| Loans | Note 6 – Loans The Company grants loans primarily to customers throughout north central, central and south central Pennsylvania and the southern tier of New York. Although the Company had a diversified loan portfolio at March 31, 2018 and December 31, 2017, a substantial portion of its debtors' ability to honor their contracts is dependent on the economic conditions within these regions. The following table summarizes the primary segments of the loan portfolio and how those segments are analyzed within the allowance for loan losses as of March 31, 2018 and December 31, 2017 (in thousands): March 31, 2018 Total Loans Individually evaluated for impairment Loans acquired with deteriorated credit quality Collectively evaluated for impairment Real estate loans: Residential $ 215,349 $ 1,234 $ 31 $ 214,084 Commercial 320,381 13,949 1,422 305,010 Agricultural 248,710 3,818 689 244,203 Construction 22,239 - - 22,239 Consumer 9,672 - - 9,672 Other commercial loans 74,930 4,139 442 70,349 Other agricultural loans 40,396 1,380 - 39,016 State and political subdivision loans 100,061 - - 100,061 Total 1,031,738 24,520 2,584 1,004,634 Allowance for loan losses 11,587 408 - 11,179 Net loans $ 1,020,151 $ 24,112 $ 2,584 $ 993,455 December 31, 2017 Total Loans Individually evaluated for impairment Loans acquired with deteriorated credit quality Collectively evaluated for impairment Real estate loans: Residential $ 214,479 $ 1,065 $ 33 $ 213,381 Commercial 308,084 13,864 1,460 292,760 Agricultural 239,957 3,901 702 235,354 Construction 13,502 - - 13,502 Consumer 9,944 8 - 9,936 Other commercial loans 72,013 4,197 443 67,373 Other agricultural loans 37,809 1,363 - 36,446 State and political subdivision loans 104,737 - - 104,737 Total 1,000,525 24,398 2,638 973,489 Allowance for loan losses 11,190 410 - 10,780 Net loans $ 989,335 $ 23,988 $ 2,638 $ 962,709 Purchased loans acquired in The First National Bank of Fredericksburg (FNB) acquisition and the State College branch acquisition, were recorded at fair value on their purchase date without a carryover of the related allowance for loan losses. Upon acquisition, the Company evaluated whether an acquired loan was within the scope of ASC 310-30, Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality. Purchased credit-impaired ("PCI") 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. Based upon management's review, there were no material increases or decreases in the expected cash flows of these loans between the acquisition date and March 31, 2018. The fair value of PCI loans, on the acquisition date, was determined, primarily based on the fair value of the loans' collateral. The carrying value of PCI loans was $2,584,000 and $2,638,000 at March 31, 2018 and December 31, 2017, respectively. The carrying value of the PCI loans was determined by projected discounted contractual cash flows. Changes in the accretable yield for PCI loans were as follows for the three months ended March 31, 2018 and 2017, respectively (in thousands): Three months ended March 31, 2018 2017 Balance at beginning of period $ 106 $ 389 Accretion (24 ) (114 ) Balance at end of period $ 82 $ 275 The following table presents additional information regarding loans acquired with specific evidence of deterioration in credit quality under ASC 310-30 (in thousands): March 31, 2018 December 31, 2017 Outstanding balance $ 5,284 $ 5,295 Carrying amount 2,584 2,638 The segments of the Company's loan portfolio are disaggregated into classes to a level that allows management to monitor risk and performance. Residential real estate mortgages consist primarily of 15 to 30 year first mortgages on residential real estate, while residential real estate home equity loans are consumer purpose installment loans or lines of credit with terms of 15 years or less secured by a mortgage which is often a second lien on residential real estate. Commercial real estate loans are business purpose loans secured by a mortgage on commercial real estate. Agricultural real estate loans are loans secured by a mortgage on real estate used in agriculture production. Construction real estate loans are loans secured by residential, commercial or agricultural real estate used during the construction phase of residential, commercial or agricultural projects. Consumer loans are typically unsecured or primarily secured by assets other than real estate and overdraft lines of credit are typically secured by customer deposit accounts. Other commercial loans are loans for commercial purposes primarily secured by non-real estate collateral. Other agricultural loans are loans for agricultural purposes primarily secured by non-real estate collateral. State and political subdivision loans are loans to state and local municipalities for capital and operating expenses or tax free loans used to finance commercial development. Management considers other commercial loans, other agricultural loans, state and political subdivision loans, commercial real estate loans and agricultural real estate loans which are 90 days or more past due to be impaired. Management will also consider a loan impaired based on other factors it becomes aware of, including the customer's results of operations and cash flows or if the loan is modified in a troubled debt restructuring. In addition, c ertain residential mortgages, home equity and consumer loans that are cross collateralized with commercial relationships that are determined to be impaired may also be classified as impaired. The following table includes the recorded investment and unpaid principal balances for impaired financing receivables by class, excluding PCI loans, with the associated allowance amount, if applicable (in thousands) Recorded Recorded Unpaid Investment Investment Total Principal With No With Recorded Related March 31, 2018 Balance Allowance Allowance Investment Allowance Real estate loans: Mortgages $ 1,227 $ 268 $ 870 $ 1,138 $ 22 Home Equity 112 39 57 96 16 Commercial 16,625 12,589 1,360 13,949 170 Agricultural 3,824 3,682 136 3,818 5 Construction - - - - - Consumer - - - - - Other commercial loans 4,655 3,721 418 4,139 184 Other agricultural loans 1,419 1,249 131 1,380 11 State and political subdivision loans - - - - - Total $ 27,862 $ 21,548 $ 2,972 $ 24,520 $ 408 December 31, 2017 Real estate loans: Mortgages $ 1,055 $ 273 $ 700 $ 973 $ 47 Home Equity 92 40 52 92 9 Commercial 16,363 13,154 710 13,864 94 Agricultural 5,231 3,283 618 3,901 3 Construction - - - - - Consumer 10 2 6 8 - Other commercial loans 4,739 3,766 431 4,197 231 Other agricultural loans 1,397 1,238 125 1,363 26 State and political subdivision loans - - - - - Total $ 28,887 $ 21,756 $ 2,642 $ 24,398 $ 410 The following tables includes the average balance of impaired financing receivables by class and the income recognized on these receivables for the three month periods ended March 31, 2018 and 2017(in thousands): For the Three Months Ended March 31, 2018 March 31, 2017 Interest Interest Average Interest Income Average Interest Income Recorded Income Recognized Recorded Income Recognized Investment Recognized Cash Basis Investment Recognized Cash Basis Real estate loans: Mortgages $ 1,023 $ 4 $ - $ 894 $ 3 $ - Home Equity 107 1 - 56 1 - Commercial 13,795 122 5 5,793 24 3 Agricultural 4,086 51 - 3,382 31 - Construction - - - - - - Consumer 4 - - 1 - - Other commercial loans 4,156 26 - 5,597 40 10 Other agricultural loans 1,370 10 - 1,627 23 - State and political subdivision loans - - - - - - Total $ 24,541 $ 214 $ 5 $ 17,350 $ 122 $ 13 Credit Quality Information For commercial real estate, agricultural real estate, construction, other commercial, other agricultural and state and political subdivision loans, management uses a nine grade internal risk rating system to monitor credit quality. The first five categories are considered not criticized and are aggregated as "Pass" rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The definitions of each rating are defined below: · Pass (Grades 1-5) – These loans are to customers with credit quality ranging from an acceptable to very high quality and are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral. · Special Mention (Grade 6) – This loan grade is in accordance with regulatory guidance and includes loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected. · Substandard (Grade 7) – This loan grade is in accordance with regulatory guidance and includes loans that have a well-defined weakness based on objective evidence and be characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. · Doubtful (Grade 8) – This loan grade is in accordance with regulatory guidance and includes loans that have all the weaknesses inherent in a substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances. · Loss (Grade 9) – This loan grade is in accordance with regulatory guidance and includes loans that are considered uncollectible, or of such value that continuance as an asset is not warranted. To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay the loan as agreed, the Company's loan rating process includes several layers of internal and external oversight. The Company's loan officers are responsible for the timely and accurate risk rating of the loans in each of their portfolios at origination and on an ongoing basis under the supervision of management. All commercial and agricultural loans are reviewed annually to ensure the appropriateness of the loan grade. In addition, the Company engages an external consultant on at least an annual basis to 1) review a minimum of 50% of the dollar volume of the commercial loan portfolio on an annual basis, 2) review new loans originated for over $1.0 million in the last year, 3) review a majority of borrowers with commitments greater than or equal to $1.0 million, 4) review selected loan relationships over $750,000 which are over 30 days past due or classified Special Mention, Substandard, Doubtful, or Loss, and 5) such other loans which management or the consultant deems appropriate. The following tables represent credit exposures by internally assigned grades as of March 31, 2018 and December 31, 2017 (in thousands) March 31, 2018 Pass Special Mention Substandard Doubtful Loss Ending Balance Real estate loans: Commercial $ 294,894 $ 15,387 $ 9,981 $ 119 $ - $ 320,381 Agricultural 231,711 11,766 5,233 - - 248,710 Construction 22,108 - 131 - - 22,239 Other commercial loans 70,850 862 3,095 123 - 74,930 Other agricultural loans 38,697 341 1,358 - - 40,396 State and political subdivision loans 89,480 - 10,581 - - 100,061 Total $ 747,740 $ 28,356 $ 30,379 $ 242 $ - $ 806,717 December 31, 2017 Pass Special Mention Substandard Doubtful Loss Ending Balance Real estate loans: Commercial $ 281,742 $ 15,029 $ 11,271 $ 42 $ - $ 308,084 Agricultural 222,198 11,538 6,221 - - 239,957 Construction 13,364 - 138 - - 13,502 Other commercial loans 67,706 615 3,567 125 - 72,013 Other agricultural loans 34,914 1,325 1,570 - - 37,809 State and political subdivision loans 94,125 - 10,612 - - 104,737 Total $ 714,049 $ 28,507 $ 33,379 $ 167 $ - $ 776,102 For residential real estate mortgages, home equity and consumer loans, credit quality is monitored based on whether the loan is performing or non-performing, which is typically based on the aging status of the loan and payment activity, unless a specific action, such as bankruptcy, repossession, death or significant delay in payment occurs to raise awareness of a possible credit event. Non-performing loans include those loans that are considered nonaccrual, described in more detail below, and all loans past due 90 or more days and still accruing. The following table presents the recorded investment in those loan classes based on payment activity as of March 31, 2018 and December 31, 2017 ( in thousands) March 31, 2018 Performing Non-performing PCI Total Real estate loans: Mortgages $ 154,274 $ 1,501 $ 31 $ 155,806 Home Equity 59,444 99 - 59,543 Consumer 9,635 37 - 9,672 Total $ 223,353 $ 1,637 $ 31 $ 225,021 December 31, 2017 Performing Non-performing PCI Total Real estate loans: Mortgages $ 152,820 $ 1,492 $ 33 $ 154,345 Home Equity 60,022 112 - 60,134 Consumer 9,895 49 - 9,944 Total $ 222,737 $ 1,653 $ 33 $ 224,423 Aging Analysis of Past Due Financing Receivables Management 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 table includes an aging analysis of the recorded investment of past due financing receivables as of March 31, 2018 and December 31, 2017 (in thousands): 90 Days or 30-59 Days 60-89 Days 90 Days Total Past Total Financing Greater and March 31, 2018 Past Due Past Due Or Greater Due Current PCI Receivables Accruing Real estate loans: Mortgages $ 425 $ 281 $ 911 $ 1,617 $ 154,158 $ 31 $ 155,806 $ 44 Home Equity 186 54 74 314 59,229 - 59,543 - Commercial 4,276 241 4,647 9,164 309,795 1,422 320,381 - Agricultural 112 - 159 271 247,750 689 248,710 - Construction - - 127 127 22,112 - 22,239 - Consumer 104 44 25 173 9,499 - 9,672 7 Other commercial loans 584 47 2,597 3,228 71,260 442 74,930 378 Other agricultural loans 91 36 - 127 40,269 - 40,396 - State and political subdivision loans - - - - 100,061 - 100,061 - Total $ 5,778 $ 703 $ 8,540 $ 15,021 $ 1,014,133 $ 2,584 $ 1,031,738 $ 429 Loans considered non-accrual $ 375 $ 446 $ 8,111 $ 8,932 $ 2,501 $ - $ 11,433 Loans still accruing 5,403 257 429 6,089 1,011,632 2,584 1,020,305 Total $ 5,778 $ 703 $ 8,540 $ 15,021 $ 1,014,133 $ 2,584 $ 1,031,738 90 Days or 30-59 Days 60-89 Days 90 Days Total Past Total Financing Greater and December 31, 2017 Past Due Past Due Or Greater Due Current PCI Receivables Accruing Real estate loans: Mortgages $ 996 $ 362 $ 810 $ 2,168 $ 152,144 $ 33 $ 154,345 $ 218 Home Equity 277 86 78 441 59,693 - 60,134 - Commercial 1,353 1,010 3,865 6,228 300,396 1,460 308,084 162 Agricultural 242 - 205 447 238,808 702 239,957 30 Construction - - 133 133 13,369 - 13,502 - Consumer 53 33 49 135 9,809 - 9,944 7 Other commercial loans 132 - 2,372 2,504 69,066 443 72,013 32 Other agricultural loans - 42 106 148 37,661 - 37,809 106 State and political subdivision loans - - - - 104,737 - 104,737 - Total $ 3,053 $ 1,533 $ 7,618 $ 12,204 $ 985,683 $ 2,638 $ 1,000,525 $ 555 Loans considered non-accrual $ 816 $ 281 $ 7,063 $ 8,160 $ 2,011 $ - $ 10,171 Loans still accruing 2,237 1,252 555 4,044 983,672 2,638 990,354 Total $ 3,053 $ 1,533 $ 7,618 $ 12,204 $ 985,683 $ 2,638 $ 1,000,525 Nonaccrual Loans Loans are considered for non-accrual status upon reaching 90 days delinquency, although the Company may be receiving partial payments of interest and partial repayments of principal on such loans or if full payment of principal and interest is not expected. Additionally, if management is made aware of other information including bankruptcy, repossession, death, or legal proceedings, the loan may be placed on non-accrual status. If a loan is 90 days or more past due and is well secured and in the process of collection, it may still be considered accruing. The following table reflects the financing receivables, excluding PCI loans, on non-accrual status as of March 31, 2018 and December 31, 2017, respectively. The balances are presented by class of financing receivable (in thousands): March 31, 2018 December 31, 2017 Real estate loans: Mortgages $ 1,458 $ 1,274 Home Equity 98 112 Commercial 6,372 5,192 Agricultural 194 175 Construction 127 133 Consumer 30 42 Other commercial loans 2,494 2,637 Other agricultural loans 660 606 State and political subdivision - - $ 11,433 $ 10,171 Troubled Debt Restructurings In situations where, for economic or legal reasons related to a borrower's financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a Troubled Debt Restructuring (TDR). Management strives to identify borrowers in financial difficulty early and work with them to structure more affordable terms before their loan reaches nonaccrual status. These restructured terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of interest or principal, or both, management measures any impairment on the restructuring by calculating the present value of the revised loan terms and comparing this balance to the Company's investment in the loan prior to the restructuring. As these loans are individually evaluated, they are excluded from pooled portfolios when calculating the allowance for loan and lease losses and a separate allocation within the allowance for loan and lease losses is provided. Management continually evaluates loans that are considered TDRs, including payment history under the modified loan terms, the borrower's ability to continue to repay the loan based on continued evaluation of their operating results and cash flows from operations. Based on this evaluation management would no longer consider a loan to be a TDR when the relevant facts support such a conclusion. As of March 31, 2018 and December 31, 2017, included within the allowance for loan losses are reserves of $37,000 and $41,000 respectively, that are associated with loans modified as TDRs. Loan modifications that are considered TDRs completed during the three months ended March 31, 2018 and 2017 were as follows (dollars in thousands): For the Three Months Ended March 31, 2018 Number of contracts Pre-modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Interest Modification Term Modification Interest Modification Term Modification Interest Modification Term Modification Real estate loans: Mortgages - 1 $ - $ 7 $ - $ 7 Total - 1 $ - $ 7 $ - $ 7 For the Three Months Ended March 31, 2017 Number of contracts Pre-modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Interest Modification Term Modification Interest Modification Term Modification Interest Modification Term Modification Real estate loans: Commercial - 2 $ - $ 703 $ - $ 703 Total - 2 $ - $ 703 $ - $ 703 Recidivism, or the borrower defaulting on its obligation pursuant to a modified loan, results in the loan once again becoming a non-accrual loan. Recidivism on modified loans occurs at a notably higher rate than do defaults on new origination loans, so modified loans present a higher risk of loss than do new origination loans. There were no loans that were modified as TDRs during each 12-month period prior to the current reporting periods, which began January 1, 2018 and 2017 (3 month periods), respectively, that subsequently defaulted during these reporting periods. Allowance for Loan Losses The following table segregates the allowance for loan losses (ALLL) into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of March 31, 2018 and December 31, 2017, respectively (in thousands): March 31, 2018 December 31, 2017 Individually evaluated for impairment Collectively evaluated for impairment Total Individually evaluated for impairment Collectively evaluated for impairment Total Real estate loans: Residential $ 38 $ 1,039 $ 1,077 $ 56 $ 993 $ 1,049 Commercial 170 3,836 4,006 94 3,773 3,867 Agricultural 5 3,335 3,340 3 3,140 3,143 Construction - 39 39 - 23 23 Consumer - 123 123 - 124 124 Other commercial loans 184 1,089 1,273 231 1,041 1,272 Other agricultural loans 11 521 532 26 466 492 State and political subdivision loans - 789 789 - 816 816 Unallocated - 408 408 - 404 404 Total $ 408 $ 11,179 $ 11,587 $ 410 $ 10,780 $ 11,190 The following tables roll forward the balance of the ALLL by portfolio segment for the three month periods ended March 31, 2018 and 2017, respectively (in thousands): For the three months ended March 31, 2018 Balance at December 31, 2017 Charge-offs Recoveries Provision Balance at March 31, 2018 Real estate loans: Residential $ 1,049 $ (15 ) $ - $ 43 $ 1,077 Commercial 3,867 - - 139 4,006 Agricultural 3,143 - - 197 3,340 Construction 23 - - 16 39 Consumer 124 (13 ) 10 2 123 Other commercial loans 1,272 (45 ) 3 43 1,273 Other agricultural loans 492 (43 ) - 83 532 State and political subdivision loans 816 - - (27 ) 789 Unallocated 404 - - 4 408 Total $ 11,190 $ (116 ) $ 13 $ 500 $ 11,587 For the three months ended March 31, 2017 Balance at December 31, 2016 Charge-offs Recoveries Provision Balance at March 31, 2017 Real estate loans: Residential $ 1,064 $ (45 ) $ - $ 23 $ 1,042 Commercial 3,589 (41 ) 4 113 3,665 Agricultural 1,494 458 1,952 Construction 47 - - (1 ) 46 Consumer 122 (28 ) 10 19 123 Other commercial loans 1,327 - 9 (121 ) 1,215 Other agricultural loans 312 (5 ) (1 ) 306 State and political subdivision loans 833 - - (9 ) 824 Unallocated 98 - - 134 232 Total $ 8,886 $ (119 ) $ 23 $ 615 $ 9,405 The Company allocates the ALLL based on the factors described below, which conform to the Company's loan classification policy and credit quality measurements. In reviewing risk within the Company's loan portfolio, management has determined there to be several different risk categories within the loan portfolio. The ALLL consists of amounts applicable to: (i) residential real estate loans; (ii) residential real estate home equity loans; (iii) commercial real estate loans; (iv) agricultural real estate loans; (v) real estate construction loans; (vi) other commercial and agricultural loans; (vii) consumer loans; (viii) other agricultural loans and (ix) state and political subdivision loans. Factors considered in this process include general loan terms, collateral, and availability of historical data to support the analysis. Historical loss percentages are calculated and used as the basis for calculating allowance allocations. Certain qualitative factors are evaluated to determine additional inherent risks in the loan portfolio, which are not necessarily reflected in the historical loss percentages. These factors are then added to the historical allocation percentage to get the adjusted factor to be applied to non-classified loans. The following qualitative factors are analyzed: · Level of and trends in delinquencies and impaired/classified loans § Change in volume and severity of past due loans § Volume of non-accrual loans § Volume and severity of classified, adversely or graded loans; · Level of and trends in charge-offs and recoveries; · Trends in volume, terms and nature of the loan portfolio; · Effects of any changes in risk selection and underwriting standards and any other changes in lending and recovery policies, procedures and practices; · Changes in the quality of the Company's loan review system; · Experience, ability and depth of lending management and other relevant staff; · National, state, regional and local economic trends and business conditions § General economic conditions § Unemployment rates § Inflation rate/ Consumer Price Index § Changes in values of underlying collateral for collateral-dependent loans; · Industry conditions including the effects of external factors such as competition, legal, and regulatory requirements on the level of estimated credit losses; · Existence and effect of any credit concentrations, and changes in the level of such concentrations; and · Any change in the level of board oversight. The Company analyzes its loan portfolio each quarter to determine the adequacy of its ALLL. Loans determined to be TDRs are impaired and for purposes of estimating the ALLL must be individually evaluated for impairment. In calculating the impairment, the Company calculates the present value utilizing an analysis of discounted cash flows. If the present value calculated is below the recorded investment of the loan, impairment is recognized by a charge to the provision for loan and lease losses and a credit to the ALLL. For the three months ended March 31, 2018, the allowance for residential real estate increased in general reserves for pooled loans as a result of increased loss rates reflected in the charge-offs for the three month period, as well as higher loan balances. The increase was offset by a decrease in the specific reserve for individually evaluated residential loans. This was represented as an increase to the provision. The allowance for commercial real estate was increased in general reserves due to growth in the commercial real estate loan portfolio. It was also impacted by an increase in specific reserves during the quarter. This was represented as an increase in the provision. The allowance for agricultural real estate loans was increased in general reserves as a result of higher loan balances. The result of this growth was represented as an increase in the provision. The allowance for other agricultural loans was increased in general reserves as a result of higher loan balances. The result of these changes was represented as an increase in the provision. For the three months ended March 31, 2017, the allowance for commercial real estate was increased in general reserves due to growth in the loan portfolio. This was offset by a decrease in qualitatives associated with the decrease in classified and past due loans. The result of these changes was represented as an increase in the provision. The allowance for agricultural real estate loans was increased in general reserves as a result of higher loan balances. It was also impacted by the classified and past due loan trend in the agricultural real estate portfolio. The result of these changes was represented as an increase in the provision. The allowance for other commercial loans was decreased as a result of a lower specific allowance as well as lower classified and past due loans. This was represented by a decrease to the provision. Foreclosed Assets Held For Sale Foreclosed assets acquired in settlement of loans are carried at fair value, less estimated costs to sell, and are included in other assets on the Consolidated Balance Sheet. As of March 31, 2018 and December 31, 2017, included with other assets are $952,000 and $1,119,000, respectively, of foreclosed assets. As of March 31, 2018, included within the foreclosed assets are $136,000 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of March 31 2018, the Company has initiated formal foreclosure proceedings on $1,776,000 of consumer residential mortgages, which have not yet been transferred into foreclosed assets. |
