8. 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):






	March 31, 2018				December 31, 2017
Real Estate Loans:
Residential	$	232,771	30.0	%	$	235,759	30.8	%
Commercial		348,507	44.9			342,934	44.9
Construction		17,831	2.3			17,228	2.3
Commercial, financial and agricultural		100,840	13.0			97,461	12.7
Consumer loans to individuals		75,964	9.8			70,953	9.3
Total loans		775,913	100.0	%		764,335	100.0	%
Deferred fees, net		(232)				(243)
Total loans receivable		775,681				764,092
Allowance for loan losses		(8,099)				(7,634)
Net loans receivable	$	767,582			$	756,458

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



	March 31, 2018		December 31, 2017

Outstanding Balance	$	1,411	$	1,444
Carrying Amount	$	1,157	$	1,174

As a result of the acquisition of Delaware Bancshares, Inc. (“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 March 31, 2018 and December 31, 2017, foreclosed real estate owned totaled $1,436,000 and $1,661,000, respectively. During the three months ended March 31, 2018, there was one consumer residential mortgage with a balance of $191,000 that was received via a deed in lieu transaction prior to the period end. The property was disposed of during the current period. As of March 31, 2018, the Company has initiated formal foreclosure proceedings on eight properties classified as consumer residential mortgages with a carrying value of $702,000.

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
March 31, 2018	(In thousands)

Individually evaluated for impairment	$	23	$	1,215	$	-	$	-	$	-	$	1,238
Loans acquired with deteriorated credit quality		823		334		-		-		-		1,157
Collectively evaluated for impairment		231,925		346,958		17,831		100,840		75,964		773,518
Total Loans	$	232,771	$	348,507	$	17,831	$	100,840	$	75,964	$	775,913



	Real Estate Loans
							Commercial		Consumer
	Residential		Commercial		Construction		Loans		Loans		Total
	(In thousands)
December 31, 2017

Individually evaluated for impairment	$	23	$	1,224	$	-	$	-	$	-	$	1,247
Loans acquired with deteriorated credit quality		833		341		-		-		-		1,174
Collectively evaluated for impairment		234,903		341,369		17,228		97,461		70,953		761,914
Total Loans	$	235,759	$	342,934	$	17,228	$	97,461	$	70,953	$	764,335

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
March 31, 2018				(in thousands)
With no related allowance recorded:
Real Estate Loans
Residential	$	23	$	28	$	-
Commercial		1,215		1,487		-
Subtotal		1,238		1,515		-
Total:
Real Estate Loans
Residential		23		28		-
Commercial		1,215		1,487		-
Total Impaired Loans	$	1,238	$	1,515	$	-



			Unpaid
	Recorded		Principal		Associated
	Investment		Balance		Allowance
December 31, 2017				(in thousands)
With no related allowance recorded:
Real Estate Loans
Residential	$	23	$	28	$	-
Commercial		1,224		1,496		-
Subtotal		1,247		1,524		-
Total:
Real Estate Loans
Residential		23		28		-
Commercial		1,224		1,496		-
Total Impaired Loans	$	1,247	$	1,524	$	-

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 March 31, 2018 and 2017, respectively (in thousands):



	Average Recorded				Interest Income
	Investment				Recognized
	2018		2017		2018		2017

Real Estate Loans:
Residential	$	23	$	83	$	-	$	-
Commercial		1,219		2,559		14		22
Total	$	1,242	$	2,642	$	14	$	22

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 March 31, 2018 and December 31, 2017, troubled debt restructured loans totaled $1.1 million with no specific reserve. For the three-month period ended March 31, 2018, there were no new loans identified as troubled debt restructurings. During 2018, the Company did not recognize any losses on loans that were previously identified as a troubled debt restructuring.

For the three-month period ended March 31, 2017, there were no new loans identified as troubled debt restructurings. During the 2017 period, 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 $262,000 as of March 31, 2017.

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 nonperformance, 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 March 31, 2018 and December 31, 2017 (in thousands):



			Special					Doubtful
	Pass		Mention		Substandard		or Loss		Total
March 31, 2018
Commercial real estate loans	$	335,523	$	8,484	$	4,500	$	-	$	348,507
Commercial loans		100,776		12		52		-		100,840
Total	$	436,299	$	8,496	$	4,552	$	-	$	449,347



			Special					Doubtful
	Pass		Mention		Substandard		or Loss		Total
December 31, 2017
Commercial real estate loans	$	329,617	$	9,680	$	3,637	$	-	$	342,934
Commercial loans		97,389		16		56		-		97,461
Total	$	427,006	$	9,696	$	3,693	$	-	$	440,395

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 March 31, 2018 and December 31, 2017 (in thousands):



	Performing		Nonperforming		Total
March 31, 2018
Residential real estate loans	$	231,363	$	1,408	$	232,771
Construction		17,831		-		17,831
Consumer loans		75,964		-		75,964
Total	$	325,158	$	1,408	$	326,566



	Performing		Nonperforming		Total
December 31, 2017
Residential real estate loans	$	233,966	$	1,793	$	235,759
Construction		17,228		-		17,228
Consumer loans		70,953		-		70,953
Total	$	322,147	$	1,793	$	323,940

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 March 31, 2018 and December 31, 2017 (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
March 31, 2018
Real Estate loans
Residential	$	230,742	$	516	$	105	$	-	$	1,408	$	2,029	$	232,771
Commercial		347,526		685		24		-		272		981		348,507
Construction		17,831		-		-		-		-		-		17,831
Commercial loans		100,786		54		-		-		-		54		100,840
Consumer loans		75,865		84		15		-		-		99		75,964
Total	$	772,750	$	1,339	$	144	$	-	$	1,680	$	3,163	$	775,913



	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, 2017
Real Estate loans
Residential	$	233,291	$	594	$	81	$	87	$	1,706	$	2,468	$	235,759
Commercial		341,602		646		-		409		277		1,332		342,934
Construction		17,228		-		-		-		-		-		17,228
Commercial loans		97,424		10		27		-		-		37		97,461
Consumer loans		70,869		60		24		-		-		84		70,953
Total	$	760,414	$	1,310	$	132	$	496	$	1,983	$	3,921	$	764,335

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, 2017	$	1,272	$	5,265	$	90	$	463	$	544	$	7,634
Charge Offs		(51)		-		-		-		(48)		(99)
Recoveries		1		6		-		-		7		14
Provision for loan losses		303		(142)		30		175		184		550
Ending balance, March 31, 2018	$	1,525	$	5,129	$	120	$	638	$	687	$	8,099
Ending balance individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-
Ending balance collectively evaluated for impairment	$	1,525	$	5,129	$	120	$	638	$	687	$	8,099



(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		(39)		(85)		(8)		-		(52)		(184)
Recoveries		1		2		12		-		7		22
Provision for loan losses		125		291		13		62		109		600
Ending balance, March 31, 2017	$	1,179	$	4,831	$	95	$	369	$	427	$	6,901
Ending balance individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-
Ending balance collectively evaluated for impairment	$	1,179	$	4,831	$	95	$	369	$	427	$	6,901

The Company’s primary business activity as of March 31, 2018 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 March 31, 2018, the Company considered its concentration of credit risk to be acceptable. The highest concentrations are in commercial rentals with $68.5 million of loans outstanding, or 8.8% of total loans outstanding, and the hospitality/lodging industry with loans outstanding of $58.6 million, or 7.6% of loans outstanding. During 2018, the Company did not recognize any losses in the named concentrations.

The Company did not sell any residential mortgage loans during the first three months of 2018 or 2017.