XML 20 R15.htm IDEA: XBRL DOCUMENT v2.3.0.15
Loans Receivable and Allowance for Loan Losses
9 Months Ended
Sep. 30, 2011
Loans Receivable and Allowance for Loan Losses 
Loans Receivable and Allowance for Loan Losses
8. Loans Receivable and Allowance for Loan Losses

Included in the 2011 growth are balances acquired from North Penn, as of the acquisition date, as follows (in thousands):

Real Estate –  Residential
   $ 36,221  
      Commercial
     70,789  
      Construction
     358  
Commercial, financial and agricultural
     10,499  
Consumer loans to individuals
     1,831  
   Total loans
   $ 119,698  

    Set forth below is selected data relating to the composition of the loan portfolio at the dates indicated:

    Types of  loans              
    (dollars in thousands)              
    September 30, 2011     December 31, 2010  
                         
Real Estate-    Residential
   $ 148,925       32.7 %   $ 124,562       34.9 %
      Commercial
     256,964       56.5       184,094       51.5  
      Construction
     11,486       2.5       12,638       3.5  
Commercial, financial and agricultural
     23,343       5.1       22,386       6.3  
Consumer loans to individuals
     14,524       3.2       13,668       3.8  
  Total loans
     455,242       100.0 %     357,348       100.0 %
                                 
  Deferred fees (net)
     (410 )             (493 )        
 
     454,832               356,855          
  Less: Allowance for loan losses
     5,345               5,616          
  Net loans receivable
   $ 449,487             $ 351,239          

    Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date without a carryover of the related allowance for loan losses.
 
    Upon acquisition, 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.  The carrying value of purchased loans acquired with deteriorated credit quality was $1.5 million at June 30, 2011.  There were no material increases or decreases in the expected cash flows of these loans between May 31, 2011 (the "acquisition date") and September 30, 2011.  The fair value of purchased credit-impaired loans, on the acquisition date, was determined, primarily based on the fair value of loan collateral.

    On the acquisition date, the preliminary estimate of the unpaid principal balance for all loans evidencing credit impairment acquired in the North Penn acquisition was $1.9 million and the estimated fair value of the loans was $1.5 million. Total contractually required payments on these loans, including interest, at the acquisition date was $3.6 million. However, the Company's preliminary estimate of expected cash flows was $1.9 million. 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 the customer nor liquidation of collateral) of $1.7 million 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 $329,000 on the acquisition date relating to these impaired loans.

    The carrying value of the loans acquired and accounted for in accordance with ASC Subtopic 310-30, Loans and Debt Securities Acquired with Deteriorated 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 North Penn acquisition:

(In thousands)
  
2011
  
       
Unpaid principal balance
   $ 1,936  
Interest
     1,669  
Contractual cash flows
     3,605  
Non-accretable discount
     (1,724 )
Expected cash flows
     1,881  
Accretable discount
     ( 329 )
Estimated fair value
   $ 1,552  
 
    Changes in the accretable yield for purchased credit-impaired loans were as follows for the nine months ended September 30, 2011:

Balance at beginning of period
   $ 329  
Accretion
     (40 )
Reclassification and other
     -  
Balance at end of period
   $ 289  
         

The Company maintains a loan review system, which allows for a periodic review of our loan portfolio and the early identification of potential impaired loans.  Such system takes into consideration, among other things, delinquency status, size of loans, type and market value of collateral and financial condition of the borrowers.  Specific loan loss allowances are established for identified losses based on a review of such information.  A loan evaluated for impairment is considered to be impaired when, based on current information and events, it is probably that we will be unable to collect all amounts due according to the contractual terms of the loan agreement.  All loans identified as impaired are evaluated independently.  We do not aggregate such loans for evaluation purposes.  Impairment is measured on a loan-by-loan basis for commercial and construction loans by the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral-dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.  Accordingly, the Company does not separately identify individual consumer and residential mortgage loans for impairment disclosures, unless such loans are part of a larger relationship that is impaired, or are classified as a troubled debt restructuring.

A loan is considered to be a troubled debt restructuring ("TDR") loan when the Company grants a concession to the borrower because of the borrower's financial condition that it would not otherwise consider.  Such concessions include the reduction of interest rates, forgiveness of principal or interest, or other modifications of interest rates that are less than the current market rate for new obligations with similar risk.  TDR loans that are in compliance with their modified terms and that yield a market rate may be removed from the TDR status after a period of performance.
 
    The following table shows the amount of loans in each category that were individually and collectively evaluated for impairment at the dates indicated:
 
    Real Estate Loans                    
                       Commercial      Consumer        
    Residential      Commercial       Construction      Loans      Loans      Total  
September 30, 2011
              
(In thousands)
                    
Total Loans
   $ 148,925     $ 256,964     $ 11,486     $ 23,343     $ 14,524     $ 455,242  
                                                 
                                                 
                                                 
  Individually evaluated for impairment
   $ -     $ 14,174     $ -     $ 391     $ -     $ 14,565  
  Loans acquired with deteriorated 
  credit quality
         -           780           -           -           -           780  
  Collectively evaluated for impairment
   $ 148,925     $ 242,010     $ 11,486     $ 22,952     $ 14,524     $ 439,897  
                                               
                                               
    Real Estate Loans                          
                          Commercial     Consumer          
    Residentail     Commercial   Construction     Loans     Loans     Total  
December 31, 2010
                  
(In thousands)
                          
Total Loans
   $ 124,562     $ 184,094     $ 12,638     $ 22,386     $ 13,668     $ 357,348  
                                                 
                                                 
                                                 
  Individually evaluated for impairment
   $ -     $ 14,239     $ -     $ 513     $ -     $ 14,752  
  Collectively evaluated for impairment
   $ 124,562     $ 169,855     $ 12,638     $ 21,873     $ 13,668     $ 342,596  
 
The following table includes the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable.  Also presented are the average recorded investments in the impaired loans and the related amount of interest recognized during the time within the period that the impaired loans were impaired.

   
 
Recorded
Investment
    
Unpaid
Principal
Balance
    
 
Associated
Allowance
    
Average
Recorded
Investment
    
Interest
Income
Recognized
  
September 30, 2011
With no related allowance recorded:
  
  (In thousands)
  
Real Estate Loans
                              
    Residential
   $ -     $ -     $ -     $ -     $ -  
    Construction
     -       -       -       -       -  
    Commercial
     7,539       7,539       -       5,072       238  
Commercial Loans
     391       391       -       395       -  
Consumer Loans
     -       -       -       -       -  
          Total
     7,930       7,930       -       5,467       238  
With an allowance recorded:
                                        
Real Estate Loans
                                        
    Residential
     -       -       -       -       -  
    Construction
     -       -       -       -       -  
    Commercial
     7,415       7,415       1,322       10,382       142  
Commercial Loans
     -       -       -       -       -  
Consumer Loans
     -       -       -       -       -  
          Total
     7,415       7,415       1,322       10,382       142  
Total:
                                        
Real Estate loans
                                        
    Residential
     -       -       -       -       -  
    Construction
     -       -       -       -       -  
    Commercial
     14,954       14,954       1,322       15,454       380  
Commercial Loans
     391       391       -       395       -  
Consumer Loans
     -       -       -       -       -  
          Total Impaired Loans
   $ 15,345     $ 15,345     $ 1,322     $ 15,849     $ 380  
 
    
 
Recorded
Investment
    
Unpaid
Principal
Balance
    
 
Associated
Allowance
    
Average
Recorded
Investment
    
Interest
Income
Recognized
  
December 31, 2010
With no related allowance recorded:
     (In thousands)
  
Real Estate Loans
                              
    Residential
   $ -     $ -     $ -     $ -     $ -  
    Construction
     -       -       -       -       -  
    Commercial
     5,598       5,598       -       5,088       266  
Commercial Loans
     513       513       -       115       -  
Consumer Loans
     -       -       -       -       -  
          Total
     6,111       6,111       -       5,203       266  
With an allowance recorded:
                                        
Real Estate Loans
                                        
    Residential
     -       -       -       -       -  
    Construction
     -       -       -       -       -  
    Commercial
     8,641       8,548       1,648       4,734       119  
Commercial Loans
     -       -       -       159       -  
Consumer Loans
     -       -       -       -       -  
          Total
     8,641       8,548       1,648       4,893       119  
Total:
                                        
Real Estate loans
                                        
    Residential
     -       -       -       -       -  
    Construction
     -       -       -       -       -  
    Commercial
     14,239       14,146       1,648       9,822       385  
Commercial Loans
     513       513       -       274       -  
Consumer Loans
     -       -       -       -       -  
          Total Impaired Loans
   $ 14,752     $ 14,659     $ 1,648     $ 10,096     $ 385  

 
    Troubled debt restructured loans are those loans whose terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of financial difficulties experienced by the borrower, who could not obtain comparable terms from alternate financing sources.  As of September 30, 2011, troubled debt restructured loans totaled $7.4 million and resulted in specific reserves of $1.3 million.  During 2011, there were no new loans identified as troubled debt restructurings.  As of December 31, 2010, troubled debt restructured loans totaled $7.6 million and resulted in specific reserves of $1.5 million.  During the first nine months of 2010, there were no loan modifications classified as troubled debt restructurings.  The following table provides detail related to loans identified as troubled debt restructurings as of September 30, 2011:

   
Modifications
As of September 30, 2011
    
   
 
Number of Contracts
    
Pre-Modification
Outstanding Recorded
Investments
    
Post-Modification
Outstanding
Recorded Investments
    
    (In thousands)    
Troubled Debt Restructuring
                    
  Commercial
     2     $ 8,534     $ 7,406    
                           
                           
   
Number of Contracts
    
Recorded Investment
    
Troubled Debt Restructuring
                          
That Subsequently Defaulted
                          
  Commercial
     1       $480            
                           
                           
                           

Management uses a seven point internal risk rating system to monitor the credit quality of the overall loan portfolio.  The first three 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.  Any portion of a loan that has been charged off is placed in the Loss category.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight.  Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as non performance, repossession, or death occurs to raise awareness of a possible credit event.  The Bank's Loan Review Department is responsible for the timely and accurate risk rating of the loans on an ongoing basis.  Every credit which must be approved by Loan Committee or the Board of Directors is assigned a risk rating at time of consideration.  Loan Review also annually reviews relationships of $500,000 and over to assign or re-affirm risk ratings.  Loans in the Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.
 
The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard, Doubtful and Loss within the internal risk rating system as of  September 30, 2011 and December 31, 2010 (in thousands):

   
 
Pass
    
Special
Mention
    
 
Substandard
    
 
Doubtful
    
 
Loss
    
 
Total
  
September 30, 2011
                                    
 
Commercial real estate loans
   $ 230,028     $ 8,209     $ 18,727     $ -     $ -     $ 256,964  
Commercial loans
     22,393       86       864       -       -       23,343  
          Total
   $ 252,421     $ 8,295     $ 19,591     $ -     $ -     $ 280,307  
                                                 

 
   
 
Pass
    
Special
Mention
    
 
Substandard
    
 
Doubtful
    
 
Loss
    
 
Total
  
December 31,  2010
                                    
Commercial real estate loans
   $ 165,226     $ 1,780     $ 17,088     $ -     $ -     $ 184,094  
Commercial loans
     21,759       75       552       -       -       22,386  
          Total
   $ 186,985     $ 1,855     $ 17,640     $ -     $ -     $ 206,480  
                                                 
 
For residential real estate loans, construction loans and consumer loans, the Company evaluates credit quality based on the performance of the individual credits.  The following table presents the recorded investment in the loan classes based on payment activity as of September 30, 2011 and December 31, 2010 (in thousands):

September 30, 2011
  
Performing
    
Nonperforming
    
Total
  
                         
Residential real estate loans
   $ 147,132     $ 1,793     $ 148,925  
Construction
     11,486       -       11,486  
Consumer loans
     14,524       -       14,524  
     Total
   $ 173,142     $ 1,793     $ 174,935  
                         

December 31, 2010
  
Performing
    
Nonperforming
    
Total
  
                         
Residential real estate loans
   $ 123,623     $ 939     $ 124,562  
Construction
     12,638       -       12,638  
Consumer loans
     13,668       -       13,668  
     Total
   $ 149,929     $ 939     $ 150,868  
                         

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 presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of September 30, 2011 and December 31, 2010 (in thousands):
 
 
 
 
 
 
Current
    
 
 
 
31-60
Days Past
Due
    
 
 
 
61-90
Days Past
Due
    
 
 
Greater than
90 Days Past
Due and still
accruing
    
 
 
 
 
Non-Accrual
    
 
 
Total Past
Due and
Non-Accrual
    
 
 
 
 
Total Loans
  
 
September 30, 2011
                                          
Real Estate loans
                                          
   Residential
   $ 142,993     $ 2,334     $ 1,805     $ -     $ 1,793     $ 5,932     $ 148,925  
  Construction
     11,445       35       6       -       -       41       11,486  
  Commercial
     250,979       1,302       593       -       4,090       5,985       256,964  
Commercial  loans
     22,952       -       -       -       391       391       23,343  
Consumer  loans
     14,467       52       5       -       -       57       14,524  
    Total
   $ 442,836     $ 3,723     $ 2,409     $ -     $ 6,274     $ 12,406     $ 455,242  
                                                         
   
 
 
 
 
 
Current
    
 
 
 
31-60
Days Past
Due
    
 
 
 
61-90
Days Past
Due
    
 
 
Greater than
90 Days Past
Due and still
accruing
    
 
 
 
 
Non-Accrual
    
 
 
Total Past
Due and
Non-Accrual
    
 
 
 
 
Total Loans
  
 
December 31, 2010
                                                        
Real Estate loans
                                                        
   Residential
   $ 123,177     $ 407     $ -     $ 39     $ 939     $ 1,385     $ 124,562  
  Construction
     12,622       16       -       -       -       16       12,638  
  Commercial
     176,981       3,047       1,478       -       2,588       7,113       184,094  
Commercial  loans
     21,858       15       -       -       513       528       22,386  
Consumer  loans
     13,642       24       2       -       -       26       13,668  
    Total
   $ 348,280     $ 3,509     $ 1,480     $ 39     $ 4,040     $ 9,068     $ 357,348  
                                                         

The following table presents changes in the allowance for loan losses:


    Three months ended     Nine months ended  
    September 30,     September 30,  
   
2011
    
2010
    
2011
    
2010
  
 
  
(In thousands)
  
                                 
Allowance balance at beginning of period
   $ 5,267     $ 5,421     $ 5,616     $ 5,453  
Charge-offs:
     (384 )     (166 )     (1,417 )     (690 )
Recoveries:
     37       8       71       20  
Provision expense
     425       250       1,075       730  
Allowance balance at end of period
   $ 5,345     $ 5,513     $ 5,345     $ 5,513  
    
            The following table presents the allowance for loan losses by the classes of the loan portfolio:
 
(In thousands)
  
 
Residential
Real Estate
    
 
Commercial
Real Estate
    
 
 
Construction
    
 
 
 Commercial
    
 
 
Consumer
    
 
 
Total
  
                                     
                                     
Beginning balance, December 31, 2010
   $ 1,167     $ 3,976     $ 110     $ 171     $ 192     $ 5,616  
Charge Offs
     (372 )     (963 )     -       (2 )     (80 )     (1,417 )
Recoveries
     25       -       -       5       41       71  
Provision Expense
     333       782       (29 )     (20 )     9       1,075  
Ending balance, September  30, 2011
   $ 1,153     $ 3,795     $ 81     $ 154     $ 162     $ 5,345  
Ending balance individually
  evaluated for impairment
   $ -     $ 1,322     $ -     $ -     $ -     $ 1,322  
Ending balance collectively
  evaluated for impairment
   $ 1,153     $ 2,473     $ 81     $ 154     $ 162     $ 4,023  
 
The Company's primary business activity is with customers located in northeastern Pennsylvania. Accordingly, the Company has extended credit primarily to commercial entities and individuals in this area whose ability to honor their contracts is influenced by the region's economy.

As of September 30, 2011, the Company considered its concentration of credit risk to be acceptable.  The highest concentrations are in the hospitality lodging industry, summer camps, and builders/contractors with loans outstanding of $44.6 million, or 52.4% of capital, to the hospitality lodging industry; $14.4 million, or 16.9% of capital, to summer camps; and $13.0 million, or 15.2% of capital, to builders/contractors.   During the third quarter, the Company recognized a write-down of $198,000 on one motel loan that was previously carried in nonaccrual status and transferred the property to Foreclosed Real Estate Owned.  There were no losses recognized on loans to builders/contractors or summer camps in 2011.

Gross realized gains and gross realized losses on sales of residential mortgage loans were $240,000 and $21,000 respectively, in the first nine months of 2011 compared to $153,000 and $14,000, respectively, in the same period in 2010.  The proceeds from the sales of residential mortgage loans totaled $9.0 million and $10.7 million for the nine months ended September 30, 2011 and 2010, respectively.