 | | | $ | 92 | | | $ | 11,834 | | | $ | 81 | | | $ | 23 | | | | | |
| | | |
| | | | |
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| | Nine Months Ended September 30, | | | | |
| | 2014 | | 2013 | | | | |
(In Thousands) | | Average | | Interest Income | | Interest Income | | Average | | Interest Income | | Interest Income | | | | |
Investment in | Recognized on an | Recognized on a | Investment in | Recognized on an | Recognized on a | | | | |
Impaired Loans | Accrual Basis on | Cash Basis on | Impaired Loans | Accrual Basis on | Cash Basis on | | | | |
| Impaired Loans | Impaired Loans | | Impaired Loans | Impaired Loans | | | | |
Commercial and agricultural | | $ | 675 | | | $ | 18 | | | $ | 20 | | | $ | 869 | | | $ | 20 | | | $ | — | | | | | |
| | | |
Real estate mortgage: | | | | | | | | | | | | | | | | | | | | | | |
| | | |
Residential | | 1,195 | | | 32 | | | 14 | | | 2,110 | | | 45 | | | 21 | | | | | |
| | | |
Commercial | | 10,240 | | | 95 | | | 79 | | | 11,278 | | | 138 | | | 89 | | | | | |
| | | |
Construction | | 1,102 | | | 10 | | | 8 | | | 4,071 | | | 1 | | | 561 | | | | | |
| | | |
| | $ | 13,212 | | | $ | 155 | | | $ | 121 | | | $ | 18,328 | | | $ | 204 | | | $ | 671 | | | | | |
| | | |
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Currently, there is $0 committed to be advanced in connection with impaired loans. |
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Modifications |
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The loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring (“TDR”), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months. |
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Loan modifications that are considered TDRs completed during the three and nine months ended September 30, 2014 and 2013 were as follows: |
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| | Three Months Ended September 30, | | | | | | |
| | 2014 | | 2013 | | | | | | |
(In Thousands, Except Number of Contracts) | | Number | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | | Number | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | | | | | | |
of | of | | | | | | |
Contracts | Contracts | | | | | | |
Commercial and agricultural | | 3 | | | $ | 620 | | | $ | 620 | | | — | | | $ | — | | | $ | — | | | | | | | |
| | | | | |
Real estate mortgage: | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
Residential | | 1 | | | 105 | | | 105 | | | — | | | — | | | — | | | | | | | |
| | | | | |
Commercial | | 3 | | | 636 | | | 636 | | | 2 | | | 1,634 | | | 1,634 | | | | | | | |
| | | | | |
| | 7 | | | $ | 1,361 | | | $ | 1,361 | | | 2 | | | $ | 1,634 | | | $ | 1,634 | | | | | | | |
| | | | | |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | | | | |
| | 2014 | | 2013 | | | | | | |
(In Thousands, Except Number of Contracts) | | Number | | Pre-Modification | | Post-Modification | | Number | | Pre-Modification | | Post-Modification | | | | | | |
of | Outstanding | Outstanding | of | Outstanding | Outstanding | | | | | | |
Contracts | Recorded | Recorded | Contracts | Recorded | Recorded | | | | | | |
| Investment | Investment | | Investment | Investment | | | | | | |
Commercial and agricultural | | 3 | | | $ | 620 | | | $ | 620 | | | — | | | $ | — | | | $ | — | | | | | | | |
| | | | | |
Real estate mortgage: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
Residential | | 1 | | | 105 | | | 105 | | | 2 | | | 61 | | | 61 | | | | | | | |
| | | | | |
Commercial | | 3 | | | 636 | | | 636 | | | 4 | | | 1,898 | | | 1,898 | | | | | | | |
| | | | | |
| | 7 | | | $ | 1,361 | | | $ | 1,361 | | | 6 | | | $ | 1,959 | | | $ | 1,959 | | | | | | | |
| | | | | |
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There was one loan modification considered a troubled debt restructuring made during the twelve months previous to September 30, 2014 that defaulted during the nine months ended September 30, 2014. The loan that defaulted is a commercial real estate loan with a recorded investment of $122,000 at September 30, 2014. |
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Troubled debt restructurings amounted to $12,558,000 and $11,472,000 as of September 30, 2014 and December 31, 2013. |
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Internal Risk Ratings |
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Management 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 currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a substandard classification. 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 exhibit the same weaknesses found in the substandard loans, however, the weaknesses are more pronounced. Such loans are static and collection in full is improbable. However, these loans are not yet rated as loss because certain events may occur which would salvage the debt. Loans classified loss are considered uncollectible and charge-off is imminent. |
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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 category unless a specific action, such as bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. An external annual loan review of all commercial relationships $800,000 or greater is performed, as well as a sample of smaller transactions. Confirmation of the appropriate risk category is included in the review. Detailed reviews, including plans for resolution, are performed on loans classified as substandard, doubtful, or loss on a quarterly basis. |
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The following table presents the credit quality categories identified above as of September 30, 2014 and December 31, 2013: |
| | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 30-Sep-14 | | | | |
| | Commercial and | | Real Estate Mortgages | | Installment Loans | | | | | | |
(In Thousands) | | Agricultural | | Residential | | Commercial | | Construction | | to Individuals | | Totals | | | | |
Pass | | $ | 116,755 | | | $ | 433,579 | | | $ | 266,751 | | | $ | 21,442 | | | $ | 20,719 | | | $ | 859,246 | | | | | |
| | | |
Special Mention | | 6,240 | | | 1,476 | | | 7,674 | | | 216 | | | — | | | 15,606 | | | | | |
| | | |
Substandard | | 1,284 | | | 419 | | | 14,958 | | | 496 | | | — | | | 17,157 | | | | | |
| | | |
| | $ | 124,279 | | | $ | 435,474 | | | $ | 289,383 | | | $ | 22,154 | | | $ | 20,719 | | | $ | 892,009 | | | | | |
| | | |
|
| | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2013 | | | | |
| | Commercial and | | Real Estate Mortgages | | Installment Loans | | | | | | |
(In Thousands) | | Agricultural | | Residential | | Commercial | | Construction | | to Individuals | | Totals | | | | |
Pass | | $ | 99,256 | | | $ | 398,327 | | | $ | 259,505 | | | $ | 13,608 | | | $ | 14,647 | | | $ | 785,343 | | | | | |
| | | |
Special Mention | | 4,529 | | | 598 | | | 10,181 | | | 214 | | | — | | | 15,522 | | | | | |
| | | |
Substandard | | 1,244 | | | 856 | | | 12,790 | | | 3,460 | | | — | | | 18,350 | | | | | |
| | | |
| | $ | 105,029 | | | $ | 399,781 | | | $ | 282,476 | | | $ | 17,282 | | | $ | 14,647 | | | $ | 819,215 | | | | | |
| | | |
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Allowance for Loan Losses |
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An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated future loss experience, and the amount of non-performing loans. |
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The Bank’s methodology for determining the ALL is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment (previously discussed) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance. The total of the two components represents the Bank’s ALL. |
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Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. Allowances are segmented based on collateral characteristics previously disclosed, and consistent with credit quality monitoring. Loans that are collectively evaluated for impairment are grouped into two classes for evaluation. A general allowance is determined for “Pass” rated credits, while a separate pool allowance is provided for “Criticized” rated credits that are not individually evaluated for impairment. |
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For the general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative factors. A historical charge-off factor is calculated utilizing a twelve quarter moving average. Management has identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are: national and local economic trends and conditions; levels of and trends in delinquency rates and non-accrual loans; trends in volumes and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry and/or geographic standpoint. |
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Loans in the criticized pools, which possess certain qualities or characteristics that may lead to collection and loss issues, are closely monitored by management and subject to additional qualitative factors. Management also monitors industry loss factors by loan segment for applicable adjustments to actual loss experience. |
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Management reviews the loan portfolio on a quarterly basis 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. |
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There has been no allowance for loan losses recorded for loans acquired in the Luzerne Bank transaction with or without specific evidence of deterioration in credit quality as of June 1, 2013 as well as those acquired without specific evidence of deterioration in credit quality as of September 30, 2014. |
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Activity in the allowance is presented for the three and nine months ended September 30, 2014 and 2013: |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2014 |
| | Commercial and | | Real Estate Mortgages | | Installment Loans | | | | |
(In Thousands) | | Agricultural | | Residential | | Commercial | | Construction | | to Individuals | | Unallocated | | Totals |
Beginning Balance | | $ | 694 | | | $ | 3,262 | | | $ | 3,394 | | | $ | 718 | | | $ | 198 | | | $ | 545 | | | $ | 8,811 | |
|
Charge-offs | | — | | | (2 | ) | | — | | | — | | | (36 | ) | | — | | | (38 | ) |
|
Recoveries | | 1 | | | 6 | | | — | | | — | | | 10 | | | — | | | 17 | |
|
Provision | | 133 | | | 157 | | | 283 | | | 67 | | | 64 | | | (244 | ) | | 460 | |
|
Ending Balance | | $ | 828 | | | $ | 3,423 | | | $ | 3,677 | | | $ | 785 | | | $ | 236 | | | $ | 301 | | | $ | 9,250 | |
|
|
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2013 |
| | Commercial and | | Real Estate Mortgages | | Installment Loans | | | | |
(In Thousands) | | Agricultural | | Residential | | Commercial | | Construction | | to Individuals | | Unallocated | | Totals |
Beginning Balance | | $ | 540 | | | $ | 3,045 | | | $ | 3,988 | | | $ | 843 | | | $ | 141 | | | $ | 847 | | | $ | 9,404 | |
|
Charge-offs | | — | | | (105 | ) | | (193 | ) | | (100 | ) | | (29 | ) | | — | | | (427 | ) |
|
Recoveries | | 39 | | | (2 | ) | | 1 | | | 1 | | | 14 | | | — | | | 53 | |
|
Provision | | (59 | ) | | 520 | | | (31 | ) | | 8 | | | 14 | | | 148 | | | 600 | |
|
Ending Balance | | $ | 520 | | | $ | 3,458 | | | $ | 3,765 | | | $ | 752 | | | $ | 140 | | | $ | 995 | | | $ | 9,630 | |
|
|
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2014 |
| | Commercial and | | Real Estate Mortgages | | Installment Loans | | | | |
(In Thousands) | | Agricultural | | Residential | | Commercial | | Construction | | to Individuals | | Unallocated | | Totals |
Beginning Balance | | $ | 474 | | | $ | 3,917 | | | $ | 4,079 | | | $ | 741 | | | $ | 139 | | | $ | 794 | | | $ | 10,144 | |
|
Charge-offs | | — | | | (65 | ) | | (2,038 | ) | | — | | | (104 | ) | | — | | | (2,207 | ) |
|
Recoveries | | 12 | | | 9 | | | — | | | — | | | 47 | | | — | | | 68 | |
|
Provision | | 342 | | | (438 | ) | | 1,636 | | | 44 | | | 154 | | | (493 | ) | | 1,245 | |
|
Ending Balance | | $ | 828 | | | $ | 3,423 | | | $ | 3,677 | | | $ | 785 | | | $ | 236 | | | $ | 301 | | | $ | 9,250 | |
|
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2013 |
| | Commercial and | | Real Estate Mortgages | | Installment Loans | | | | |
(In Thousands) | | Agricultural | | Residential | | Commercial | | Construction | | to Individuals | | Unallocated | | Totals |
Beginning Balance | | $ | 361 | | | $ | 1,954 | | | $ | 3,831 | | | $ | 950 | | | $ | 144 | | | $ | 377 | | | $ | 7,617 | |
|
Charge-offs | | — | | | (239 | ) | | (199 | ) | | (100 | ) | | (79 | ) | | — | | | (617 | ) |
|
Recoveries | | 52 | | | 3 | | | 7 | | | 851 | | | 42 | | | — | | | 955 | |
|
Provision | | 107 | | | 1,740 | | | 126 | | | (949 | ) | | 33 | | | 618 | | | 1,675 | |
|
Ending Balance | | $ | 520 | | | $ | 3,458 | | | $ | 3,765 | | | $ | 752 | | | $ | 140 | | | $ | 995 | | | $ | 9,630 | |
|
|
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The Company grants commercial, industrial, residential, and installment loans to customers throughout north-east and central Pennsylvania. Although the Company has a diversified loan portfolio at September 30, 2014, a substantial portion of its debtors’ ability to honor their contracts is dependent on the economic conditions within this region. |
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The Company has a concentration of loans at September 30, 2014 and 2013 as follows: |
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| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, | | | | | | | | | | | | | | | | | | | | | | |
| | 2014 | | 2013 | | | | | | | | | | | | | | | | | | | | | | |
Owners of residential rental properties | | 15.98 | % | | 15.73 | % | | | | | | | | | | | | | | | | | | | | | | |
Owners of commercial rental properties | | 14.9 | % | | 13.2 | % | | | | | | | | | | | | | | | | | | | | | | |
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The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of September 30, 2014 and December 31, 2013: |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 30-Sep-14 |
| | Commercial and | | Real Estate Mortgages | | Installment Loans | | | | |
(In Thousands) | | Agricultural | | Residential | | Commercial | | Construction | | to Individuals | | Unallocated | | Totals |
Allowance for Loan Losses: | | | | | | | | | | | | | | | | | | | | | |
|
Ending allowance balance attributable to loans: | | | | | | | | | | | | | | | | | | | | | |
|
Individually evaluated for impairment | | $ | 150 | | | $ | 80 | | | $ | 1,079 | | | $ | 171 | | | $ | — | | | $ | — | | | $ | 1,480 | |
|
Collectively evaluated for impairment | | 678 | | | 3,343 | | | 2,598 | | | 614 | | | 236 | | | 301 | | | 7,770 | |
|
Total ending allowance balance | | $ | 828 | | | $ | 3,423 | | | $ | 3,677 | | | $ | 785 | | | $ | 236 | | | $ | 301 | | | $ | 9,250 | |
|
| | | | | | | | | | | | | | |
Loans: | | | | | | | | | | | | | | | | | | | | | |
|
Individually evaluated for impairment | | $ | 1,136 | | | $ | 1,005 | | | $ | 10,630 | | | $ | 1,315 | | | $ | — | | | | | | $ | 14,086 | |
|
Loans acquired with deteriorated credit quality | | — | | | 349 | | | 306 | | | — | | | — | | | | | | 655 | |
|
Collectively evaluated for impairment | | 123,143 | | | 434,120 | | | 278,447 | | | 20,839 | | | 20,719 | | | | | | 877,268 | |
|
Total ending loans balance | | $ | 124,279 | | | $ | 435,474 | | | $ | 289,383 | | | $ | 22,154 | | | $ | 20,719 | | | | | | $ | 892,009 | |
|
|
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2013 |
| | Commercial and | | Real Estate Mortgages | | Installment Loans | | | | |
(In Thousands) | | Agricultural | | Residential | | Commercial | | Construction | | to Individuals | | Unallocated | | Totals |
Allowance for Loan Losses: | | | | | | | | | | | | | | | | | | | | | |
|
Ending allowance balance attributable to loans: | | | | | | | | | | | | | | | | | | | | | |
|
Individually evaluated for impairment | | $ | 224 | | | $ | 65 | | | $ | 2,153 | | | $ | 113 | | | $ | — | | | $ | — | | | $ | 2,555 | |
|
Collectively evaluated for impairment | | 250 | | | 3,852 | | | 1,926 | | | 628 | | | 139 | | | 794 | | | 7,589 | |
|
Total ending allowance balance | | $ | 474 | | | $ | 3,917 | | | $ | 4,079 | | | $ | 741 | | | $ | 139 | | | $ | 794 | | | $ | 10,144 | |
|
| | | | | | | | | | | | | | |
Loans: | | | | | | | | | | | | | | | | | | | | | |
|
Individually evaluated for impairment | | $ | 532 | | | $ | 881 | | | $ | 7,707 | | | $ | 1,040 | | | $ | — | | | | | | $ | 10,160 | |
|
Loans acquired with deteriorated credit quality | | — | | | 354 | | | 514 | | | — | | | | | | | 868 | |
|
Collectively evaluated for impairment | | 104,497 | | | 398,546 | | | 274,255 | | | 16,242 | | | 14,647 | | | | | | 808,187 | |
|
Total ending loans balance | | $ | 105,029 | | | $ | 399,781 | | | $ | 282,476 | | | $ | 17,282 | | | $ | 14,647 | | | | | | $ | 819,215 | |
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