Loans

3 Months Ended

Mar. 31, 2015

Loans and Leases Receivable Disclosure [Abstract]

Loans

Loans

Management segments the Banks' loan portfolio to a level that enables risk and performance monitoring according to similar risk characteristics.  Loans are segmented based on the underlying collateral characteristics.  Categories include commercial, financial, and agricultural, real estate, and installment loans to individuals.  Real estate loans are further segmented into three categories: residential, commercial, and construction.

The following table presents the related aging categories of loans, by segment, as of March 31, 2015 and December 31, 2014:

	March 31, 2015
				Past Due		Past Due 90
				30 To 89		Days Or More		Non-
(In Thousands)	Current			Days		& Still Accruing		Accrual		Total
Commercial, financial, and agricultural	$	130,868		$	665	$	216	$	834	$	132,583
Real estate mortgage:
Residential	466,322			7,043		129		709		474,203
Commercial	281,544			2,682		—		8,311		292,537
Construction	21,538			4		46		908		22,496
Installment loans to individuals	22,867			402		—		4		23,273
	923,139			$	10,796	$	391	$	10,766	945,092
Net deferred loan fees and discounts	(1,222		)							(1,222		)
Allowance for loan losses	(10,826		)							(10,826		)
Loans, net	$	911,091								$	933,044

	December 31, 2014
				Past Due		Past Due 90
				30 To 89		Days Or More		Non-
(In Thousands)	Current			Days		& Still Accruing		Accrual		Total
Commercial, financial, and agricultural	$	122,624		$	773	$	—	$	759	$	124,156
Real estate mortgage:
Residential	450,503			6,078		332		847		457,760
Commercial	279,731			1,819		54		9,744		291,348
Construction	21,485			—		—		511		21,996
Installment loans to individuals	21,125			383		1		—		21,509
	895,468			$	9,053	$	387	$	11,861	916,769
Net deferred loan fees and discounts	(1,190		)							(1,190		)
Allowance for loan losses	(10,579		)							(10,579		)
Loans, net	$	883,699								$	905,000

Purchased loans acquired are recorded at fair value on their purchase date without a carryover of the related allowance for loan losses.

Upon the acquisition of Luzerne Bank on June 1, 2013, 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. There were no material increases or decreases in the expected cash flows of these loans between June 1, 2013 (the “acquisition date”) and March 31, 2015.  The fair value of purchased credit-impaired loans, on the acquisition date, was determined, primarily based on the fair value of loan collateral.  The carrying value of purchased loans acquired with deteriorated credit quality was $447,000 at March 31, 2015.

On the acquisition date, the preliminary estimate of the unpaid principal balance for all loans evidencing credit impairment acquired in the Luzerne Bank acquisition was $1,211,000 and the estimated fair value of the loans was $878,000. Total contractually required payments on these loans, including interest, at the acquisition date was $1,783,000. However, the Company’s preliminary estimate of expected cash flows was $941,000. 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 either the customer or liquidation of collateral) of $842,000 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 $63,000 on the acquisition date relating to these impaired loans.

The carrying value of the loans acquired in the Luzerne Bank transaction with specific evidence of deterioration in 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 Luzerne Bank acquisition as of June 1, 2013.

The amortizable yield for purchased credit-impaired loans was fully amortized during 2014. Changes in the amortizable yield for purchased credit-impaired loans were as follows for the three months ended March 31, 2014:

(In Thousands)	March 31, 2014
Balance at beginning of period or at acquisition	$	35
Accretion	(7		)
Balance at end of period	$	28

The following table presents additional information regarding loans acquired in the Luzerne Bank transaction with specific evidence of deterioration in credit quality:

(In Thousands)	March 31, 2015		December 31, 2014
Outstanding balance	$	447	$	449
Carrying amount	347		349

There were no material increases or decreases in the expected cash flows of these loans between June 1, 2013 (the “acquisition date”) and March 31, 2015. There has been no allowance for loan losses recorded for acquired loans with specific evidence of deterioration in credit quality as of March 31, 2015.

The following table presents interest income the Banks would have recorded if interest had been recorded based on the original loan agreement terms and rate of interest for non-accrual loans and interest income recognized on a cash basis for non-accrual loans for the three months ended March 31, 2015 and 2014:

	Three Months Ended March 31,
	2015				2014
(In Thousands)	Interest Income That Would Have Been Recorded Based on Original Term and Rate		Interest Income Recorded on a Cash Basis		Interest Income That Would Have Been Recorded Based on Original Term and Rate		Interest Income Recorded on a Cash Basis
Commercial, financial, and agricultural	$	12	$	8	$	2	$	—
Real estate mortgage:
Residential	5		9		8		4
Commercial	105		25		131		34
Construction	15		7		19		8
	$	137	$	49	$	160	$	46

Impaired Loans

Impaired loans are loans for which it is probable the Banks will not be able to collect all amounts due according to the contractual terms of the loan agreement.  The Banks evaluate such loans for impairment individually and does not aggregate loans by major risk classifications.  The definition of “impaired loans” is not the same as the definition of “non-accrual loans,” although the two categories overlap.  The Banks may choose to place a loan on non-accrual status due to payment delinquency or uncertain collectability, while not classifying the loan as impaired. Factors considered by management in determining impairment include payment status and collateral value.  The amount of impairment for these types of loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original interest rate, and its recorded value, or as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loan.  When foreclosure is probable, impairment is measured based on the fair value of the collateral.

Management evaluates individual loans in all of the commercial segments for possible impairment if the loan is greater than $100,000 and if the loan is either on non-accrual status or has a risk rating of substandard.  Management may also elect to measure an individual loan for impairment if less than $100,000 on a case-by-case basis.

Mortgage loans on one-to-four family properties and all consumer loans are large groups of smaller-balance homogeneous loans and are measured for impairment collectively. Loans that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified as impaired.  Management determines the significance of payment delays on a case-by-case basis taking into consideration all circumstances surrounding the loan and the borrower including the length of the delay, the borrower’s prior payment record, and the amount of shortfall in relation to the principal and interest owed.  Interest income for impaired loans is recorded consistent with the Banks' policy on non-accrual loans.

The following table presents the recorded investment, unpaid principal balance, and related allowance of impaired loans by segment as of March 31, 2015 and December 31, 2014:

	March 31, 2015
	Recorded		Unpaid Principal		Related
(In Thousands)	Investment		Balance		Allowance
With no related allowance recorded:
Commercial, financial, and agricultural	$	516	$	516	$	—
Real estate mortgage:
Residential	594		594		—
Commercial	4,435		4,435		—
Construction	610		610		—
	6,155		6,155		—
With an allowance recorded:
Commercial, financial, and agricultural	670		670		264
Real estate mortgage:
Residential	1,314		1,414		211
Commercial	10,196		10,433		1,451
Construction	307		307		66
	12,487		12,824		1,992
Total:
Commercial, financial, and agricultural	1,186		1,186		264
Real estate mortgage:
Residential	1,908		2,008		211
Commercial	14,631		14,868		1,451
Construction	917		917		66
	$	18,642	$	18,979	$	1,992

	December 31, 2014
	Recorded		Unpaid Principal		Related
(In Thousands)	Investment		Balance		Allowance
With no related allowance recorded:
Commercial, financial, and agricultural	$	439	$	439	$	—
Real estate mortgage:
Residential	139		139		—
Commercial	3,228		3,228		—
Construction	716		716		—
	4,522		4,522		—
With an allowance recorded:
Commercial, financial, and agricultural	673		673		298
Real estate mortgage:
Residential	1,327		1,449		147
Commercial	10,745		10,889		1,581
Construction	309		309		67
	13,054		13,320		2,093
Total:
Commercial, financial, and agricultural	1,112		1,112		298
Real estate mortgage:
Residential	1,466		1,588		147
Commercial	13,973		14,117		1,581
Construction	1,025		1,025		67
	$	17,576	$	17,842	$	2,093

The following table presents the average recorded investment in impaired loans and related interest income recognized for the three months ended for March 31, 2015 and 2014:

	Three Months Ended March 31,
	2015						2014
(In Thousands)	Average Investment in Impaired Loans		Interest Income Recognized on an Accrual Basis on Impaired Loans		Interest Income Recognized on a Cash Basis on Impaired Loans		Average Investment in Impaired Loans		Interest Income Recognized on an Accrual Basis on Impaired Loans		Interest Income Recognized on a Cash Basis on Impaired Loans
Commercial, financial, and agricultural	$	1,149	$	5	$	7	$	528	$	7	$	—
Real estate mortgage:
Residential	1,644		12		5		1,170		13		4
Commercial	14,773		71		25		9,492		42		15
Construction	719		—		7		1,120		—		8
	$	18,285	$	88	$	44	$	12,310	$	62	$	27

Currently, there is $184,000 committed to be advanced in connection with impaired loans.

Troubled Debt Restructurings

The loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring (“TDR”), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties.  These concessions typically result from loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions.  Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.

There were no loan modifications considered TDRs completed during the three months ended March 31, 2014. Loan modifications that are considered TDRs completed during the three months ended March 31, 2015 were as follows:

	Three Months Ended March 31,
	2015
(In Thousands, Except Number of Contracts)	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial, financial, and agricultural	2	$	97	$	97
Real estate mortgage:
Residential	5	234		234
Commercial	1	270		270
	8	$	601	$	601

There was one loan modification considered a TDRs made during the twelve months previous to March 31, 2015 that defaulted during the three months ended March 31, 2015.  The loan that defaulted is a commercial loan with a recorded investment of $48,000 at March 31, 2015. There were two loan modifications considered TDRs made during the twelve months previous to March 31, 2014 that defaulted during the three months ended March 31, 2014. The loans that defaulted are commercial real estate loans that are currently in litigation with a recorded investment of $1,634,000 at March 31, 2014.

Troubled debt restructurings amounted to $9,666,000 and $11,810,000 as of March 31, 2015 and December 31, 2014.

The amount of foreclosed residential real estate held at March 31, 2015 and December 31, 2014, totaled $125,000 and $324,000, respectively. Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at March 31, 2015 and December 31, 2014, totaled $401,000 and $382,000, respectively.

Internal Risk Ratings

Management uses a ten point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six 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 evaluated for substandard classification.  Loans in the doubtful category exhibit the same weaknesses found in the substandard loans, however, the weaknesses are more pronounced.  Such loans are static and collection in full is improbable.  However, these loans are not yet rated as loss because certain events may occur which would salvage the debt.  Loans classified loss are considered uncollectible and charge-off is imminent.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Banks have a structured loan rating process with several layers of internal and external oversight.  Generally, consumer and residential mortgage loans are included in the pass category unless a specific action, such as bankruptcy, repossession, or death occurs to raise awareness of a possible credit event.  An external annual loan review of large commercial relationships is performed, as well as a sample of smaller transactions. Confirmation of the appropriate risk category is included in the review. Detailed reviews, including plans for resolution, are performed on loans classified as substandard, doubtful, or loss on a quarterly basis.

The following table presents the credit quality categories identified above as of March 31, 2015 and December 31, 2014:

	March 31, 2015
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Installment Loans to Individuals
(In Thousands)			Residential		Commercial		Construction				Totals
Pass	$	127,707	$	471,113	$	260,831	$	21,486	$	23,273	$	904,410
Special Mention	2,315		1,971		13,983		400		—		18,669
Substandard	2,561		1,119		17,723		610		—		22,013
	$	132,583	$	474,203	$	292,537	$	22,496	$	23,273	$	945,092

	December 31, 2014
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Installment Loans to Individuals
(In Thousands)			Residential		Commercial		Construction				Totals
Pass	$	118,210	$	454,885	$	256,444	$	20,927	$	21,509	$	871,975
Special Mention	3,186		2,384		16,262		445		—		22,277
Substandard	2,760		491		18,642		624		—		22,517
	$	124,156	$	457,760	$	291,348	$	21,996	$	21,509	$	916,769

Allowance for Loan Losses

An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio.  The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated future loss experience, and the amount of non-performing loans.

The Banks' methodology for determining the ALL is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment (previously discussed) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance.  The total of the two components represents the Banks' ALL.

Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate.  Allowances are segmented based on collateral characteristics previously disclosed, and consistent with credit quality monitoring.  Loans that are collectively evaluated for impairment are grouped into two classes for evaluation.  A general allowance is determined for “Pass” rated credits, while a separate pool allowance is provided for “Criticized” rated credits that are not individually evaluated for impairment.

For the general allowances, historical loss trends are used in the estimation of losses in the current portfolio.  These historical loss amounts are modified by other qualitative factors.  A historical charge-off factor is calculated utilizing a twelve quarter moving average.  Management has identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience.  The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are: national and local economic trends and conditions; levels of and trends in delinquency rates and non-accrual loans; trends in volumes and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry and/or geographic standpoint.

Loans in the criticized pools, which possess certain qualities or characteristics that may lead to collection and loss issues, are closely monitored by management and subject to additional qualitative factors.  Management also monitors industry loss factors by loan segment for applicable adjustments to actual loss experience.

Management reviews the loan portfolio on a quarterly basis in order to make appropriate and timely adjustments to the ALL.  When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.

Activity in the allowance is presented for the three months ended March 31, 2015 and 2014:

	Three Months Ended March 31, 2015
	Commercial, Financial, and Agricultural			Real Estate Mortgages									Installment Loans to Individuals
(In Thousands)				Residential			Commercial			Construction						Unallocated			Totals
Beginning Balance	$	1,124		$	3,755		$	4,205		$	786		$	245		$	464		$	10,579
Charge-offs	(20		)	(1		)	(449		)	—			(56		)	—			(526		)
Recoveries	26			24			—			11			12			—			73
Provision	348			449			117			(45		)	(8		)	(161		)	700
Ending Balance	$	1,478		$	4,227		$	3,873		$	752		$	193		$	303		$	10,826

	Three Months Ended March 31, 2014
	Commercial, Financial, and Agricultural		Real Estate Mortgages								Installment Loans to Individuals
(In Thousands)			Residential			Commercial			Construction					Unallocated			Totals
Beginning Balance	$	474	$	3,917		$	4,079		$	741	$	139		$	794		$	10,144
Charge-offs	—		(56		)	(2,038		)	—		(40		)	—			(2,134		)
Recoveries	3		2			—			—		20			—			25
Provision	60		(801		)	1,283			54		42			(153		)	485
Ending Balance	$	537	$	3,062		$	3,324		$	795	$	161		$	641		$	8,520

The Company grants commercial, industrial, residential, and installment loans to customers throughout north-east and central Pennsylvania. Although the Company has a diversified loan portfolio at March 31, 2015, a substantial portion of its debtors’ ability to honor their contracts is dependent on the economic conditions within this region.

The Company has a concentration of loans at March 31, 2015 and 2014 as follows:

	March 31,
	2015		2014
Owners of residential rental properties	16.20	%	15.87	%
Owners of commercial rental properties	14.46	%	13.18	%

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of March 31, 2015 and December 31, 2014:

	March 31, 2015
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Installment Loans to Individuals		Unallocated
(In Thousands)			Residential		Commercial		Construction						Totals
Allowance for Loan Losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	264	$	211	$	1,451	$	66	$	—	$	—	$	1,992
Collectively evaluated for impairment	1,214		4,016		2,422		686		193		303		8,834
Total ending allowance balance	$	1,478	$	4,227	$	3,873	$	752	$	193	$	303	$	10,826
Loans:
Individually evaluated for impairment	$	1,186	$	1,561	$	14,631	$	917	$	—			$	18,295
Loans acquired with deteriorated credit quality	—		347		—		—		—				347
Collectively evaluated for impairment	131,397		472,295		277,906		21,579		23,273				926,450
Total ending loans balance	$	132,583	$	474,203	$	292,537	$	22,496	$	23,273			$	945,092

	December 31, 2014
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Installment Loans to Individuals		Unallocated
(In Thousands)			Residential		Commercial		Construction						Totals
Allowance for Loan Losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	298	$	147	$	1,581	$	67	$	—	$	—	$	2,093
Collectively evaluated for impairment	826		3,608		2,624		719		245		464		8,486
Total ending allowance balance	$	1,124	$	3,755	$	4,205	$	786	$	245	$	464	$	10,579
Loans:
Individually evaluated for impairment	$	1,112	$	1,117	$	13,973	$	1,025	$	—			$	17,227
Loans acquired with deteriorated credit quality	—		349		—		—		—				349
Collectively evaluated for impairment	123,044		456,294		277,375		20,971		21,509				899,193
Total ending loans balance	$	124,156	$	457,760	$	291,348	$	21,996	$	21,509			$	916,769