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. 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, 2020 and December 31, 2019 : March 31, 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 $ 155,692 $ 489 $ 31 $ 1,938 $ 158,150 Real estate mortgage: Residential 607,445 6,321 1,383 1,005 616,154 Commercial 351,202 2,795 — 6,740 360,737 Construction 39,003 230 — 64 39,297 Consumer automobile loans 150,891 700 74 50 151,715 Other consumer installment loans 21,451 522 15 — 21,988 1,325,684 $ 11,057 $ 1,503 $ 9,797 1,348,041 Net deferred loan fees and discounts 1,359 1,359 Allowance for loan losses (12,500 ) (12,500 ) Loans, net $ 1,314,543 $ 1,336,900 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 months ended March 31, 2020 and 2019 : Three Months Ended March 31, 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 $ 9 $ — $ 24 $ 39 Real estate mortgage: Residential 9 — 33 23 Commercial 42 — 89 40 Construction — — 1 1 Consumer automobile loans 2 — 2 1 Other consumer installment loans — — 1 — $ 62 $ — $ 150 $ 104 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 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. The following table presents the recorded investment, unpaid principal balance, and related allowance of impaired loans by segment as of March 31, 2020 and December 31, 2019 : March 31, 2020 Recorded Unpaid Principal Related (In Thousands) Investment Balance Allowance With no related allowance recorded: Commercial, financial, and agricultural $ 1,921 $ 4,708 $ — Real estate mortgage: Residential 4,656 4,656 — Commercial 5,089 5,089 — Construction 65 65 — Consumer automobile loans — — — Installment loans to individuals — — — 11,731 14,518 — With an allowance recorded: Commercial, financial, and agricultural 104 104 — Real estate mortgage: Residential 1,074 1,074 177 Commercial 3,472 3,522 1,062 Construction — — — Consumer automobile loans 21 21 5 Installment loans to individuals — — — 4,671 4,721 1,244 Total: Commercial, financial, and agricultural 2,025 4,812 — Real estate mortgage: Residential 5,730 5,730 177 Commercial 8,561 8,611 1,062 Construction 65 65 — Consumer automobile loans 21 21 5 Installment loans to individuals — — — $ 16,402 $ 19,239 $ 1,244 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 The following table presents the average recorded investment in impaired loans and related interest income recognized for the three months ended March 31, 2020 and 2019 : Three Months Ended March 31, 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 $ 2,155 $ 1 $ — $ 5,302 $ 1 $ 38 Real estate mortgage: Residential 5,953 57 — 4,163 28 17 Commercial 8,568 26 — 11,069 31 36 Construction 65 — — 73 — 1 Consumer automobile 76 — — 52 — 1 Other consumer installment loans 8 — — 18 — — $ 16,825 $ 84 $ — $ 20,677 $ 60 $ 93 Currently, there is $4,000 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 to be TDRs completed during the three months ended March 31, 2020 and 2019. There were three loan modifications considered to be TDRs made during the twelve months previous to March 31, 2020 that defaulted during the three months ended March 31, 2020 . The defaulted loan types and recorded investments at March 31, 2020 are as follows: one commercial real estate loan with a recorded investment of $1,040,000 , and two commercial and agricultural loans with a recorded investment of $1,112,000 . There were no loan modifications considered to be TDR's made during the twelve months previous to March 31, 2019 that defaulted during the three months ended March 31, 2019. Troubled debt restructurings amounted to $12,885,000 and $13,282,000 as of March 31, 2020 and December 31, 2019 , respectively. The amount of foreclosed residential real estate held at March 31, 2020 and December 31, 2019 , totaled $393,000 and $493,000 , respectively. Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at March 31, 2020 and December 31, 2019 , totaled $421,000 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 March 31, 2020, rate modifications have been granted on 23 loans with an aggregate balance of $2,476,000 . In addition, payment deferrals of up to 90 days have been granted on 36 loans with an aggregate balance of $4,044,000 . 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. 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 semi-annual loan review of large commercial relationships is performed, as well as a sample of smaller transactions. During 2019, the threshold for the annual loan review was commercial relationships of $1,750,000 or greater for JSSB and $1,500,000 or greater for Luzerne with the 2020 review beginning in the second quarter. 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, 2020 and December 31, 2019 : March 31, 2020 Commercial, Financial, and Agricultural Real Estate Mortgages Consumer automobile Other consumer installment loans (In Thousands) Residential Commercial Construction Totals Pass $ 151,756 $ 611,584 $ 346,727 $ 39,163 $ 151,715 $ 21,985 $ 1,322,930 Special Mention 3,154 2,416 5,018 — — — 10,588 Substandard 3,240 2,154 8,992 134 — 3 14,523 $ 158,150 $ 616,154 $ 360,737 $ 39,297 $ 151,715 $ 21,988 $ 1,348,041 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 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, 2020 and 2019 : t Three Months Ended March 31, 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 (14 ) (41 ) — — (75 ) (100 ) — (230 ) Recoveries 21 21 — 2 1 41 — 86 Provision 111 251 204 40 149 48 (53 ) 750 Ending Balance $ 1,897 $ 4,537 $ 3,414 $ 160 $ 1,855 $ 267 $ 370 $ 12,500 Three Months Ended March 31, 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 (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 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 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, 2020 and 2019 : March 31, 2020 2019 Owners of residential rental properties 16.04 % 14.82 % Owners of commercial rental properties 12.53 % 12.07 % 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, 2020 and December 31, 2019 : March 31, 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 $ — $ 177 $ 1,062 $ — $ 5 $ — $ — $ 1,244 Collectively evaluated for impairment 1,897 4,360 2,352 160 1,850 267 370 11,256 Total ending allowance balance $ 1,897 $ 4,537 $ 3,414 $ 160 $ 1,855 $ 267 $ 370 $ 12,500 Loans: Individually evaluated for impairment $ 2,025 $ 5,730 $ 8,561 $ 65 $ 21 $ — $ 16,402 Collectively evaluated for impairment 156,125 610,424 352,176 39,232 151,694 21,988 1,331,639 Total ending loans balance $ 158,150 $ 616,154 $ 360,737 $ 39,297 $ 151,715 $ 21,988 $ 1,348,041 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 |