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 (dollars in thousands):






	September 30, 2017				December 31, 2016
Real Estate Loans:
Residential	$	235,508	31.1	%	$	237,177	33.2	%
Commercial		344,960	45.6			320,187	44.8
Construction		15,328	2.0			19,709	2.8
Commercial, financial and agricultural		92,979	12.3			85,508	12.0
Consumer loans to individuals		67,492	9.0			51,524	7.2
Total loans		756,267	100.0	%		714,105	100.0	%
Deferred fees, net		(253)				(216)
Total loans receivable		756,014				713,889
Allowance for loan losses		(7,760)				(6,463)
Net loans receivable	$	748,254			$	707,426

The following table presents the components of the purchase accounting adjustments related to the purchased credit-impaired loans acquired:



(In Thousands)		July 31, 2016

Contractually required principal and interest	$	2,621
Non-accretable discount		(1,014)
Expected cash flows		1,607
Accretable discount		(239)
Estimated fair value	$	1,368

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



	2017
Balance at beginning of period	$	208
Additions		-
Accretion		(56)
Reclassification and other		(15)
Balance at end of period	$	137

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



	September 30, 2017		December 31, 2016

Outstanding Balance	$	1,555	$	1,821
Carrying Amount	$	1,256	$	1,386

As a result of the acquisition of Delaware, the Company added $1,397,000 of loans that were accounted for in accordance with ASC 310-30. Based on a review of the loans acquired by senior lending management, which included an analysis of credit deterioration of the loans since origination, the Company recorded a specific credit fair value adjustment of $499,000. For loans that were acquired with specific evidence of deterioration in credit quality, loan losses will be accounted for through a reduction of the specific reserve and will not impact the allowance for loan losses until actual losses exceed the allotted reserves. For loans acquired without a deterioration of credit quality, losses incurred will result in adjustments to the allowance for loan losses 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.

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, 2017 and December 31, 2016, foreclosed real estate owned totaled $4,243,000 and $5,302,000, respectively. During the nine months ended September 30, 2017, there were no consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of September 30, 2017, the Company has initiated formal foreclosure proceedings on eight properties classified as consumer residential mortgages with a carrying value of $494,000.

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, 2017	(In thousands)

Individually evaluated for impairment	$	23	$	1,382	$	-	$	-	$	-	$	1,405
Loans acquired with deteriorated credit quality		831		425		-		-		-		1,256
Collectively evaluated for impairment		234,654		343,153		15,328		92,979		67,492		753,606
Total Loans	$	235,508	$	344,960	$	15,328	$	92,979	$	67,492	$	756,267



	Real Estate Loans
							Commercial		Consumer
	Residential		Commercial		Construction		Loans		Loans		Total
	(In thousands)
December 31, 2016

Individually evaluated for impairment	$	23	$	2,601	$	-	$	-	$	-	$	2,624
Loans acquired with deteriorated credit quality		821		565		-		-		-		1,386
Collectively evaluated for impairment		236,333		317,021		19,709		85,508		51,524		710,095
Total Loans	$	237,177	$	320,187	$	19,709	$	85,508	$	51,524	$	714,105

The following table 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, 2017				(in thousands)
With no related allowance recorded:
Real Estate Loans
Residential	$	23	$	28	$	-
Commercial		1,382		2,263		-
Subtotal		1,405		2,291		-
Total:
Real Estate Loans
Residential		23		28		-
Commercial		1,382		2,263		-
Total Impaired Loans	$	1,405	$	2,291	$	-



			Unpaid
	Recorded		Principal		Associated
	Investment		Balance		Allowance
December 31, 2016				(in thousands)
With no related allowance recorded:
Real Estate Loans
Residential	$	23	$	28	$	-
Commercial		2,601		3,427		-
Subtotal		2,624		3,455		-
Total:
Real Estate Loans
Residential		23		28		-
Commercial		2,601		3,427		-
Total Impaired Loans	$	2,624	$	3,455	$	-

The following table presents the average recorded investment in impaired loans and the related amount of interest income recognized during the three-month periods ended September 30, 2017 and 2016 (in thousands):



	Average Recorded				Interest Income
	Investment				Recognized
	2017		2016		2017		2016

Real Estate Loans:
Residential	$	23	$	579	$	-	$	1
Commercial		1,423		3,253		12		33
Total	$	1,446	$	3,832	$	12	$	34

The following table presents the average recorded investment in impaired loans and the related amount of interest income recognized during the nine-month periods ended September 30, 2017 and 2016 (in thousands):



	Average Recorded				Interest Income
	Investment				Recognized
	2017		2016		2017		2016

Real Estate Loans:
Residential	$	23	$	372	$	-	$	3
Commercial		1,465		3,249		41		90
Total	$	1,488	$	3,621	$	41	$	93

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, 2017, troubled debt restructured loans totaled $1.3 million with no specific reserve. As of December 31, 2016, troubled debt restructured loans totaled $1.5 million with no specific reserve. For the nine month period ended September 30, 2017, there were no new loans identified as troubled debt restructurings. During 2017, the Company recognized a write-down of $55,000 on one loan that was previously identified as a troubled debt restructuring with a carrying value of $175,000 as of September 30, 2017.

For the nine-month period ended September 30, 2016, there were no new loans identified as troubled debt restructurings. During the 2016 period, the Company recognized write-downs of $2,519,000 on loans previously identified as a troubled debt restructuring.

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 $1,500,000 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, 2017 and December 31, 2016 (in thousands):



			Special					Doubtful
	Pass		Mention		Substandard		or Loss		Total
September 30, 2017
Commercial real estate loans	$	331,511	$	9,542	$	3,907	$	-	$	344,960
Commercial loans		92,879		20		80		-		92,979
Total	$	424,390	$	9,562	$	3,987	$	-	$	437,939



			Special					Doubtful
	Pass		Mention		Substandard		or Loss		Total
December 31, 2016
Commercial real estate loans	$	310,432	$	5,432	$	4,323	$	-	$	320,187
Commercial loans		84,600		885		23		-		85,508
Total	$	395,032	$	6,317	$	4,346	$	-	$	405,695

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, 2017 and December 31, 2016 (in thousands):



	Performing		Nonperforming		Total
September 30, 2017
Residential real estate loans	$	234,004	$	1,504	$	235,508
Construction		15,328		-		15,328
Consumer loans		67,492		-		67,492
Total	$	316,824	$	1,504	$	318,328



	Performing		Nonperforming		Total
December 31, 2016
Residential real estate loans	$	235,829	$	1,137	$	237,177
Construction		19,681		28		19,709
Consumer loans		51,524		-		51,524
Total	$	307,034	$	1,165	$	308,410

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, 2017 and December 31, 2016 (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, 2017
Real Estate loans
Residential	$	232,909	$	909	$	186	$	-	$	1,504	$	2,599	$	235,508
Commercial		343,754		703		-		-		503		1,206		344,960
Construction		15,328		-		-		-		-		-		15,328
Commercial loans		92,897		40		42		-		-		82		92,979
Consumer loans		67,457		29		6		-		-		35		67,492
Total	$	752,345	$	1,681	$	234	$	-	$	2,007	$	3,922	$	756,267



	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, 2016
Real Estate loans
Residential	$	234,790	$	986	$	264	$	1	$	1,136	$	2,387	$	237,177
Commercial		318,979		445		1		-		762		1,208		320,187
Construction		19,681		-		-		-		28		28		19,709
Commercial loans		85,355		143		10		-		-		153		85,508
Consumer loans		51,456		39		29		-		-		68		51,524
Total	$	710,261	$	1,613	$	304	$	1	$	1,926	$	3,844	$	714,105

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the allowance for loan losses. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the allowance. 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, 2016	$	1,092	$	4,623	$	78	$	307	$	363	$	6,463
Charge Offs		(83)		(308)		(28)		-		(127)		(546)
Recoveries		4		5		12		-		22		43
Provision for loan losses		340		979		35		165		281		1,800
Ending balance, September 30, 2017	$	1,353	$	5,299	$	97	$	472	$	539	$	7,760
Ending balance individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-
Ending balance collectively evaluated for impairment	$	1,353	$	5,299	$	97	$	472	$	539	$	7,760


(In thousands)	Residential Real Estate		Commercial Real Estate		Construction		Commercial		Consumer		Total
Beginning balance, June 30, 2017	$	1,254	$	5,228	$	93	$	360	$	484	$	7,419
Charge Offs		-		(212)		(15)		-		(45)		(272)
Recoveries		1		1		-		-		11		13
Provision for loan losses		98		282		19		112		89		600
Ending balance, September 30, 2017	$	1,353	$	5,299	$	97	$	472	$	539	$	7,760



(In thousands)	Residential Real Estate		Commercial Real Estate		Construction		Commercial		Consumer		Total
Beginning balance, December 31, 2015	$	1,069	$	5,506	$	90	$	397	$	236	$	7,298
Charge Offs		(32)		(2,670)		-		(15)		(71)		(2,788)
Recoveries		4		11		-		-		39		54
Provision for loan losses		15		1,516		(12)		(46)		127		1,600
Ending balance, September 30, 2016	$	1,056	$	4,363	$	78	$	336	$	331	$	6,164
Ending balance individually evaluated for impairment	$	-	$	15	$	-	$	-	$	-	$	15
Ending balance collectively evaluated for impairment	$	1,056	$	4,348	$	78	$	336	$	331	$	6,149


(In thousands)	Residential Real Estate		Commercial Real Estate		Construction		Commercial		Consumer		Total
Beginning balance, June 30, 2016	$	976	$	4,191	$	59	$	293	$	279	$	5,798
Charge Offs		(15)		(28)		-		(15)		(41)		(99)
Recoveries		2		9		-		-		4		15
Provision for loan losses		93		191		19		58		89		450
Ending balance, September 30, 2016	$	1,056	$	4,363	$	78	$	336	$	331	$	6,164

The Company’s primary business activity as of September 30, 2017 was with customers located in northeastern Pennsylvania and the New York counties of Delaware and Sullivan. 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, 2017, the Company considered its concentration of credit risk to be acceptable. The highest concentrations are in commercial rentals with $81.3 million of loans outstanding, or 10.8% of total loans outstanding, and the hospitality/lodging industry with loans outstanding of $53.8 million, or 7.1% of loans outstanding. During 2017, the Company recognized a loss of $212,000 on one loan in the named concentrations which was paid off during the three month period ending September 30, 2017.

The Company did not sell any residential mortgage loans during the first nine months of 2017. Gross realized gains and gross realized losses on sales of residential mortgage loans were $54,000 and $0, respectively, in the first nine months of 2016. The proceeds from the sales of residential mortgage loans totaled $1.7 million for the nine months ended September 30, 2016.

During the nine months ended September 30, 2017, the Company sold $1.7 million of USDA guaranteed commercial real estate loans. The gross realized gain on the sale was $67,000.

The Company did not sell any residential mortgage loans during the three months ended September 30, 2017 or 2016.