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.


	September 30, 2020
			Past Due		Past Due 90
			30 To 89		Days Or More		Non-
(In Thousands)	Current		Days		& Still Accruing		Accrual		Total
Commercial, financial, and agricultural	$	171,344	$	245	$	—	$	1,565	$	173,154
Real estate mortgage:
Residential	590,275		2,581		595		1,667		595,118
Commercial	348,644		429		196		6,452		355,721
Construction	43,142		—		—		58		43,200
Consumer automobile loans	159,810		374		—		17		160,201
Other consumer installment loans	20,294		373		—		3		20,670
	1,333,509		$	4,002	$	791	$	9,762	1,348,064
Net deferred loan fees and discounts	1,076								1,076
Allowance for loan losses	(13,429)								(13,429)
Loans, net	$	1,321,156							$	1,335,711


	December 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	$	153,737	$	249	$	30	$	2,197	$	156,213
Real estate mortgage:
Residential	615,580		4,881		1,529		1,266		623,256
Commercial	355,597		775		164		6,725		363,261
Construction	37,871		131		—		65		38,067
Consumer automobile loans	149,703		709		—		105		150,517
Other consumer installment loans	22,124		579		324		16		23,043
	1,334,612		$	7,324	$	2,047	$	10,374	1,354,357
Net deferred loan fees and discounts	1,187								1,187
Allowance for loan losses	(11,894)								(11,894)
Loans, net	$	1,323,905							$	1,343,650

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 and nine months ended September 30, 2020 and 2019:


	Three Months Ended September 30,
	2020				2019
(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	$	2	$	14	$	51	$	49
Real estate mortgage:
Residential	14		2		76		76
Commercial	52		—		68		30
Construction	—		—		1		1
Consumer automobile loans	—		—		—		—
Other consumer installment loans	—		—		1		1
	$	68	$	16	$	197	$	157


	Nine Months Ended September 30,
	2020				2019
(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	$	37	$	14	$	108	$	132
Real estate mortgage:
Residential	27		2		142		118
Commercial	116		—		233		104
Construction	1		—		3		3
Consumer automobile loans	2		3		3		2
Other consumer installment loans	3		—		2		1
	$	186	$	19	$	491	$	360

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 individually evaluate such loans for impairment 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 or worse. 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 with the exception of loans identified as troubled debt restructurings. 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 to the Banks' policy.


	December 31, 2019
	Recorded		Unpaid Principal		Related
(In Thousands)	Investment		Balance		Allowance
With no related allowance recorded:
Commercial, financial, and agricultural	$	2,285	$	5,072	$	—
Real estate mortgage:
Residential	5,008		5,008		—
Commercial	5,035		5,035		—
Construction	65		65		—
Consumer automobile loans	—		—		—
Installment loans to individuals	—		—		—
	12,393		15,180		—
With an allowance recorded:
Commercial, financial, and agricultural	—		—		—
Real estate mortgage:
Residential	1,168		1,200		211
Commercial	3,540		3,590		1,104
Construction	—		—		—
Consumer automobile loans	130		130		62
Installment loans to individuals	16		16		16
	4,854		4,936		1,393
Total:
Commercial, financial, and agricultural	2,285		5,072		—
Real estate mortgage:
Residential	6,176		6,208		211
Commercial	8,575		8,625		1,104
Construction	65		65		—
Consumer automobile loans	130		130		62
Installment loans to individuals	16		16		16
	$	17,247	$	20,116	$	1,393


	Three Months Ended September 30,
	2020						2019
(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	$	1,543	$	33	$	14	$	5,236	$	1	$	49
Real estate mortgage:
Residential	5,117		63		2		5,006		26		76
Commercial	6,587		71		—		9,037		30		31
Construction	54		1		—		70		—		1
Consumer automobile	147		—		—		37		—		—
Other consumer installment loans	—		—		—		5		—		—
	$	13,448	$	168	$	16	$	19,391	$	57	$	157


	Nine Months Ended September 30,
	2020						2019
(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	$	1,849	$	34	$	14	$	5,269	$	3	$	131
Real estate mortgage:
Residential	5,535		177		2		4,584		81		115
Commercial	7,577		118		—		10,053		91		100
Construction	60		1		—		72		—		3
Consumer automobile	111		1		3		45		—		1
Other consumer installment loans	4		—		—		11		—		—
	$	15,136	$	331	$	19	$	20,034	$	175	$	350

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 to be TDRs completed during the three and nine months ended September 30, 2020. There were five loan modifications considered TDRs completed during the nine months ended September 30, 2019. Loan modifications that are considered TDRs completed during the three and nine months ended September 30, 2019 were as follows:


		Three Months Ended September 30,
	2019
(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			1	2,059		2,059
Commercial			—	—		—

			1	$	2,059	$	2,059


		Nine Months Ended September 30,
	2019
(In Thousands, Except Number of Contracts)			Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial, financial, and agricultural			2	$	4,014	$	4,014
Real estate mortgage:
Residential			1	2,059		2,059
Commercial			2	2,862		2,862

			5	$	8,935	$	8,935

There were two loan modifications considered to be TDRs made during the twelve months previous to September 30, 2020 that defaulted during the nine months ended September 30, 2020. The defaulted loan types and recorded investments at September

30, 2020 are as follows: one commercial real estate loan with a recorded investment of $1,040,000, and one commercial and agricultural loans with a recorded investment of $640,000. There were no loan modifications considered to be TDRs made during the twelve months previous to September 30, 2019 that defaulted during the nine months ended September 30, 2019.

The amount of foreclosed residential real estate held at September 30, 2020 and December 31, 2019, totaled $376,000 and $493,000, respectively. Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at September 30, 2020 and December 31, 2019, totaled $446,000 and $32,000, respectively.

The Company began offering short-term loan modifications to provide relief to borrowers during the COVID-19 national emergency. The CARES Act along with a joint agency statement issued by federal and state banking agencies, provides that short-term modifications made in a good faith basis in response to COVID-19 who were current at the time the modification program is implemented do not need to be accounted for as TDRs. Loan modifications and payment deferrals have been at historical high levels as the impact of the pandemic continues. As of September 30, 2020, the loan modification/deferral program in place has generated deferrals of up to 180 days that have been granted on 1,530 loans with 1,395 loans remaining in their deferral period with an aggregate outstanding balance of $230,326,000. These loan modifications met applicable requirements to not be considered troubled debt restructurings. The number of customers seeking loan modifications or payment deferrals may increase as the effects of the pandemic continue.

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 semi-annual loan review of large commercial relationships is performed, as well as a sample of smaller transactions. The 2020 loan review has an aggregate commercial relationship threshold of $1,750,000 which can consist of outstanding loans, commercial real estate mortgages and outstanding commitments. Detailed reviews, including plans for resolution, are performed on loans classified as substandard, doubtful, or loss on a quarterly basis.


	September 30, 2020
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer automobile		Other consumer installment loans
(In Thousands)			Residential		Commercial		Construction						Totals
Pass	$	167,073	$	592,131	$	341,309	$	43,041	$	160,184	$	20,667	$	1,324,405
Special Mention	4,516		1,320		7,960		40		—		—		13,836
Substandard	1,565		1,667		6,452		119		17		3		9,823
	$	173,154	$	595,118	$	355,721	$	43,200	$	160,201	$	20,670	$	1,348,064


	December 31, 2019
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer automobile		Other consumer installment loans
(In Thousands)			Residential		Commercial		Construction						Totals
Pass	$	149,349	$	618,350	$	348,864	$	37,931	$	150,517	$	23,039	$	1,328,050
Special Mention	3,174		2,436		5,080		—		—		—		10,690
Substandard	3,690		2,470		9,317		136		—		4		15,617
	$	156,213	$	623,256	$	363,261	$	38,067	$	150,517	$	23,043	$	1,354,357

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.


	Three Months Ended September 30, 2020
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer automobile		Other consumer installment
(In Thousands)			Residential		Commercial		Construction						Unallocated		Totals
Beginning Balance	$	1,953	$	4,478	$	3,335	$	150	$	2,214	$	127	$	720	$	12,977
Charge-offs	—		(6)		—		—		(200)		(33)		—		(239)
Recoveries	9		1		—		—		10		26		—		46
Provision	17		(24)		(290)		20		(27)		135		814		645
Ending Balance	$	1,979	$	4,449	$	3,045	$	170	$	1,997	$	255	$	1,534	$	13,429


	Three Months Ended September 30, 2019
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer automobile		Other consumer installment
(In Thousands)			Residential		Commercial		Construction						Unallocated		Totals
Beginning Balance	$	1,584	$	5,749	$	3,523	$	132	$	1,435	$	240	$	1,338	$	14,001
Charge-offs	—		(114)		—		—		(34)		(73)		—		(221)
Recoveries	43		2		—		2		14		48		—		109
Provision	159		4		(12)		22		(41)		27		201		360
Ending Balance	$	1,786	$	5,641	$	3,511	$	156	$	1,374	$	242	$	1,539	$	14,249


t	Nine Months Ended September 30, 2020
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer automobile		Other consumer installment
(In Thousands)			Residential		Commercial		Construction						Unallocated		Totals
Beginning Balance	$	1,779	$	4,306	$	3,210	$	118	$	1,780	$	278	$	423	$	11,894
Charge-offs	(22)		(174)		—		—		(289)		(215)		—		(700)
Recoveries	32		48		—		5		17		93		—		195
Provision	190		269		(165)		47		489		99		1,111		2,040
Ending Balance	$	1,979	$	4,449	$	3,045	$	170	$	1,997	$	255	$	1,534	$	13,429


	Nine Months Ended September 30, 2019
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer automobile		Other consumer installment
(In Thousands)			Residential		Commercial		Construction						Unallocated		Totals
Beginning Balance	$	1,680	$	5,616	$	4,047	$	143	$	1,328	$	259	$	764	$	13,837
Charge-offs	(80)		(251)		(150)		—		(172)		(235)		—		(888)
Recoveries	84		3		1		10		74		93		—		265
Provision	102		273		(387)		3		144		125		775		1,035
Ending Balance	$	1,786	$	5,641	$	3,511	$	156	$	1,374	$	242	$	1,539	$	14,249

The shift in allocation of the loan provision is primarily due to changes in the credit metrics within the loan portfolio and the economic uncertainty caused by the COVID-19 pandemic. The increase in the loan provision within the unallocated segment is the result of the uncertainty that has been caused by the COVID-19 pandemic.

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.


	September 30, 2020
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer Automobile		Other consumer installment		Unallocated
(In Thousands)			Residential		Commercial		Construction								Totals
Allowance for Loan Losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	187	$	920	$	—	$	—	$	—	$	—	$	1,107
Collectively evaluated for impairment	1,979		4,262		2,125		170		1,997		255		1,534		12,322
Total ending allowance balance	$	1,979	$	4,449	$	3,045	$	170	$	1,997	$	255	$	1,534	$	13,429

Loans:
Individually evaluated for impairment	$	1,835	$	5,577	$	7,205	$	60	$	—	$	—			$	14,677

Collectively evaluated for impairment	171,319		589,541		348,516		43,140		160,201		20,670				1,333,387
Total ending loans balance	$	173,154	$	595,118	$	355,721	$	43,200	$	160,201	$	20,670			$	1,348,064


	December 31, 2019
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer Automobile		Other consumer installment		Unallocated
(In Thousands)			Residential		Commercial		Construction								Totals
Allowance for Loan Losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	211	$	1,104	$	—	$	62	$	16	$	—	$	1,393
Collectively evaluated for impairment	1,779		4,095		2,106		118		1,718		262		423		10,501
Total ending allowance balance	$	1,779	$	4,306	$	3,210	$	118	$	1,780	$	278	$	423	$	11,894

Loans:
Individually evaluated for impairment	$	2,285	$	6,176	$	8,575	$	65	$	130	$	16			$	17,247

Collectively evaluated for impairment	153,928		617,080		354,686		38,002		150,387		23,027				1,337,110
Total ending loans balance	$	156,213	$	623,256	$	363,261	$	38,067	$	150,517	$	23,043			$	1,354,357