7. Loans Receivable and Allowance for Loan Losses

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, 2015				December 31, 2014
Real Estate Loans:
Residential	$	162,328	29.8	%	$	158,139	31.5	%
Commercial		266,035	48.9			261,956	52.2
Construction		20,047	3.7			19,221	3.9
Commercial, financial and agricultural		68,264	12.6			42,514	8.5
Consumer loans to individuals		27,183	5.0			19,704	3.9
Total loans		543,857	100.0	%		501,534	100.0	%
Deferred fees, net		(321)				(399)
Total loans receivable		543,536				501,135
Allowance for loan losses		(5,747)				(5,875)
Net loans receivable	$	537,789			$	495,260

Changes in the accretable yield for purchased credit-impaired loans were as follows for the nine months ended September 30 (in thousands):



	2015		2014
Balance at beginning of period	$	8	$	20
Accretion		(1)		(12)
Reclassification and other		-		-
Balance at end of period	$	7	$	8

The following table presents additional information regarding loans acquired and accounted for in accordance with ASC 310-30 (in thousands):



	September 30, 2015		December 31, 2014

Outstanding Balance	$	585	$	1,057
Carrying Amount	$	578	$	1,049

There were no material increases or decreases in the expected cash flows of these loans since the acquisition date. As of December 31, 2014, for loans that were acquired with or without specific evidence of deterioration in credit quality, adjustments to the allowance for loan losses have been accounted for through the allowance for loan loss adequacy calculation.

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 probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. All loans identified as impaired are evaluated independently. 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.

Foreclosed assets acquired in settlement of loans are carried at fair value less estimated costs to sell and are included in foreclosed real estate owned on the Consolidated Balance Sheets. As of September 30, 2015 and December 31, 2014, foreclosed real estate owned totaled $1,345,000 and $3,726,000, respectively. As of September 30, 2015, included within foreclosed real estate owned is $63,000 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of September 30, 2015, the Company has initiated formal foreclosure proceedings on $503,000 of consumer residential mortgage loans.

The following tables show 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, 2015	(In thousands)

Individually evaluated for impairment	$	34	$	9,828	$	-	$	-	$	-	$	9,862
Loans acquired with deteriorated credit quality		214		364		-		-		-		578
Collectively evaluated for impairment		162,080		255,843		20,047		68,264		27,183		533,417
Total Loans	$	162,328	$	266,035	$	20,047	$	68,264	$	27,183	$	543,857



	Real Estate Loans
							Commercial		Consumer
	Residential		Commercial		Construction		Loans		Loans		Total
	(In thousands)
December 31, 2014

Individually evaluated for impairment	$	-	$	10,556	$	-	$	-	$	-	$	10,556
Loans acquired with deteriorated credit quality		225		824		-		-		-		1,049
Collectively evaluated for impairment		157,914		250,576		19,221		42,514		19,704		489,929
Total Loans	$	158,139	$	261,956	$	19,221	$	42,514	$	19,704	$	501,534

The following tables includes the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable.



			Unpaid
	Recorded		Principal		Associated
	Investment		Balance		Allowance
September 30, 2015				(in thousands)
With no related allowance recorded:
Real Estate Loans
Residential	$	248	$	255	$	-
Commercial		8,544		10,229		-
Subtotal		8,792		10,484		-
With an allowance recorded:
Real Estate Loans
Commercial		1,648		1,705		389
Subtotal		1,648		1,705		389
Total:
Real Estate Loans
Residential		248		255		-
Commercial		10,192		11,934		389
Total Impaired Loans	$	10,440	$	12,189	$	389



			Unpaid
	Recorded		Principal		Associated
	Investment		Balance		Allowance
December 31, 2014				(in thousands)
With no related allowance recorded:
Real Estate Loans
Residential	$	225	$	233	$	-
Commercial		8,407		8,566		-
Subtotal		8,632		8,799		-
With an allowance recorded:
Real Estate Loans
Commercial		2,973		3,837		293
Subtotal		2,973		3,837		293
Total:
Real Estate Loans
Residential		225		233		-
Commercial		11,380		12,403		293
Total Impaired Loans	$	11,605	$	12,636	$	293

The following information for impaired loans is presented (in thousands) for the nine months ended September 30, 2015 and 2014:



	Average Recorded				Interest Income
	Investment				Recognized
	2015		2014		2015		2014

Real Estate Loans:
Residential	$	236	$	235	$	3	$	4
Commercial		10,477		6,577		510		150
Total	$	10,713	$	6,812	$	513	$	154

The following information for impaired loans is presented (in thousands) for the three months ended September 30, 2015 and 2014:



	Average Recorded				Interest Income
	Investment				Recognized
	2015		2014		2015		2014

Real Estate Loans:
Residential	$	249	$	230	$	1	$	2
Commercial		10,294		6,730		45		51
Total	$	10,543	$	6,960	$	46	$	53

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, 2015, troubled debt restructured loans totaled $8.5 million and resulted in a specific allowance of $389,000. For the period ended September 30, 2015, there were no new loans identified as troubled debt restructurings. In 2015, the Company recognized write-downs in the amount of $439,000 on three loans previously identified as troubled debt restructurings with a carrying value of $2.5 million as of September 30, 2015. As of December 31, 2014, troubled debt restructured loans totaled $8.8 million and resulted in a specific allowance of $293,000.

For the period ended September 30, 2014, there were no new loans identified as troubled debt restructurings. During the nine month period ended September 30, 2014, the Company recognized write-downs in the amount of $227,000 on two loans identified as troubled debt restructurings with a carrying value of $1.2 million as of September 30, 2014.

Management uses an eight point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first four 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 Company’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 $1,000,000 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 tables present 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, 2015 and December 31, 2014 (in thousands):



			Special					Doubtful
	Pass		Mention		Substandard		or Loss		Total
September 30, 2015
Commercial real estate loans	$	251,153	$	2,653	$	12,229	$	-	$	266,035
Commercial loans		68,264		-		-		-		68,264
Total	$	319,417	$	2,653	$	12,229	$	-	$	334,299



			Special					Doubtful
	Pass		Mention		Substandard		or Loss		Total
December 31, 2014
Commercial real estate loans	$	246,629	$	1,983	$	13,344	$	-	$	261,956
Commercial loans		42,514		-		-		-		42,514
Total	$	289,143	$	1,983	$	13,344	$	-	$	304,470

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 tables present the recorded investment in the loan classes based on payment activity as of September 30, 2015 and December 31, 2014 (in thousands):



	Performing		Nonperforming		Total
September 30, 2015
Residential real estate loans	$	161,375	$	953	$	162,328
Construction		20,047		-		20,047
Consumer loans		27,182		1		27,183
Total	$	208,604	$	954	$	209,558



	Performing		Nonperforming		Total
December 31, 2014
Residential real estate loans	$	156,464	$	1,675	$	158,139
Construction		19,221		-		19,221
Consumer loans		19,700		4		19,704
Total	$	195,385	$	1,679	$	197,064

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 tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of September 30, 2015 and December 31, 2014 (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, 2015
Real Estate loans
Residential	$	160,916	$	374	$	85	$	-	$	953	$	1,412	$	162,328
Commercial		257,694		61		103		-		8,177		8,341		266,035
Construction		20,047		-		-		-		-		-		20,047
Commercial loans		68,264		-		-		-		-		-		68,264
Consumer loans		27,104		69		9		-		1		79		27,183
Total	$	534,025	$	504	$	197	$	-	$	9,131	$	9,832	$	543,857



	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, 2014
Real Estate loans
Residential	$	156,242	$	222	$	-	$	-	$	1,675	$	1,897	$	158,139
Commercial		252,495		5,100		440		-		3,921		9,461		261,956
Construction		19,221		-		-		-		-		-		19,221
Commercial loans		42,500		14		-		-		-		14		42,514
Consumer loans		19,606		94		-		-		4		98		19,704
Total	$	490,064	$	5,430	$	440	$	-	$	5,600	$	11,470	$	501,534

The following tables present 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, 2014	$	1,323	$	3,890	$	222	$	256	$	184	$	5,875
Charge Offs		(159)		(1,692)		-		-		(59)		(1,910)
Recoveries		4		-		-		-		18		22
Provision for loan losses		(181)		1,980		(137)		28		70		1,760
Ending balance, September 30, 2015	$	987	$	4,178	$	85	$	284	$	213	$	5,747
Ending balance individually evaluated for impairment	$	-	$	389	$	-	$	-	$	-	$	389
Ending balance collectively evaluated for impairment	$	987	$	3,789	$	85	$	284	$	213	$	5,358


(In thousands)	Residential Real Estate		Commercial Real Estate		Construction		Commercial		Consumer		Total
Beginning balance, June 30, 2015	$	1,085	$	4,152	$	97	$	405	$	208	$	5,947
Charge Offs		(46)		(865)		-		-		(16)		(927)
Recoveries		-		-		-		-		7		7
Provision for loan losses		(52)		891		(12)		(121)		14		720
Ending balance, September 30, 2015	$	987	$	4,178	$	85	$	284	$	213	$	5,747



(In thousands)	Residential Real Estate		Commercial Real Estate		Construction		Commercial		Consumer		Total
Beginning balance, December 31, 2013	$	1,441	$	3,025	$	898	$	184	$	160	$	5,708
Charge Offs		(132)		(1,177)		-		-		(36)		(1,345)
Recoveries		-		-		-		-		28		28
Provision for loan losses		(57)		2,005		(704)		14		2		1,260
Ending balance, September 30, 2014	$	1,252	$	3,853	$	194	$	198	$	154	$	5,651
Ending balance individually evaluated for impairment	$	-	$	61	$	-	$	-	$	-	$	61
Ending balance collectively evaluated for impairment	$	1,252	$	3,792	$	194	$	198	$	154	$	5,590


(In thousands)	Residential Real Estate		Commercial Real Estate		Construction		Commercial		Consumer		Total
Beginning balance, June 30, 2014	$	1,194	$	3,900	$	205	$	179	$	133	$	5,611
Charge Offs		(34)		(348)		-		-		(9)		(391)
Recoveries		-		-		-		-		11		11
Provision for loan losses		92		301		(11)		19		19		420
Ending balance, September 30, 2014	$	1,252	$	3,853	$	194	$	198	$	154	$	5,651

The Company’s primary business activity as of September 30, 2015 and December 31, 2014 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, 2015, the Company considered its concentration of credit risk to be acceptable. The highest concentration was in the hospitality lodging industry with loans outstanding of $61.8 million, or 11.4% of loans outstanding. During 2015, the Company recorded a charge-off of $643,000 on a motel property which has been sold.

Gross realized gains and gross realized losses on sales of residential mortgage loans were $56,000 and $0, respectively, in the first nine months of 2015 compared to $72,000 and $0, respectively, in the same period in 2014. The proceeds from the sales of residential mortgage loans totaled $2.7 million and $2.3 million for the nine months ended September 30, 2015 and 2014, respectively.

Gross realized gains and gross realized losses on sales of residential mortgage loans were $16,000 and $0, respectively, for the three months ended September 30, 2015. The proceeds from the sales of residential mortgage loans totaled $818,000 for the three months ended September 30, 2015. There were no sales of residential mortgages during the three months ended September 30, 2014.