Loans | Loans Management segments the Banks' 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, financial, and agricultural, real estate, and installment loans to individuals. Real estate loans are further segmented into three categories: residential, commercial, and construction. The following table presents the related aging categories of loans, by segment, as of June 30, 2015 and December 31, 2014 : June 30, 2015 Past Due Past Due 90 30 To 89 Days Or More Non- (In Thousands) Current Days & Still Accruing Accrual Total Commercial, financial, and agricultural $ 138,551 $ 945 $ — $ 553 $ 140,049 Real estate mortgage: Residential 490,222 2,994 52 852 494,120 Commercial 284,145 2,085 783 6,499 293,512 Construction 24,321 — — 895 25,216 Installment loans to individuals 25,650 468 55 — 26,173 962,889 $ 6,492 $ 890 $ 8,799 979,070 Net deferred loan fees and discounts (1,192 ) (1,192 ) Allowance for loan losses (11,265 ) (11,265 ) Loans, net $ 950,432 $ 966,613 December 31, 2014 Past Due Past Due 90 30 To 89 Days Or More Non- (In Thousands) Current Days & Still Accruing Accrual Total Commercial, financial, and agricultural $ 122,624 $ 773 $ — $ 759 $ 124,156 Real estate mortgage: Residential 450,503 6,078 332 847 457,760 Commercial 279,731 1,819 54 9,744 291,348 Construction 21,485 — — 511 21,996 Installment loans to individuals 21,125 383 1 — 21,509 895,468 $ 9,053 $ 387 $ 11,861 916,769 Net deferred loan fees and discounts (1,190 ) (1,190 ) Allowance for loan losses (10,579 ) (10,579 ) Loans, net $ 883,699 $ 905,000 Purchased loans acquired are recorded at fair value on their purchase date without a carryover of the related allowance for loan losses. 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 June 30, 2015 . 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 $447,000 at June 30, 2015 . 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. 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. The amortizable yield for purchased credit-impaired loans was fully amortized during 2014. Changes in the amortizable yield for purchased credit-impaired loans were as follows for the six months ended June 30, 2014 : (In Thousands) June 30, 2014 Balance at beginning of period or at acquisition $ 35 Accretion (12 ) Balance at end of period $ 23 The following table presents additional information regarding loans acquired in the Luzerne Bank transaction with specific evidence of deterioration in credit quality: (In Thousands) June 30, 2015 December 31, 2014 Outstanding balance $ 447 $ 449 Carrying amount 347 349 There were no material increases or decreases in the expected cash flows of these loans between June 1, 2013 (the “acquisition date”) and June 30, 2015 . There has been no allowance for loan losses recorded for acquired loans with specific evidence of deterioration in credit quality as of June 30, 2015 . The following table presents interest income the Banks 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 six months ended June 30, 2015 and 2014 : Three Months Ended June 30, 2015 2014 (In Thousands) Interest Income That Would Have Been Recorded Based on Original Term and Rate Interest Income Recorded on a Cash Basis Interest Income That Would Have Been Recorded Based on Original Term and Rate Interest Income Recorded on a Cash Basis Commercial, financial, and agricultural $ 2 $ — $ 15 $ 1 Real estate mortgage: Residential 16 10 5 5 Commercial 66 10 147 53 Construction 15 29 24 — $ 99 $ 49 $ 191 $ 59 Six Months Ended June 30, 2015 2014 (In Thousands) Interest Income That Would Have Been Recorded Based on Original Term and Rate Interest Income Recorded on a Cash Basis Interest Income That Would Have Been Recorded Based on Original Term and Rate Interest Income Recorded on a Cash Basis Commercial, financial, and agricultural $ 14 $ 8 $ 17 $ 1 Real estate mortgage: Residential 21 19 7 9 Commercial 171 35 275 86 Construction 30 36 35 — $ 236 $ 98 $ 334 $ 96 Impaired Loans Impaired loans are loans for which it is probable the Banks will not be able to collect all amounts due according to the contractual terms of the loan agreement. The Banks evaluate 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 Banks may choose to place a loan on non-accrual status due to payment delinquency or uncertain collectability, while not classifying the loan as impaired. 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. 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. 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 Banks' policy on non-accrual loans. The following table presents the recorded investment, unpaid principal balance, and related allowance of impaired loans by segment as of June 30, 2015 and December 31, 2014 : June 30, 2015 Recorded Unpaid Principal Related (In Thousands) Investment Balance Allowance With no related allowance recorded: Commercial, financial, and agricultural $ 506 $ 506 $ — Real estate mortgage: Residential 792 792 — Commercial 4,124 4,124 — Construction 610 610 — 6,032 6,032 — With an allowance recorded: Commercial, financial, and agricultural 435 435 48 Real estate mortgage: Residential 1,143 1,243 168 Commercial 9,787 9,837 1,397 Construction 294 294 54 11,659 11,809 1,667 Total: Commercial, financial, and agricultural 941 941 48 Real estate mortgage: Residential 1,935 2,035 168 Commercial 13,911 13,961 1,397 Construction 904 904 54 $ 17,691 $ 17,841 $ 1,667 December 31, 2014 Recorded Unpaid Principal Related (In Thousands) Investment Balance Allowance With no related allowance recorded: Commercial, financial, and agricultural $ 439 $ 439 $ — Real estate mortgage: Residential 139 139 — Commercial 3,228 3,228 — Construction 716 716 — 4,522 4,522 — With an allowance recorded: Commercial, financial, and agricultural 673 673 298 Real estate mortgage: Residential 1,327 1,449 147 Commercial 10,745 10,889 1,581 Construction 309 309 67 13,054 13,320 2,093 Total: Commercial, financial, and agricultural 1,112 1,112 298 Real estate mortgage: Residential 1,466 1,588 147 Commercial 13,973 14,117 1,581 Construction 1,025 1,025 67 $ 17,576 $ 17,842 $ 2,093 The following table presents the average recorded investment in impaired loans and related interest income recognized for the three and six months ended for June 30, 2015 and 2014 : Three Months Ended June 30, 2015 2014 (In Thousands) Average Investment in Impaired Loans Interest Income Recognized on an Accrual Basis on Impaired Loans Interest Income Recognized on a Cash Basis on Impaired Loans Average Investment in Impaired Loans Interest Income Recognized on an Accrual Basis on Impaired Loans Interest Income Recognized on a Cash Basis on Impaired Loans Commercial, financial, and agricultural $ 1,064 $ 5 $ 3 $ 517 $ 7 $ — Real estate mortgage: Residential 1,922 16 12 1,117 3 3 Commercial 14,271 77 11 10,901 19 2 Construction 910 — 29 1,025 — — $ 18,167 $ 98 $ 55 $ 13,560 $ 29 $ 5 Six Months Ended June 30, 2015 2014 (In Thousands) Average Investment in Impaired Loans Interest Income Recognized on an Accrual Basis on Impaired Loans Interest Income Recognized on a Cash Basis on Impaired Loans Average Investment in Impaired Loans Interest Income Recognized on an Accrual Basis on Impaired Loans Interest Income Recognized on a Cash Basis on Impaired Loans Commercial, financial, and agricultural $ 1,080 $ 10 $ 10 $ 522 $ 13 $ — Real estate mortgage: Residential 1,741 28 17 1,142 14 7 Commercial 14,486 148 36 10,008 61 14 Construction 780 — 36 1,030 2 8 $ 18,087 $ 186 $ 99 $ 12,702 $ 90 $ 29 Currently, there is $189,000 committed to be advanced in connection with impaired loans. Troubled Debt Restructurings 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 . There were no loan modifications considered TDRs completed during the three and six months ended June 30, 2014. Loan modifications that are considered TDRs completed during the three and six months ended June 30, 2015 were as follows: Three Months Ended June 30, 2015 (In Thousands, Except Number of Contracts) Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Real estate mortgage: Residential 1 88 88 Commercial 1 247 247 Construction 1 398 398 3 $ 733 $ 733 Six Months Ended June 30, 2015 (In Thousands, Except Number of Contracts) Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Commercial, financial, and agricultural 2 $ 97 $ 97 Real estate mortgage: Residential 6 322 322 Commercial 2 517 517 Construction 1 398 398 11 $ 1,334 $ 1,334 There were three loan modifications considered to be TDRs made during the twelve months previous to June 30, 2015 that defaulted during the six months ended June 30, 2015 . The defaulted loan types and recorded investments at June 30, 2015 are as follows: one commercial loan with a recorded investment of $46,000 , one commercial real estate loan with a recorded investment of $247,000 , and one residential real estate loan with a recorded investment of $87,000 . There were two loan modifications considered TDRs made during the twelve months previous to June 30, 2014 that defaulted during the six months ended June 30, 2014 . The loans that defaulted were commercial real estate loans that were in litigation with a recorded investment of $1,634,000 at June 30, 2014 . Troubled debt restructurings amounted to $9,666,000 and $11,810,000 as of June 30, 2015 and December 31, 2014 . The amount of foreclosed residential real estate held at June 30, 2015 and December 31, 2014 , totaled $70,000 and $324,000 , respectively. Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at June 30, 2015 and December 31, 2014 , totaled $261,000 and $382,000 , respectively. Internal Risk Ratings 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 evaluated for substandard classification. 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. To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Banks have 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 large commercial relationships 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. The following table presents the credit quality categories identified above as of June 30, 2015 and December 31, 2014 : June 30, 2015 Commercial, Financial, and Agricultural Real Estate Mortgages Installment Loans to Individuals (In Thousands) Residential Commercial Construction Totals Pass $ 137,169 $ 491,003 $ 264,352 $ 24,206 $ 26,173 $ 942,903 Special Mention 1,014 2,008 12,928 400 — 16,350 Substandard 1,866 1,109 16,232 610 — 19,817 $ 140,049 $ 494,120 $ 293,512 $ 25,216 $ 26,173 $ 979,070 December 31, 2014 Commercial, Financial, and Agricultural Real Estate Mortgages Installment Loans to Individuals (In Thousands) Residential Commercial Construction Totals Pass $ 118,210 $ 454,885 $ 256,444 $ 20,927 $ 21,509 $ 871,975 Special Mention 3,186 2,384 16,262 445 — 22,277 Substandard 2,760 491 18,642 624 — 22,517 $ 124,156 $ 457,760 $ 291,348 $ 21,996 $ 21,509 $ 916,769 Allowance for Loan Losses 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. The Banks' 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 Banks' ALL. 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. 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. 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. 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. Activity in the allowance is presented for the three and six months ended June 30, 2015 and 2014 : Three Months Ended June 30, 2015 Commercial, Financial, and Agricultural Real Estate Mortgages Installment Loans to Individuals (In Thousands) Residential Commercial Construction Unallocated Totals Beginning Balance $ 1,478 $ 4,227 $ 3,873 $ 752 $ 193 $ 303 $ 10,826 Charge-offs (263 ) — — (46 ) (58 ) — (367 ) Recoveries 2 13 169 5 17 — 206 Provision 69 94 (173 ) (163 ) 85 688 600 Ending Balance $ 1,286 $ 4,334 $ 3,869 $ 548 $ 237 $ 991 $ 11,265 Three Months Ended June 30, 2014 Commercial, Financial, and Agricultural Real Estate Mortgages Installment Loans to Individuals (In Thousands) Residential Commercial Construction Unallocated Totals Beginning Balance $ 537 $ 3,062 $ 3,324 $ 795 $ 161 $ 641 $ 8,520 Charge-offs — (7 ) — — (28 ) — (35 ) Recoveries 8 1 — — 17 — 26 Provision 149 206 70 (77 ) 48 (96 ) 300 Ending Balance $ 694 $ 3,262 $ 3,394 $ 718 $ 198 $ 545 $ 8,811 Six Months Ended June 30, 2015 Commercial, Financial, and Agricultural Real Estate Mortgages Installment Loans to Individuals (In Thousands) Residential Commercial Construction Unallocated Totals Beginning Balance $ 1,124 $ 3,755 $ 4,205 $ 786 $ 245 $ 464 $ 10,579 Charge-offs (283 ) (1 ) (449 ) (46 ) (114 ) — (893 ) Recoveries 28 37 169 16 29 — 279 Provision 417 543 (56 ) (208 ) 77 527 1,300 Ending Balance $ 1,286 $ 4,334 $ 3,869 $ 548 $ 237 $ 991 $ 11,265 Six Months Ended June 30, 2014 Commercial, Financial, and Agricultural Real Estate Mortgages Installment Loans to Individuals (In Thousands) Residential Commercial Construction Unallocated Totals Beginning Balance $ 474 $ 3,917 $ 4,079 $ 741 $ 139 $ 794 $ 10,144 Charge-offs — (63 ) (2,038 ) — (68 ) — (2,169 ) Recoveries 11 3 — — 37 — 51 Provision 209 (595 ) 1,353 (23 ) 90 (249 ) 785 Ending Balance $ 694 $ 3,262 $ 3,394 $ 718 $ 198 $ 545 $ 8,811 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, a substantial portion of its debtors’ ability to honor their contracts is dependent on the economic conditions within this region. The Company has a concentration of the following to gross loans at June 30, 2015 and 2014 : June 30, 2015 2014 Owners of residential rental properties 16.32 % 15.69 % Owners of commercial rental properties 14.18 % 14.12 % 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 June 30, 2015 and December 31, 2014 : June 30, 2015 Commercial, Financial, and Agricultural Real Estate Mortgages Installment Loans to Individuals Unallocated (In Thousands) Residential Commercial Construction Totals Allowance for Loan Losses: Ending allowance balance attributable to loans: Individually evaluated for impairment $ 48 $ 168 $ 1,397 $ 54 $ — $ — $ 1,667 Collectively evaluated for impairment 1,238 4,166 2,472 494 237 991 9,598 Total ending allowance balance $ 1,286 $ 4,334 $ 3,869 $ 548 $ 237 $ 991 $ 11,265 Loans: Individually evaluated for impairment $ 941 $ 1,588 $ 13,911 $ 904 $ — $ 17,344 Loans acquired with deteriorated credit quality — 347 — — — 347 Collectively evaluated for impairment 139,108 492,185 279,601 24,312 26,173 961,379 Total ending loans balance $ 140,049 $ 494,120 $ 293,512 $ 25,216 $ 26,173 $ 979,070 December 31, 2014 Commercial, Financial, and Agricultural Real Estate Mortgages Installment Loans to Individuals Unallocated (In Thousands) Residential Commercial Construction Totals Allowance for Loan Losses: Ending allowance balance attributable to loans: Individually evaluated for impairment $ 298 $ 147 $ 1,581 $ 67 $ — $ — $ 2,093 Collectively evaluated for impairment 826 3,608 2,624 719 245 464 8,486 Total ending allowance balance $ 1,124 $ 3,755 $ 4,205 $ 786 $ 245 $ 464 $ 10,579 Loans: Individually evaluated for impairment $ 1,112 $ 1,117 $ 13,973 $ 1,025 $ — $ 17,227 Loans acquired with deteriorated credit quality — 349 — — — 349 Collectively evaluated for impairment 123,044 456,294 277,375 20,971 21,509 899,193 Total ending loans balance $ 124,156 $ 457,760 $ 291,348 $ 21,996 $ 21,509 $ 916,769 |