XML 26 R15.htm IDEA: XBRL DOCUMENT

LOANS

9 Months Ended

Sep. 30, 2020

7. LOANS

The loans receivable portfolio is segmented into residential mortgage, commercial and consumer loans. Loans outstanding at September 30, 2020 and December 31, 2019 are summarized by segment, and by classes within each segment, as follows:

Summary of Loans by Type

(In Thousands)


	September 30,		December 31,
	2020		2019
Residential mortgage:
Residential mortgage loans - first liens	$	541,827	$	510,641
Residential mortgage loans - junior liens		27,907		27,503
Home equity lines of credit		40,143		33,638
1-4 Family residential construction		29,146		14,798
Total residential mortgage		639,023		586,580
Commercial:
Commercial loans secured by real estate		530,874		301,227
Commercial and industrial		156,169		126,374
Small Business Administration - Paycheck Protection Program		163,050		0
Political subdivisions		47,883		53,570
Commercial construction and land		41,906		33,555
Loans secured by farmland		11,913		12,251
Multi-family (5 or more) residential		62,330		31,070
Agricultural loans		3,561		4,319
Other commercial loans		17,385		16,535
Total commercial		1,035,071		578,901
Consumer		17,276		16,741
Total		1,691,370		1,182,222
Less: allowance for loan losses		(10,753)		(9,836)
Loans, net	$	1,680,617	$	1,172,386

In the table above, outstanding loan balances are presented net of deferred loan origination fees, net, of $7,620,000 at September 30, 2020 and $2,482,000 at December 31, 2019.

The Corporation grants loans to individuals as well as commercial and tax-exempt entities. Commercial, residential and personal loans are made to customers geographically concentrated in northcentral Pennsylvania, the southern tier of New York State and southeastern Pennsylvania. Although the Corporation has a diversified loan portfolio, a significant portion of its debtors’ ability to honor their contracts is dependent on the local economic conditions within the region.

There is no concentration of loans to borrowers engaged in similar businesses or activities that exceed 10% of total loans at either September 30, 2020 or December 31, 2019.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act is a $2 trillion stimulus package designed to provide relief to U.S. businesses and consumers struggling as a result of the pandemic. A provision in the CARES Act includes creation of the Paycheck Protection Program (“PPP”) through the Small Business Administration (“SBA”) and Treasury Department. Under the PPP, the Corporation, as an SBA-certified lender, provides SBA-guaranteed loans to small businesses to pay their employees, rent, mortgage interest, and utilities. PPP loans will be forgiven subject to clients’ providing documentation evidencing their compliant use of funds and otherwise complying with the terms of the program.

The maximum term of PPP loans is five years, though most of the Corporation’s PPP loans have two-year terms, and the Corporation will be repaid sooner to the extent the loans are forgiven. The interest rate on PPP loans is 1%, and the Corporation has received fees from the SBA ranging between 1% and 5% per loan, depending on the size of the loan. Fees on PPP loans, net of origination costs and a market rate adjustment on PPP loans acquired from Covenant, are recognized in interest income as a yield adjustment over the term of the loans.

The Corporation began accepting and processing applications for loans under the PPP on April 3, 2020. Covenant also engaged in PPP lending starting in early April 2020. As of September 30, 2020, the recorded investment in PPP loans was $163,050,000, including contractual principal balances of $166,690,000, increased by a market rate adjustment on PPP loans acquired from Covenant of $762,000 and reduced by net deferred origination fees of $4,402,000. Net deferred origination fees and the market rate adjustment on PPP loans are recognized in interest income as yield adjustments (net accretion over the term of the loans). Accretion of fees received on PPP loans, net of amortization of the market rate adjustment on PPP loans acquired from Covenant, was $467,000 in the three-month period ended September 30, 2020 and $804,000 in the nine-month period ended September 30, 2020.

Section 4013 of the CARES Act provides that, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the coronavirus (COVID-19) pandemic declared by the President of the United States under the National Emergencies Act terminates (the “applicable period”), the Corporation may elect to suspend U.S. GAAP for loan modifications related to the pandemic that would otherwise be categorized as troubled debt restructurings (TDRs) and suspend any determination of a loan modified as a result of the effects of the pandemic as being a TDR, including impairment for accounting purposes. The suspension is applicable for the term of the loan modification that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019. The suspension is not applicable to any adverse impact on the credit of a borrower that is not related to the pandemic.

In addition, the banking regulators and other financial regulators, on March 22, 2020 and revised April 7, 2020, issued a joint interagency statement titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of the COVID-19 pandemic. Pursuant to the interagency statement, loan modifications that do not meet the conditions of Section 4013 of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. Specifically, the agencies confirmed with the FASB staff that short-term modifications made in good faith in response to the pandemic to borrowers who were current prior to any relief are not TDRs under U.S. GAAP. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. Appropriate allowances for loan and lease losses are expected to be maintained. With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to the pandemic as past due because of the deferral. The interagency statement also states that during short-term pandemic-related loan modifications, these loans generally should not be reported as nonaccrual.

To work with clients impacted by COVID-19, the Corporation is offering short-term loan modifications on a case-by-case basis to borrowers who were current in their payments at the inception of the loan modification program. Prior to

the merger, Covenant had a similar program in place, and these modified loans have been incorporated into the Corporation’s program. These efforts have been designed to assist borrowers as they deal with the current crisis and help the Corporation mitigate credit risk. For loans subject to the program, each borrower is required to resume making regularly scheduled loan payments at the end of the modification period and the deferred amounts will be moved to the end of the loan term. Consistent with Section 4013 of the CARES Act, the modified loans have not been reported as past due, nonaccrual or as TDRs at September 30, 2020. Most of the modifications under the program became effective in March and the second quarter 2020 and provided a deferral of interest or principal and interest for 90-to-180 days. Accordingly, many of the loans for which deferrals were granted returned to full payment status prior to September 30, 2020. The quantity and balances of modifications outstanding under the program at September 30, 2020 are as follows:


	Deferrals Remaining
	As of September 30, 2020
(Dollars in Thousands)	Number
	of	Recorded
	Loans	Investment
COVID-19-related loan modifications:
Residential mortgage	16	$	1,727
Commercial	28		39,912
Total	44	$	41,639

The ultimate effect of COVID-19 on the local or broader economy is not known. In the first nine months of 2020, the Corporation increased the allowance for loan losses $725,000, including $79,000 in the third quarter, based on an increase in qualitative factors related to potential deterioration in economic conditions. Further, in June and September 2020, the Corporation’s credit administration and commercial lending staffs performed a review of commercial credits with “Pass” ratings in an effort to reduce the risk of failing to identify loans that should be evaluated for risk rating downgrade or a specific allowance. Updated risk ratings and specific allowances based on that review have been included in the September 30, 2020 information presented below. Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its economic impact, the total impact on the Corporation’s loan portfolio is not determinable.

As described in Note 2, effective July 1, 2020, the Corporation acquired loans pursuant to its acquisition of Covenant, and effective April 1, 2019, the Corporation acquired loans pursuant to the acquisition of Monument. The acquired loans were recorded at their initial fair value, with adjustments made to the gross amortized cost of loans based on movements in interest rates (market rate adjustment) and based on credit fair value adjustments on non-impaired loans and impaired loans. In the last three quarters of 2019 and first nine months of 2020, the Corporation recognized amortization and accretion of a portion of the market rate adjustments and credit adjustments on non-impaired (performing) loans, and a partial recovery of purchased credit impaired (PCI) loans. For the three-month and nine-month periods ended September 30, 2020 and 2019, adjustments to the initial market rate and credit fair value adjustments of performing loans were recognized as follows:


(In Thousands)
	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2020		2019		2020		2019
Market Rate Adjustment
Adjustments to gross amortized cost of loans at beginning of period	$	(1,103)	$	(1,658)	$	(1,415)	$	0
Market rate adjustment recorded in acquisition		2,909		0		2,909		(1,807)
(Amortization) accretion recognized in interest income		(452)		110		(140)		259
Adjustments to gross amortized cost of loans at end of period	$	1,354	$	(1,548)	$	1,354	$	(1,548)
Credit Adjustment on Non-impaired Loans
Adjustments to gross amortized cost of loans at beginning of period	$	(878)	$	(1,653)	$	(1,216)	$	0
Credit adjustment recorded in acquisition		(7,219)		0		(7,219)		(1,914)
Accretion recognized in interest income		970		260		1,308		521
Adjustments to gross amortized cost of loans at end of period	$	(7,127)	$	(1,393)	$	(7,127)	$	(1,393)

The following table presents the components of the purchase accounting adjustments related to the PCI loans acquired from Covenant as of July 1, 2020:


(In Thousands)	July 1, 2020
Contractually required principal at acquisition	$	10,114
Non-accretable discount		(2,910)
Expected cash flows	$	7,204

A summary of PCI loans held at September 30, 2020 and December 31, 2019 is as follows:


(In Thousands)	September 30,		December 31,
	2020		2019
Outstanding balance	$	10,453	$	759
Carrying amount		7,447		441

In the first nine months of 2020, the Corporation recorded interest income of $120,000, including $7,000 in the third quarter 2020, from the excess of proceeds received on the pay-off of PCI loans acquired from Monument in 2019 over their carrying amounts.

The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Corporation’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available. In the process of evaluating the loan portfolio, management also considers the Corporation’s exposure to losses from unfunded loan commitments. As of September 30, 2020, and December 31, 2019, management determined that no allowance for credit losses related to unfunded loan commitments was required.

Transactions within the allowance for loan losses, summarized by segment and class, for the three-month and nine-month periods ended September 30, 2020 and 2019 were as follows:


Three Months Ended September 30, 2020	June 30, 2020								September 30, 2020
(In Thousands)	Balance		Charge-offs		Recoveries		Provision (Credit)		Balance
Allowance for Loan Losses:
Residential mortgage:
Residential mortgage loans - first liens	$	3,531	$	0	$	26	$	(92)	$	3,465
Residential mortgage loans - junior liens		365		0		0		(7)		358
Home equity lines of credit		287		0		1		1		289
1-4 Family residential construction		137		0		0		32		169
Total residential mortgage		4,320		0		27		(66)		4,281
Commercial:
Commercial loans secured by real estate		2,426		0		0		(40)		2,386
Commercial and industrial		2,496		(2,219)		0		1,974		2,251
Commercial construction and land		420		0		0		20		440
Loans secured by farmland		146		0		0		(25)		121
Multi-family (5 or more) residential		163		0		0		64		227
Agricultural loans		40		0		0		(3)		37
Other commercial loans		167		0		0		0		167
Total commercial		5,858		(2,219)		0		1,990		5,629
Consumer		263		(30)		8		17		258
Unallocated		585		0		0		0		585
Total Allowance for Loan Losses	$	11,026	$	(2,249)	$	35	$	1,941	$	10,753


Three Months Ended September 30, 2019	June 30, 2020								September 30, 2020
(In Thousands)	Balance		Charge-offs		Recoveries		Provision (Credit)		Balance
Allowance for Loan Losses:
Residential mortgage:
Residential mortgage loans - first liens	$	3,130	$	(50)	$	1	$	83	$	3,164
Residential mortgage loans - junior liens		333		0		1		16		350
Home equity lines of credit		280		0		1		1		282
1-4 Family residential construction		220		0		0		38		258
Total residential mortgage		3,963		(50)		3		138		4,054
Commercial:
Commercial loans secured by real estate		1,577		0		0		928		2,505
Commercial and industrial		1,246		0		3		7		1,256
Commercial construction and land		152		0		0		6		158
Loans secured by farmland		102		0		0		(1)		101
Multi-family (5 or more) residential		150		0		0		5		155
Agricultural loans		42		0		0		7		49
Other commercial loans		119		0		0		1		120
Total commercial		3,388		0		3		953		4,344
Consumer		264		(66)		9		67		274
Unallocated		585		0		0		0		585
Total Allowance for Loan Losses	$	8,200	$	(116)	$	15	$	1,158	$	9,257


	December 31,								September 30,
Nine Months Ended September 30, 2020	2019						Provision		2020
(In Thousands)	Balance		Charge-offs		Recoveries		(Credit)		Balance
Allowance for Loan Losses:
Residential mortgage:
Residential mortgage loans - first liens	$	3,405	$	0	$	28	$	32	$	3,465
Residential mortgage loans - junior liens		384		0		1		(27)		358
Home equity lines of credit		276		0		3		10		289
1-4 Family residential construction		117		0		0		52		169
Total residential mortgage		4,182		0		32		67		4,281
Commercial:
Commercial loans secured by real estate		1,921		0		0		465		2,386
Commercial and industrial		1,391		(2,236)		0		3,096		2,251
Commercial construction and land		966		(107)		0		(419)		440
Loans secured by farmland		158		0		0		(37)		121
Multi-family (5 or more) residential		156		0		0		71		227
Agricultural loans		41		0		0		(4)		37
Other commercial loans		155		0		0		12		167
Total commercial		4,788		(2,343)		0		3,184		5,629
Consumer		281		(100)		35		42		258
Unallocated		585		0		0		0		585
Total Allowance for Loan Losses	$	9,836	$	(2,443)	$	67	$	3,293	$	10,753


	December 31,								September 30,
Nine Months Ended September 30, 2019	2018						Provision		2019
(In Thousands)	Balance		Charge-offs		Recoveries		(Credit)		Balance
Allowance for Loan Losses:
Residential mortgage:
Residential mortgage loans - first liens	$	3,156	$	(133)	$	3	$	138	$	3,164
Residential mortgage loans - junior liens		325		(24)		1		48		350
Home equity lines of credit		302		0		5		(25)		282
1-4 Family residential construction		203		0		0		55		258
Total residential mortgage		3,986		(157)		9		216		4,054
Commercial:
Commercial loans secured by real estate		2,538		0		0		(33)		2,505
Commercial and industrial		1,553		(6)		6		(297)		1,256
Commercial construction and land		110		0		0		48		158
Loans secured by farmland		102		0		0		(1)		101
Multi-family (5 or more) residential		114		0		0		41		155
Agricultural loans		46		0		0		3		49
Other commercial loans		128		0		0		(8)		120
Total commercial		4,591		(6)		6		(247)		4,344
Consumer		233		(132)		31		142		274
Unallocated		499		0		0		86		585
Total Allowance for Loan Losses	$	9,309	$	(295)	$	46	$	197	$	9,257

In the evaluation of the loan portfolio, management determines two major components for the allowance for loan losses – (1) a specific component based on an assessment of certain larger relationships, mainly commercial purpose loans, on a loan-by-loan basis; and (2) a general component for the remainder of the portfolio, except for performing loans purchased from Covenant and Monument, based on a collective evaluation of pools of loans with similar risk characteristics. The general component is assigned to each pool of loans based on both historical net charge-off experience, and an evaluation of certain qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the above methodologies for estimating specific and general losses in the portfolio.

Performing loans acquired from Covenant and Monument are presented net of a discount for credit losses totaling $7,127,000 at September 30, 2020. Performing loans acquired from Monument are presented net of a discount of $1,216,000 at December 31, 2019. The discounts reflect estimates of the present value of credit losses based on market expectations at the acquisition dates, subsequently reduced as accretion has been recognized based on estimated and actual principal pay-downs. Purchased performing loans were excluded from the loan pools for which the general component of the allowance for loan losses was calculated.

The provision for loan losses was $1,941,000 in the third quarter 2020. The provision for loan losses in the third quarter 2020 included the net impact of a charge-off of $2,219,000 on a commercial loan of $3,500,000 for which the previously-established allowance had been $1,193,000. In total, the third quarter 2020 provision included: a net charge of $909,000 related to specific loans (net charge-offs of $2,214,000 partially offset by a decrease in specific allowances on loans of $1,305,000); a charge of $834,000 from an increase in the net charge-off experience factors used to estimate the allowance; a charge of $119,000 from the impact of loan growth, excluding loans purchased from Covenant and PPP loans; and a charge of $79,000 attributable to increases in qualitative factors. There was no provision for loan losses recorded on PPP loans because the SBA guarantees the loans, subject to compliance with program requirements. In comparison, the provision in the third quarter 2019 was $1,158,000, including recognition of a specific allowance of $678,000 on a commercial real estate secured loan and a charge of $373,000 attributable to loan growth.

For the first nine months of 2020, the provision for loan losses was $3,293,000, an increase in expense of $3,096,000 as compared to $197,000 recorded in the first nine months of 2019. The provision included the impact of the $2,219,000 charge-off of a commercial loan referenced above. In total, the provision for the first nine months of 2020 included a net charge of $1,976,000 related to specific loans (net decrease in specific allowances on loans of $400,000 and net charge-offs of $2,376,000); a charge of $745,000 from an increase in the net charge-off experience factors used to estimate the allowance; a charge of $725,000 attributable to increases in qualitative factors; and a credit of $153,000 from the impact of a reduction in outstanding loans, excluding PPP and recently purchased loans. The comparative provision for loan losses in the first nine months of 2019 included a benefit from eliminating specific allowances on commercial loans that were no longer considered impaired and a net credit of $347,000 related to changes in net charge-off experience factors used to calculate the allowance.

In determining the larger loan relationships for detailed assessment under the specific allowance component, the Corporation uses an internal risk rating system. Under the risk rating system, the Corporation classifies problem or potential problem loans as “Special Mention,” “Substandard,” or “Doubtful” on the basis of currently existing facts, conditions and values. Substandard loans include those characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected. Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans that do not currently expose the Corporation to sufficient risk to warrant classification as Substandard or Doubtful, but possess weaknesses that deserve management’s close attention, are deemed to be Special Mention. Risk ratings are updated any time that conditions or the situation warrants. Loans not classified are included in the “Pass” column in the table that follows.

The following tables summarize the aggregate credit quality classification of outstanding loans by risk rating as of September 30, 2020 and December 31, 2019:

September 30, 2020

(In Thousands)


									Purchased
			Special						Credit
	Pass		Mention		Substandard		Doubtful		Impaired		Total
Residential Mortgage:
Residential Mortgage loans - first liens	$	525,833	$	6,331	$	9,586	$	0	$	77	$	541,827
Residential Mortgage loans - junior liens		27,078		124		570		63		72		27,907
Home Equity lines of credit		39,408		59		676		0		0		40,143
1-4 Family residential construction		29,146		0		0		0		0		29,146
Total residential mortgage		621,465		6,514		10,832		63		149		639,023
Commercial:
Commercial loans secured by real estate		508,540		7,920		10,072		0		4,342		530,874
Commercial and Industrial		142,181		9,495		2,905		802		786		156,169
Small Business Administration - Paycheck Protection Program		163,050		0		0		0		0		163,050
Political subdivisions		47,883		0		0		0		0		47,883
Commercial construction and land		41,659		198		49		0		0		41,906
Loans secured by farmland		10,231		453		1,229		0		0		11,913
Multi-family (5 or more) residential		56,507		2,420		1,233		0		2,170		62,330
Agricultural loans		2,959		0		602		0		0		3,561
Other commercial loans		17,385		0		0		0		0		17,385
Total commercial		990,395		20,486		16,090		802		7,298		1,035,071
Consumer		17,184		0		92		0		0		17,276
Totals	$	1,629,044	$	27,000	$	27,014	$	865	$	7,447	$	1,691,370

December 31, 2019

(In Thousands)


									Purchased
			Special						Credit
	Pass		Mention		Substandard		Doubtful		Impaired		Total
Residential Mortgage:
Residential Mortgage loans - first liens	$	500,963	$	193	$	9,324	$	84	$	77	$	510,641
Residential Mortgage loans - junior liens		26,953		79		471		0		0		27,503
Home equity lines of credit		33,170		59		409		0		0		33,638
1-4 Family residential construction		14,798		0		0		0		0		14,798
Total residential mortgage		575,884		331		10,204		84		77		586,580
Commercial:
Commercial loans secured by real estate		294,397		4,773		1,693		0		364		301,227
Commercial and Industrial		114,293		9,538		2,543		0		0		126,374
Political subdivisions		53,570		0		0		0		0		53,570
Commercial construction and land		32,224		0		1,331		0		0		33,555
Loans secured by farmland		6,528		4,681		1,042		0		0		12,251
Multi-family (5 or more) residential		30,160		0		910		0		0		31,070
Agricultural loans		3,343		335		641		0		0		4,319
Other commercial loans		16,416		0		119		0		0		16,535
Total commercial		550,931		19,327		8,279		0		364		578,901
Consumer		16,720		0		21		0		0		16,741
Totals	$	1,143,535	$	19,658	$	18,504	$	84	$	441	$	1,182,222

The general component of the allowance for loan losses covers pools of loans including commercial loans not considered individually impaired, as well as smaller balance homogeneous classes of loans, such as residential real estate, home equity lines of credit and other consumer loans. Accordingly, the Corporation generally does not separately identify individual consumer and residential loans for impairment disclosures, unless such a loan: (1) is subject to a restructuring agreement, or (2) has an outstanding balance of $400,000 or more and a credit grade of Special Mention, Substandard or Doubtful. The pools of loans are evaluated for loss exposure based upon average historical net charge-off rates for each loan class, adjusted for qualitative factors (described in the following paragraphs). The time period used in determining the average historical net charge-off rate for each loan class is based on management’s evaluation of an appropriate time period that captures an historical loss experience relevant to the current portfolio. At September 30, 2020 and December 31, 2019, a five-year average net charge-off rate was used for commercial loans secured by real estate and for multi-family residential loans, while a three-year average net charge-off rate was used for all other loan classes.

Qualitative risk factors are evaluated for the impact on each of the three segments (residential mortgage, commercial and consumer) within the loan portfolio. Each qualitative factor is assigned a value to reflect improving, stable or declining conditions based on management’s judgment using relevant information available at the time of the evaluation. The adjustment for qualitative factors is applied as an increase or decrease to the average net charge-off rate for each loan class within each segment.

The qualitative factors used in the general component calculations are designed to address credit risk characteristics associated with each segment. The Corporation’s credit risk associated with all of the segments is significantly impacted by these factors, which include economic conditions within its market area, the Corporation’s lending policies, changes or trends in the portfolio, risk profile, competition, regulatory requirements and other factors.

Loans are classified as impaired, when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial loans, by the fair value of the collateral (if the loan is collateral dependent), by future cash flows discounted at the loan’s effective rate or by the loan’s observable market price.

The scope of loans reviewed individually each quarter to determine if they are impaired include all commercial loan relationships greater than $200,000 and any residential mortgage or consumer loans of $400,000 or more for which there is at least one extension of credit graded Special Mention, Substandard or Doubtful. Loans that are individually reviewed, but which are determined to not be impaired, are combined with all remaining loans that are not reviewed on a specific basis, and such loans are included within larger pools of loans based on similar risk and loss characteristics for purposes of determining the general component of the allowance. The loans that have been individually reviewed, but which have been determined to not be impaired, are included in the “Collectively Evaluated” column in the table summarizing the allowance and associated loan balances as of September 30, 2020 and December 31, 2019. All loans classified as troubled debt restructurings (discussed in more detail below), all PCI loans and all commercial loan relationships less than $200,000 or other loan relationships less than $400,000 in the aggregate, but with an estimated loss of $100,000 or more, are individually evaluated for impairment.

The following tables present a summary of loan balances and the related allowance for loan losses summarized by portfolio segment and class for each impairment method used as of September 30, 2020 and December 31, 2019.

September 30, 2020

(In Thousands)


	Loans:								Allowance for Loan Losses:
					Purchased
	Individually		Collectively		Performing				Individually		Collectively
	Evaluated		Evaluated		Loans		Totals		Evaluated		Evaluated		Totals
Residential mortgage:
Residential mortgage loans - first liens	$	2,238	$	380,348	$	159,241	$	541,827	$	9	$	3,456	$	3,465
Residential mortgage loans - junior liens		424		21,777		5,706		27,907		161		197		358
Home equity lines of credit		85		30,368		9,690		40,143		0		289		289
1-4 Family residential construction		0		18,946		10,200		29,146		0		169		169
Total residential mortgage		2,747		451,439		184,837		639,023		170		4,111		4,281
Commercial:
Commercial loans secured by real estate		12,242		190,045		328,587		530,874		410		1,976		2,386
Commercial and industrial		1,367		119,401		35,401		156,169		71		2,180		2,251
Small Business Administration - Paycheck Protection Program		0		99,310		63,740		163,050		0		0		0
Political subdivisions		0		47,883		0		47,883		0		0		0
Commercial construction and land		0		41,906		0		41,906		0		440		440
Loans secured by farmland		85		11,505		323		11,913		0		121		121
Multi-family (5 or more) residential		2,171		16,754		43,405		62,330		0		227		227
Agricultural loans		0		3,561		0		3,561		0		37		37
Other commercial loans		0		15,895		1,490		17,385		0		167		167
Total commercial		15,865		546,260		472,946		1,035,071		481		5,148		5,629
Consumer		0		16,918		358		17,276		0		258		258
Unallocated														585

Total	$	18,612	$	1,014,617	$	658,141	$	1,691,370	$	651	$	9,517	$	10,753

December 31, 2019

(In Thousands)


	Loans:								Allowance for Loan Losses:
					Purchased
	Individually		Collectively		Performing				Individually		Collectively
	Evaluated		Evaluated		Loans		Totals		Evaluated		Evaluated		Totals
Residential mortgage:
Residential mortgage loans - first liens	$	1,023	$	405,186	$	104,432	$	510,641	$	0	$	3,405	$	3,405
Residential mortgage loans - junior liens		368		24,730		2,405		27,503		176		208		384
Home equity lines of credit		0		32,147		1,491		33,638		0		276		276
1-4 Family residential construction		0		14,640		158		14,798		0		117		117
Total residential mortgage		1,391		476,703		108,486		586,580		176		4,006		4,182
Commercial:
Commercial loans secured by real estate		684		198,532		102,011		301,227		0		1,921		1,921
Commercial and industrial		1,467		122,313		2,594		126,374		149		1,242		1,391
Political subdivisions		0		53,570		0		53,570		0		0		0
Commercial construction and land		1,261		29,710		2,584		33,555		678		288		966
Loans secured by farmland		607		11,386		258		12,251		48		110		158
Multi-family (5 or more) residential		0		10,617		20,453		31,070		0		156		156
Agricultural loans		76		4,243		0		4,319		0		41		41
Other commercial loans		0		15,947		588		16,535		0		155		155
Total commercial		4,095		446,318		128,488		578,901		875		3,913		4,788
Consumer		0		16,741		0		16,741		0		281		281
Unallocated														585

Total	$	5,486	$	939,762	$	236,974	$	1,182,222	$	1,051	$	8,200	$	9,836

Summary information related to impaired loans at September 30, 2020 and December 31, 2019 is provided in the table immediately below.


(In Thousands)	September 30, 2020						December 31, 2019
	Unpaid						Unpaid
	Principal		Recorded		Related		Principal		Recorded		Related
	Balance		Investment		Allowance		Balance		Investment		Allowance
With no related allowance recorded:
Residential mortgage loans - first liens	$	1,084	$	1,034	$	0	$	645	$	617	$	0
Residential mortgage loans - junior liens		167		112		0		42		42		0
Home equity lines of credit		151		85		0		0		0		0
Commercial loans secured by real estate		7,570		5,745		0		684		684		0
Commercial and industrial		1,732		1,295		0		563		563		0
Loans secured by farmland		85		85		0		129		129		0
Multi-family (5 or more) residential		2,771		2,171		0		0		0		0
Agricultural loans		0		0		0		76		76		0
Total with no related allowance recorded		13,560		10,527		0		2,139		2,111		0

With a related allowance recorded:
Residential mortgage loans - first liens		1,204		1,204		9		406		406		0
Residential mortgage loans - junior liens		312		312		161		326		326		176
Commercial loans secured by real estate		6,497		6,497		409		0		0		0
Commercial and industrial		72		72		72		904		904		149
Construction and other land loans		0		0		0		1,261		1,261		678
Loans secured by farmland		0		0		0		478		478		48
Total with a related allowance recorded		8,085		8,085		651		3,375		3,375		1,051
Total	$	21,645	$	18,612	$	651	$	5,514	$	5,486	$	1,051

In the table immediately above, loans to two borrowers are presented under the Residential mortgage loans – first liens and Residential mortgage loans – junior liens classes. Each of these loans is collateralized by one property, and the allowance associated with each of these loans was determined based on an analysis of the total amounts of the Corporation’s exposure in comparison to the estimated net proceeds if the Corporation were to sell the property. The total allowance related to these two borrowers was $161,000 at September 30, 2020 and $176,000 at December 31, 2019.

The average balance of impaired loans, excluding purchased credit impaired loans, and interest income recognized on these impaired loans is as follows:


(In Thousands)									Interest Income Recognized on
	Average Investment in Impaired Loans								Impaired Loans on a Cash Basis
	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
	September 30,				September 30,				September 30,				September 30,
	2020		2019		2020		2019		2020		2019		2020		2019
Residential mortgage:
Residential mortgage loans - first lien	$	2,159	$	1,057	$	1,579	$	997	$	27	$	21	$	70	$	39
Residential mortgage loans - junior lien		384		285		386		289		5		8		18		10
Home equity lines of credit		65		65		65		16		0		3		2		3
Total residential mortgage		2,608		1,407		2,030		1,302		32		32		90		52
Commercial:
Commercial loans secured by real estate		7,298		1,738		3,779		2,371		65		49		81		66
Commercial and industrial		2,235		1,202		3,178		1,460		1		4		21		38
Commercial construction and land		49		0		678		0		1		0		14		0
Loans secured by farmland		253		1,359		397		1,443		2		23		26		42
Agricultural loans		76		6		76		481		2		0		4		24
Other commercial loans		0		50		25		13		0		2		1		2
Total commercial		9,911		4,355		8,133		5,768		71		78		147		172
Consumer		0		0		0		4		0		0		0		0
Total	$	12,519	$	5,762	$	10,163	$	7,074	$	103	$	110	$	237	$	224

Loans are placed on nonaccrual status for all classes of loans when, in the opinion of management, collection of interest is doubtful. Any unpaid interest previously accrued on those loans is reversed from income. Interest income is not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest payments received on loans for which the risk of further loss is greater than remote are applied as a reduction of the loan principal balance. Interest income on other nonaccrual loans, including impaired loans, is recognized only to the extent of interest payments received. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments. Also, the amortization of deferred loan fees is discontinued when a loan is placed on nonaccrual status.

The breakdown by portfolio segment and class of nonaccrual loans and loans past due ninety days or more and still accruing is as follows:


(In Thousands)	September 30, 2020				December 31, 2019
	Past Due				Past Due
	90+ Days and				90+ Days and
	Accruing		Nonaccrual		Accruing		Nonaccrual
Residential mortgage:
Residential mortgage loans - first liens	$	1,336	$	6,354	$	878	$	4,679
Residential mortgage loans - junior liens		56		383		53		326
Home equity lines of credit		213		255		71		73
1-4 Family residential construction		0		39		0		0
Total residential mortgage		1,605		7,031		1,002		5,078
Commercial:
Commercial loans secured by real estate		381		12,414		107		1,148
Commercial and industrial		112		955		15		1,051
Commercial construction and land		0		49		0		1,311
Loans secured by farmland		188		85		43		565
Multi-family (5 or more) residential		0		2,170		0		0
Other commercial		0		0		0		49
Total commercial		681		15,673		165		4,124
Consumer		22		92		40		16
Totals	$	2,308	$	22,796	$	1,207	$	9,218

The amounts shown in the table immediately above include loans classified as troubled debt restructurings (described in more detail below), if such loans are past due ninety days or more or nonaccrual. PCI loans with a total recorded investment of $7,447,000 at September 30, 2020 and $441,000 at December 31, 2019 are classified as nonaccrual.

The table below presents a summary of the contractual aging of loans as of September 30, 2020 and December 31, 2019. Loans modified under the Corporation’s program designed to work with clients impacted by COVID-19, as described above, are included in the current and past due less than 30 days category in the table that follows.


(In Thousands)	As of September 30, 2020								As of December 31, 2019
	Current &								Current &
	Past Due		Past Due		Past Due				Past Due		Past Due		Past Due
	Less than		30-89		90+				Less than		30-89		90+
	30 Days		Days		Days		Total		30 Days		Days		Days		Total
Residential mortgage:
Residential mortgage loans - first liens	$	534,303	$	2,819	$	4,705	$	541,827	$	499,024	$	7,839	$	3,778	$	510,641
Residential mortgage loans - junior liens		27,660		44		203		27,907		27,041		83		379		27,503
Home equity lines of credit		39,737		145		261		40,143		33,115		452		71		33,638
1-4 Family residential construction		28,629		517		0		29,146		14,758		40		0		14,798
Total residential mortgage		630,329		3,525		5,169		639,023		573,938		8,414		4,228		586,580

Commercial:
Commercial loans secured by real estate		525,211		867		4,796		530,874		299,640		737		850		301,227
Commercial and industrial		155,140		57		972		156,169		126,221		16		137		126,374
Small Business Administration - Paycheck Protection Program		163,050		0		0		163,050		0		0		0		0
Political subdivisions		47,883		0		0		47,883		53,570		0		0		53,570
Commercial construction and land		41,857		49		0		41,906		33,505		0		50		33,555
Loans secured by farmland		11,654		37		222		11,913		11,455		666		130		12,251
Multi-family (5 or more) residential		62,330		0		0		62,330		31,070		0		0		31,070
Agricultural loans		3,456		105		0		3,561		4,318		1		0		4,319
Other commercial loans		17,385		0		0		17,385		16,535		0		0		16,535
Total commercial		1,027,966		1,115		5,990		1,035,071		576,314		1,420		1,167		578,901
Consumer		17,077		87		112		17,276		16,496		189		56		16,741
Totals	$	1,675,372	$	4,727	$	11,271	$	1,691,370	$	1,166,748	$	10,023	$	5,451	$	1,182,222

Nonaccrual loans are included in the contractual aging in the immediately preceding table. A summary of the contractual aging of nonaccrual loans at September 30, 2020 and December 31, 2019 is as follows:


(In Thousands)	Current &
	Past Due		Past Due		Past Due
	Less than		30-89		90+
	30 Days		Days		Days		Total
September 30, 2020 Nonaccrual Totals	$	12,605	$	1,228	$	8,963	$	22,796
December 31, 2019 Nonaccrual Totals	$	3,840	$	1,134	$	4,244	$	9,218

Loans whose terms are modified are classified as TDRs if the Corporation grants such borrowers concessions, and it is deemed that those borrowers are experiencing financial difficulty. Loans classified as TDRs are designated as impaired. The outstanding balance of loans subject to TDRs, as well as contractual aging information at September 30, 2020 and December 31, 2019 is as follows:


(In Thousands)	Current &
	Past Due		Past Due		Past Due
	Less than		30-89		90+
	30 Days		Days		Days		Nonaccrual		Total
September 30, 2020 Totals	$	167	$	91	$	338	$	7,441	$	8,037
December 31, 2019 Totals	$	889	$	0	$	0	$	1,737	$	2,626

At September 30, 2020 and December 31, 2019, there were no commitments to loan additional funds to borrowers whose loans have been classified as TDRs.

TDRs that occurred during the three-month and nine-month periods ended September 30, 2020 and 2019 are as follows:


	Three Months Ended			Three Months Ended
	September 30, 2020			September 30, 2019
		Post-			Post-
	Number	Modification		Number	Modification
	of	Recorded		of	Recorded
(Balances in Thousands)	Loans	Investment		Loans	Investment
Commercial loans secured by real estate:
Principal and interest payment deferral non-COVID related	2	$	4,831	0	$	0
Extended interest only payments and reduced monthly payments with a balloon payment at maturity	0		0	1		1,261
Multi-family (5 or more) residential:
Principal and interest payment deferral non-COVID related	3		2,170	0		0
Total	5	$	7,001	1	$	1,261


(Balances in Thousands)	Nine Months Ended			Nine Months Ended
	September 30, 2020			September 30, 2019
		Post-			Post-
	Number	Modification		Number	Modification
	of	Recorded		of	Recorded
	Loans	Investment		Loans	Investment
Residential mortgage - junior liens:
Reduced monthly payments and extended maturity date	0	$	0	1	$	18
New loan at lower than risk-adjusted market rate to borrower from whom short sale of other collateral was accepted	1		30	0		0
Commerical loans secured by real estate:
Interest only payments for a nine-month period	1		240	0		0
Principal and interest payment deferral non-COVID related	2		4,831	0		0
Extended interest only payments and reduced monthly payments with a balloon payment at maturity	0		0	1		1,261
Commercial and industrial,
Reduced monthly payments and extended maturity date	0		0	9		448
Multi-family (5 or more) residential,
Principal and interest payment deferral non-COVID related	3		2,170	0		0
Agricultural loans,
Reduced monthly payments and extended maturity date	0		0	1		84
Total	7	$	7,271	12	$	1,811

In the three-month and nine-month periods ended September 30, 2020, the Corporation recorded a specific allowance for loan losses of $134,000 related to a loan secured by commercial real estate for which a TDR concession was also made in the quarter and included in the table above. The other loans for which TDRs were granted in the three-month and nine month periods ended September 30, 2020 had no specific impact on the provision or allowance for loan losses.

In the third quarter 2019, the Corporation recorded a specific allowance for loan losses of $678,000 related to the commercial loan secured by real estate in the table above. This loan was subsequently paid off in the first quarter of 2020 for less than the full principal balance, resulting in a charge-off of $107,000.

In the three-month and nine-month periods ended September 30, 2020 and 2019, payment defaults on loans for which modifications considered to be TDRs were entered into within the previous 12 months are summarized as follows:


(Balances in Thousands)	Three Months Ended			Three Months Ended
	September 30, 2020			September 30, 2019
	Number			Number
	of	Recorded		of	Recorded
	Loans	Investment		Loans	Investment
Residential mortgage - junior liens	0	$	0	1	$	18
Commercial loans secured by real estate	1		240	0		0
Commercial and industrial	0		0	9		431
Agricultural loans	0		0	1		81
Total	1	$	240	12	$	530


(Balances in Thousands)	Nine Months Ended			Nine Months Ended
	September 30, 2020			September 30, 2019
	Number			Number
	of	Recorded		of	Recorded
	Loans	Investment		Loans	Investment
Residential mortgage - junior liens	0	$	0	1	$	18
Commercial loans secured by real estate	1		240	0		0
Commercial and industrial	0		0	9		431
Agricultural loans	0		0	1		81
Total	1	$	240	12	$	530

In the third quarter of 2020, one commercial real estate loan experienced a payment default. This loan was individually evaluated for impairment at September 30, 2020 and no specific allowance was recorded as the estimated value of collateral exceeded the outstanding loan balance. All of the TDRs for which payment defaults occurred in the third quarter of 2019 were related to one commercial relationship. These loans were individually evaluated for impairment at September 30, 2019 and no specific allowance for loan losses was recognized because the estimate values of collateral and U.S. Government (Small Business Administration) guarantees exceeded the outstanding balances of the loans.

The carrying amount of foreclosed residential real estate properties held as a result of obtaining physical possession (included in foreclosed assets held for sale in the unaudited consolidated balance sheets) is as follows:


(In Thousands)	September 30,		December 31,
	2020		2019
Foreclosed residential real estate	$	104	$	292

The recorded investment of consumer mortgage loans secured by residential real properties for which formal foreclosure proceedings were in process is as follows:


(In Thousands)	September 30,		December 31,
	2020		2019
Residential real estate in process of foreclosure	$	1,719	$	1,717