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. Real estate loans are further segmented into three categories: residential, commercial, and construction, while installment loans are classified as either consumer automobile loans or other installment loans.

The following table presents the related aging categories of loans, by segment, as of March 31, 2019 and December 31, 2018:



	March 31, 2019
				Past Due		Past Due 90
				30 To 89		Days Or More		Non-
(In Thousands)	Current			Days		& Still Accruing		Accrual		Total
Commercial, financial, and agricultural	$	189,540		$	79	$	32	$	5,266	$	194,917
Real estate mortgage:
Residential	611,264			4,430		947		1,918		618,559
Commercial	357,600			2,057		267		7,165		367,089
Construction	38,922			287		—		72		39,281
Consumer automobile loans	139,462			301		—		74		139,837
Other consumer installment loans	23,243			545		22		31		23,841
	1,360,031			$	7,699	$	1,268	$	14,526	1,383,524
Net deferred loan fees and discounts	946									946
Allowance for loan losses	(13,792		)							(13,792		)
Loans, net	$	1,347,185								$	1,370,678



	December 31, 2018
				Past Due		Past Due 90
				30 To 89		Days Or More		Non-
(In Thousands)	Current			Days		& Still Accruing		Accrual		Total
Commercial, financial, and agricultural	$	182,651		$	616	$	—	$	5,294	$	188,561
Real estate mortgage:
Residential	611,281			7,688		1,238		2,172		622,379
Commercial	361,624			2,349		—		7,722		371,695
Construction	43,144			305		—		74		43,523
Consumer automobile loans	132,713			412		27		31		133,183
Other consumer installment loans	23,902			636		9		5		24,552
	1,355,315			$	12,006	$	1,274	$	15,298	1,383,893
Net deferred loan fees and discounts	864									864
Allowance for loan losses	(13,837		)							(13,837		)
Loans, net	$	1,342,342								$	1,370,920

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, 2019 and 2018:



	Three Months Ended March 31,
	2019				2018
(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	$	24	$	39	$	1	$	—
Real estate mortgage:
Residential	33		23		31		11
Commercial	89		40		61		17
Construction	1		1		—		—
Consumer automobile loans	2		1		—		—
Other consumer installment loans	1		—		—		—
	$	150	$	104	$	93	$	28

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 do 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, 2019 and December 31, 2018:



	March 31, 2019
	Recorded		Unpaid Principal		Related
(In Thousands)	Investment		Balance		Allowance
With no related allowance recorded:
Commercial, financial, and agricultural	$	1,242	$	1,242	$	—
Real estate mortgage:
Residential	2,372		2,372		—
Commercial	3,238		3,238		—
Construction	72		72		—
Consumer automobile loans	5		5		—
Installment loans to individuals	5		5		—
	6,934		6,934		—
With an allowance recorded:
Commercial, financial, and agricultural	4,100		4,100		644
Real estate mortgage:
Residential	1,743		1,742		286
Commercial	7,236		7,236		1,253
Construction	—		—		—
Consumer automobile loans	68		68		32
Installment loans to individuals	26		26		13
	13,173		13,172		2,228
Total:
Commercial, financial, and agricultural	5,342		5,342		644
Real estate mortgage:
Residential	4,115		4,114		286
Commercial	10,474		10,474		1,253
Construction	72		72		—
Consumer automobile loans	73		73		32
Installment loans to individuals	31		31		13
	$	20,107	$	20,106	$	2,228



	December 31, 2018
	Recorded		Unpaid Principal		Related
(In Thousands)	Investment		Balance		Allowance
With no related allowance recorded:
Commercial, financial, and agricultural	$	1,152	$	1,152	$	—
Real estate mortgage:
Residential	2,619		2,619		—
Commercial	2,457		2,457		—
Construction	74		74		—
Consumer automobile loans	31		31		—
Installment loans to individuals	—		—		—
	6,333		6,333		—
With an allowance recorded:
Commercial, financial, and agricultural	4,111		4,111		650
Real estate mortgage:
Residential	1,591		1,591		168
Commercial	9,207		9,207		1,720
Construction	—		—		—
Consumer automobile loans	—		—		—
Installment loans to individuals	5		5		5
	14,914		14,914		2,543
Total:
Commercial, financial, and agricultural	5,263		5,263		650
Real estate mortgage:
Residential	4,210		4,210		168
Commercial	11,664		11,664		1,720
Construction	74		74		—
Consumer automobile loans	31		31		—
Installment loans to individuals	5		5		5
	$	21,247	$	21,247	$	2,543

The following table presents the average recorded investment in impaired loans and related interest income recognized for the three months ended for March 31, 2019 and 2018:



	Three Months Ended March 31,
	2019						2018
(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	$	5,302	$	1	$	38	$	1,259	$	17	$	—
Real estate mortgage:
Residential	4,163		28		17		4,098		38		11
Commercial	11,069		31		36		9,430		58		17
Construction	73		—		1		—		—		—
Consumer automobile	52		—		1		—		—		—
Other consumer installment loans	18		—		—		—		—
	$	20,677	$	60	$	93	$	14,787	$	113	$	28

Currently, there is $3,000 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, 2019. Loan modifications that are considered TDRs completed during the three months ended March 31, 2018 were as follows:



	Three Months Ended March 31,
	2018
(In Thousands, Except Number of Contracts)	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial, financial, and agricultural	—	$	—	$	—
Real estate mortgage:
Residential	2	102		120
Commercial	1	106		106
	3	$	208	$	226

There were no loan modifications considered to be TDRs made during the twelve months previous to March 31, 2019 that defaulted during the three months ended March 31, 2019. There were no loan modifications considered TDRs made during the twelve months previous to March 31, 2018 that defaulted during the three months ended March 31, 2018.

Troubled debt restructurings amounted to $8,836,000 and $9,599,000 as of March 31, 2019 and December 31, 2018, respectively.

The amount of foreclosed residential real estate held at March 31, 2019 and December 31, 2018, totaled $536,000 and $624,000, respectively. Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at March 31, 2019 and December 31, 2018, totaled $189,000 and $167,000, 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, 2019 and December 31, 2018:



	March 31, 2019
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer automobile		Other consumer installment loans
(In Thousands)	Commercial, Financial, and Agricultural		Residential		Commercial		Construction		Consumer automobile		Other consumer installment loans		Totals
Pass	$	186,169	$	616,004	$	348,504	$	39,268	$	139,837	$	23,841	$	1,353,623
Special Mention	3,430		691		6,449		—		—		—		10,570
Substandard	5,318		1,864		12,136		13		—		—		19,331
	$	194,917	$	618,559	$	367,089	$	39,281	$	139,837	$	23,841	$	1,383,524



	December 31, 2018
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer automobile		Other consumer installment loans
(In Thousands)	Commercial, Financial, and Agricultural		Residential		Commercial		Construction		Consumer automobile		Other consumer installment loans		Totals
Pass	$	179,840	$	619,800	$	351,703	$	43,523	$	133,183	$	24,552	$	1,352,601
Special Mention	3,426		694		6,587		—		—		—		10,707
Substandard	5,295		1,885		13,405				—		—		20,585
	$	188,561	$	622,379	$	371,695	$	43,523	$	133,183	$	24,552	$	1,383,893

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. However, management may adjust the moving average time frame by up to four quarters to adjust for variances in the economic cycle. 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, 2019 and 2018:



	Three Months Ended March 31, 2019
	Commercial, Financial, and Agricultural			Real Estate Mortgages									Consumer automobile			Other consumer installment
(In Thousands)	Commercial, Financial, and Agricultural			Residential			Commercial			Construction			Consumer automobile			Other consumer installment			Unallocated			Totals
Beginning Balance	$	1,680		$	5,616		$	4,047		$	143		$	1,328		$	259		$	764		$	13,837
Charge-offs	(50		)	(73		)	(139		)	—			(100		)	(96		)	—			(458		)
Recoveries	6			1			—			5			26			15			—			53
Provision	96			186			(106		)	(18		)	148			100			(46		)	360
Ending Balance	$	1,732		$	5,730		$	3,802		$	130		$	1,402		$	278		$	718		$	13,792



	Three Months Ended March 31, 2018
	Commercial, Financial, and Agricultural			Real Estate Mortgages									Consumer automobile			Other consumer installment
(In Thousands)	Commercial, Financial, and Agricultural			Residential			Commercial			Construction			Consumer automobile			Other consumer installment			Unallocated			Totals
Beginning Balance	$	1,177		$	5,679		$	4,277		$	155		$	804		$	271		$	495		$	12,858
Charge-offs	(33		)	(51		)	(55		)	—			(30		)	(71		)	—			(240		)
Recoveries	7			24			—			2			1			24			—			58
Provision	221			4			(219		)	(1		)	241			81			(167		)	160
Ending Balance	$	1,372		$	5,656		$	4,003		$	156		$	1,016		$	305		$	328		$	12,836

The shift in allocation of the loan provision is primarily due to portfolio growth and changes in the credit metrics within the real estate mortgage portfolio.

The Company grants commercial, industrial, residential, and installment loans to customers primarily throughout north-east and central Pennsylvania. Although the Company has a diversified loan portfolio, 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 the following to gross loans at March 31, 2019 and 2018:



	March 31,
	2019		2018
Owners of residential rental properties	14.82	%	15.00	%
Owners of commercial rental properties	12.07	%	13.16	%

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, 2019 and December 31, 2018:



	March 31, 2019
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer Automobile		Other consumer installment		Unallocated
(In Thousands)	Commercial, Financial, and Agricultural		Residential		Commercial		Construction		Consumer Automobile		Other consumer installment		Unallocated		Totals
Allowance for Loan Losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	644	$	286	$	1,253	$	—	$	32	$	13	$	—	$	2,228
Collectively evaluated for impairment	1,088		5,444		2,549		130		1,370		265		718		11,564
Total ending allowance balance	$	1,732	$	5,730	$	3,802	$	130	$	1,402	$	278	$	718	$	13,792

Loans:
Individually evaluated for impairment	$	5,342	$	4,115	$	10,474	$	72	$	73	$	31			$	20,107
Collectively evaluated for impairment	189,575		614,444		356,615		39,209		139,764		23,810				1,363,417
Total ending loans balance	$	194,917	$	618,559	$	367,089	$	39,281	$	139,837	$	23,841			$	1,383,524



	December 31, 2018
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer Automobile		Other consumer installment		Unallocated
(In Thousands)	Commercial, Financial, and Agricultural		Residential		Commercial		Construction		Consumer Automobile		Other consumer installment		Unallocated		Totals
Allowance for Loan Losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	650	$	168	$	1,720	$	—	$	—	$	5	$	—	$	2,543
Collectively evaluated for impairment	1,030		5,448		2,327		143		1,328		254		764		11,294
Total ending allowance balance	$	1,680	$	5,616	$	4,047	$	143	$	1,328	$	259	$	764	$	13,837

Loans:
Individually evaluated for impairment	$	5,263	$	4,210	$	11,664	$	74	$	31	$	5			$	21,247
Collectively evaluated for impairment	183,298		618,169		360,031		43,449		133,152		24,547				1,362,646
Total ending loans balance	$	188,561	$	622,379	$	371,695	$	43,523	$	133,183	$	24,552			$	1,383,893