During 2020 and 2021 the Company participated in the Paycheck Protection Program (“PPP”), administered directly by the U.S. SBA. The PPP provides loans to small businesses who were affected by economic conditions as a result of COVID-19 to provide cash-flow assistance to employers who maintain their payroll (including healthcare and certain related expenses), mortgage interest, rent, leases, utilities and interest on existing debt during the COVID-19 emergency. The PPP loans are fully guaranteed by the SBA and may be eligible for forgiveness by the SBA to the extent that the proceeds are used to cover eligible payroll costs, interest costs, rent, and utility costs over a period of up to 24 weeks after the loan is made as long as certain conditions are met regarding employee retention and compensation levels. PPP loans deemed eligible for forgiveness by the SBA will be repaid by the SBA to the Company. PPP loans are included in the Commercial loan category.

In accordance with the SBA terms and conditions on these PPP loans, the Company received approximately $2.4 million in fees associated with the processing of these loans. Upon funding of the loan, these fees were deferred and will be amortized over the life of the loan as an adjustment to yield in accordance with FASB ASC 310-20-25-2.

Included in commercial loans in the above table are 488 loans totaling $64.4 million originated by the Company under the Payroll Protection Program through the quarter ended March 31, 2021 compared to 673 loans totaling $76.8 million at September 30, 2020. These loans mature in two or five years.

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

The following table presents additional information regarding loans acquired and accounted for in accordance with ASC 310-30 (in thousands):

The following tables show the amount of loans in each category that were individually and collectively evaluated for impairment at the dates indicated (in thousands):

	Total Loans		Individually Evaluated for Impairment		Loans Acquired with Deteriorated Credit Quality		Collectively Evaluated for Impairment
March 31, 2021
Real estate loans:
Residential	$	588,775	$	2,994	$	—	$	585,781
Construction		9,664		—		—		9,664
Commercial		555,404		11,478		908		543,018
Commercial		115,202		7,282		—		107,920
Obligations of states and political subdivisions		69,573		—		—		69,573
Home equity loans and lines of credit		39,094		95		—		38,999
Auto loans		24,619		76		—		24,543
Other		1,628		10		—		1,618
Total	$	1,403,959	$	21,935	$	908	$	1,381,116

	Total Loans		Individually Evaluated for Impairment		Loans Acquired with Deteriorated Credit Quality		Collectively Evaluated for Impairment
September 30, 2020
Real estate loans:
Residential	$	610,172	$	3,949	$	—	$	606,223
Construction		11,853		—		—		11,853
Commercial		509,628		11,322		1,025		497,281
Commercial		139,603		1,595		—		138,008
Obligations of states and political sub divisions		79,230		—		—		79,230
Home equity loans and lines of credit		40,800		117		—		40,683
Auto loans		39,795		210		—		39,585
Other		2,293		11		—		2,282
Total	$	1,433,374	$	17,204	$	1,025	$	1,415,145

The Company maintains a loan review system that allows for a periodic review of our loan portfolio and the early identification of potential impaired loans. Such system takes into consideration, among other things, delinquency status, size of loans, type and market value of collateral and financial condition of the borrowers. Specific loan loss allowances are established for identified losses based on a review of such information. A loan evaluated for impairment is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. All loans identified as impaired are evaluated independently. The Company does not aggregate such loans for evaluation purposes. Impairment is measured on a loan-by-loan basis for commercial and construction loans by the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral-dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential mortgage loans for impairment disclosures, unless such loans are part of a larger relationship that is impaired, or are classified as a troubled debt restructuring.

A loan is considered to be a troubled debt restructuring (“TDR”) loan when the Company grants a concession to the borrower that it would not otherwise consider because of the borrower’s financial condition. Such concessions include the reduction of interest rates, forgiveness of principal or interest, or other modifications of interest rates that are less than the current market rate for new obligations with similar risk. TDR loans that are in compliance with their modified terms and that yield a market rate at the time of modification may be removed from TDR status after one year of performance.

The following tables include the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount at the dates indicated, if applicable (in thousands):

	Recorded Investment		Unpaid Principal Balance		Associated Allowance
March 31, 2021
With no specific allowance recorded:
Real estate loans
Residential	$	2,845	$	4,112	$	—
Construction		—		—		—
Commercial		4,164		6,454		—
Commercial		2,098		2,199		—
Obligations of states and political subdivisions		—		—		—
Home equity loans and lines of credit		95		181		—
Auto loans		38		62		—
Other		10		22		—
Total		9,250		13,030		—
With an allowance recorded:
Real estate loans
Residential		149		182		19
Construction		—		—		—
Commercial		7,314		7,441		66
Commercial		5,184		5,186		1,121
Obligations of states and political subdivisions		—		—		—
Home equity loans and lines of credit		—		—		—
Auto loans		38		44		13
Other		—		—		—
Total		12,685		12,853		1,219
Total:
Real estate loans
Residential		2,994		4,294		19
Construction		—		—		—
Commercial		11,478		13,895		66
Commercial		7,282		7,385		1,121
Obligations of states and political subdivisions		—		—		—
Home equity loans and lines of credit		95		181		—
Auto loans		76		106		13
Other		10		22		—
Total Impaired Loans	$	21,935	$	25,883	$	1,219

	Recorded Investment		Unpaid Principal Balance		Associated Allowance
September 30, 2020
With no specific allowance recorded:
Real Estate Loans
Residential	$	3,699	$	5,070	$	—
Construction		—		—		—
Commercial		4,203		6,342		—
Commercial		1,539		1,625		—
Obligations of states and political subdivisions		—		—		—
Home equity loans and lines of credit		117		222		—
Auto Loans		72		131		—
Other		11		22		—
Total		9,641		13,412		—
With an allowance recorded:
Real Estate Loans
Residential		250		271		26
Construction		—		—		—
Commercial		7,119		7,169		132
Commercial		56		57		20
Obligations of states and political subdivisions		—		—		—
Home equity loans and lines of credit		—		—		—
Auto Loans		138		143		43
Other		—		—		—
Total		7,563		7,640		221
Total:
Real Estate Loans
Residential		3,949		5,341		26
Construction		—		—		—
Commercial		11,322		13,511		132
Commercial		1,595		1,682		20
Obligations of states and political subdivisions		—		—		—
Home equity loans and lines of credit		117		222		—
Auto Loans		210		274		43
Other		11		22		—
Total Impaired Loans	$	17,204	$	21,052	$	221

The following table represents the average recorded investments in the impaired loans and the related amount of interest recognized during the time within the period that the impaired loans were impaired (in thousands):

	For the Three Months Ended March 31,
	2021		2020		2021		2020
	Average Recorded Investment		Average Recorded Investment		Interest Income Recognized		Interest Income Recognized
With no specific allowance recorded:
Real estate loans
Residential	$	1,369	$	3,825	$	2	$	—
Construction		—		—		—		—
Commercial		6,671		2,140		6		8
Commercial		1,448		1,061		—		1
Obligations of states and political subdivisions		—		—		—		—
Home equity loans and lines of credit		95		195		—		—
Auto loans		51		201		—		1
Other		10		14		—		—
Total		9,644		7,436		8		10
With an allowance recorded:
Real estate loans
Residential		146		292		—		—
Construction		—		—		—		—
Commercial		7,158		165		—		—
Commercial		1,728		60		—		—
Obligations of states and political subdivisions		—		—		—		—
Home equity loans and lines of credit		—		—		—		—
Auto loans		31		88		—		—
Other		—		15		—		—
Total		9,063		620		—		—
Total:
Real estate loans
Residential		1,515		4,117		2		—
Construction		—		—		—		—
Commercial		13,829		2,305		6		8
Commercial		3,176		1,121		—		1
Obligations of states and political subdivisions		—		—		—		—
Home equity loans and lines of credit		95		195		—		—
Auto loans		82		289		—		1
Other		10		29		—		—
Total Impaired Loans	$	18,707	$	8,056	$	8	$	10

The Company 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 fundamentally sound yet exhibit potentially unacceptable credit risk or deteriorating trends or characteristics which, if left uncorrected, may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. 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 that are 90 or more days past due are considered Substandard. Loans in the Doubtful category have all the weaknesses inherent in loans classified as Substandard with the added characteristic that their weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loans in the Loss category are considered uncollectible and of little value that their continuance as bankable assets is not warranted. Certain residential real estate loans, construction loans, home equity loans and lines of credit, auto loans and other consumer loans are underwritten and structured using standardized criteria and characteristics, primarily payment performance, and are normally risk rated and monitored collectively on a monthly basis. These are typically loans to individuals in the consumer categories and are delineated as either performing or non-performing.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. The Bank’s commercial loan officers are responsible for the timely and accurate risk rating recommendation for the loans in their portfolios at origination and on an ongoing basis. The Bank’s commercial loan officers perform an annual review of all commercial relationships $750,000 or greater. Confirmation of the appropriate risk grade is included in the review on an ongoing basis. The Bank engages an external consultant to conduct loan reviews on at least a semi-annual basis. Generally, the external consultant reviews commercial relationships greater than $1,000,000 and/or all criticized relationships. Detailed reviews, including plans for resolution, are performed on loans classified as Substandard on a quarterly basis. Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.

The following tables present the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard, and Doubtful or Loss within the internal risk rating system at March 31, 2021 and September 30, 2020 (in thousands):

All other loans are underwritten and structured using standardized criteria and characteristics, primarily payment performance, and are normally risk rated and monitored collectively on a monthly basis. These are typically loans to individuals in the consumer categories and are delineated as either performing or non-performing. The following tables present the risk ratings in the consumer categories of performing and non-performing loans at March 31, 2021 and September 30, 2020 (in thousands):

The Company further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of March 31, 2021 and September 30, 2020 (in thousands):

			31-60 Days		61-89 Days		90 + Days Past Due and				Total		Purchased Credit Impaired				Total
	Current		Past Due		Past Due		Accruing		Nonaccrual		Past Due		Accruing		Nonaccrual		Loans
March 31, 2021
Real estate loans:
Residential	$	583,941	$	843	$	502	$	—	$	3,489	$	4,834	$	—	$	—	$	588,775
Construction		9,664		—		—		—		—		—		—		—		9,664
Commercial		539,326		2,255		—		—		12,915		15,170		230		678		555,404
Commercial		107,374		497		13		—		7,318		7,828		—		—		115,202
Obligations of states and political subdivisions		69,573		—		—		—		—		—		—		—		69,573
Home equity loans and lines of credit		38,751		95		53		—		195		343		—		—		39,094
Auto loans		24,246		288		—		—		85		373		—		—		24,619
Other		1,611		—		—		—		17		17		—		—		1,628
Total	$	1,374,486	$	3,978	$	568	$	—	$	24,019	$	28,565	$	230	$	678	$	1,403,959

			31-60 Days		61-89 Days		90 + Days Past Due and				Total		Purchased Credit Impaired				Total
	Current		Past Due		Past Due		Accruing		Nonaccrual		Past Due		Accruing		Nonaccrual		Loans
September 30, 2020
Real estate loans:
Residential	$	604,168	$	979	$	402	$	—	$	4,623	$	6,004	$	—	$	—	$	610,172
Construction		11,853		—		—		—		—		—		—		—		11,853
Commercial		494,881		1,085		—		—		12,637		13,722		236		789		509,628
Commercial		137,769		6		—		—		1,828		1,834		—		—		139,603
Obligations of states and political subdivisions		79,230		—		—		—		—		—		—		—		79,230
Home equity loans and lines of credit		40,533		48		—		—		219		267		—		—		40,800
Auto loans		38,971		593		8		—		223		824		—		—		39,795
Other		2,282		—		—		—		11		11		—		—		2,293
Total	$	1,409,687	$	2,711	$	410	$	—	$	19,541	$	22,662	$	236	$	789	$	1,433,374

The allowance for loan losses is maintained at a level necessary to absorb loan losses that are both probable and reasonably estimable. Management, in determining the allowance for loan losses, considers the losses inherent in its loan portfolio and changes in the nature and volume of loan activities, along with the general economic and real estate market conditions. The allowance for loan losses consists of two elements: (1) an allocated allowance, which comprises allowances established on specific loans and class allowances based on historical loss experience and current trends, and (2) an unallocated allowance based on general economic conditions and other risk factors in our markets and portfolios. We maintain a loan review system, which allows for a periodic review of our loan portfolio and the early identification of potential impaired loans. Such system takes into consideration, among other things, delinquency status, size of loans, type and market value of collateral and financial condition of the borrowers. General loan loss allowances are based upon a combination of factors including, but not limited to, actual loan loss experience, composition of the loan portfolio, current economic conditions, management’s judgment and losses which are probable and reasonably estimable. In addition, for the three months ended March 31, 2021, consideration was given and a credit provision was recorded for loans granted short term payment relief The allowance is increased through provisions charged against current earnings and recoveries of previously charged-off loans. Loans that are determined to be uncollectible are charged against the allowance. While management uses available information to recognize probable and reasonably estimable loan losses, future loss provisions may be necessary, based on changing economic conditions. Payments received on impaired loans generally are either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. The allowance for loan losses as of March 31, 2021 was maintained at a level that represents management’s best estimate of losses inherent in the loan portfolio, and such losses were both probable and reasonably estimable.

In addition, the FDIC and the Pennsylvania Department of Banking and Securities, as an integral part of their examination process, have periodically reviewed our allowance for loan losses. The banking regulators may require that we recognize additions to the allowance based on its analysis and review of information available to it at the time of its examination.

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the allowance for loan losses (“ALL”). When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.

The following table summarizes changes in the primary segments of the ALL for the three and six months ended March 31, 2021 and 2020 (in thousands):

																Home
													Obligations of			Equity
													States and			Loans and
	Real Estate Loans									Commercial			Political			Lines of						Other
	Residential			Construction			Commercial			Loans			Subdivisions			Credit			Auto Loans			Loans			Unallocated			Total
ALL balance at December 31, 2020	$	4,507		$	135		$	7,862		$	904		$	508		$	350		$	620		$	22		$	1,233		$	16,141
Charge-offs		(4	)		—			—			—			—			—			(72	)		—			—			(76	)
Recoveries		65			—			19			—			—			2			103			—			—			189
Provision		(269	)		(18	)		1,062			866			(21	)		(15	)		(212	)		(2	)		(491	)		900
ALL balance at March 31, 2021	$	4,299		$	117		$	8,943		$	1,770		$	487		$	337		$	439		$	20		$	742		$	17,154
ALL balance at December 31, 2019	$	4,161		$	82		$	3,604		$	2,241		$	340		$	369		$	1,232		$	24		$	694		$	12,747
Charge-offs		(8	)		—			(9	)		—			—			(11	)		(211	)		(3	)		—			(242	)
Recoveries		5			—			18			—			—			2			148			1			—			174
Provision		172			(27	)		950			(61	)		19			(9	)		(65	)		7			(486	)		500
ALL balance at March 31, 2020	$	4,330		$	55		$	4,563		$	2,180		$	359		$	351		$	1,104		$	29		$	208		$	13,179

ALL balance at September 30, 2020	$	4,301		$	127		$	7,209		$	874		$	555		$	337		$	780		$	25		$	1,192		$	15,400
Charge-offs		(4	)		—			(76	)		(9	)		—			(8	)		(227	)		(1	)		—			(325	)
Recoveries		65			—			36			—			—			3			175			—			—			279
Provision		(63	)		(10	)		1,774			905			(68	)		5			(289	)		(4	)		(450	)		1,800
ALL balance at March 31, 2021	$	4,299		$	117		$	8,943		$	1,770		$	487		$	337		$	439		$	20		$	742		$	17,154
ALL balance at September 30, 2019	$	4,243		$	53		$	3,806		$	1,870		$	343		$	329		$	1,384		$	28		$	574		$	12,630
Charge-offs		(29	)		—			(9	)		—			—			(40	)		(582	)		(5	)					(665	)
Recoveries		6			—			18			1			—			3			309			2						339
Provision		110			2			748			309			16			59			(7	)		4			(366	)		875
ALL balance at March 31, 2020	$	4,330		$	55		$	4,563		$	2,180		$	359		$	351		$	1,104		$	29		$	208		$	13,179

During the three months ended March 31, 2021, the Company recorded provision expense for the commercial real estate loans and commercial loans segments, due to either increased loan balances, changes in the loan mix within the pool, and/or charge-off activity in those segments. Provision expense was also recorded for possible loan losses due to the economic slowdown caused by COVID-19 restrictions. Credit provisions were recorded for loan loss for the residential real estate loans, construction real estate loans, obligations of states and political subdivisions, home equity loans and lines of credit, auto loans and other loan segments.

During the three months ended March 31, 2020 the Company recorded provision expense for the residential real estate loans, commercial real estate loans, obligations of states and political subdivisions and other loan segments, due to either increased loan balances, changes in the loan mix within the pool, and/or charge-off activity in those segments. Credit provisions were recorded for loan loss for the construction real estate, commercial loans, home equity loans and lines of credit and auto loan segments.

During the six months ended March 31, 2021, the Company recorded provision expense for the commercial real estate loans, commercial loans and home equity loans and lines of credit segments, due to either increased loan balances, changes in the loan mix within the pool, and/or charge-off activity in those segments. Provision expense was also recorded for possible loan losses due to the economic slowdown caused by COVID-19 restrictions. Credit provisions were recorded for loan loss for the residential real estate loans, construction real estate loans, obligations of states and political subdivisions, auto loan and other loan segments.

During the six months ended March 31, 2020 the Company recorded provision expense for the residential real estate loans, commercial real estate loans, obligations of states and political subdivisions, construction real estate, commercial loans, home equity loans and lines of credit and other loan segments, due to either increased loan balances, changes in the loan mix within the pool, and/or charge-off activity in those segments. Credit provisions were recorded for loan loss for the auto loan segment.

The Company is closely monitoring all customer credit positions, particularly loans requesting payment relief. Such loans, as of March 31, 2021, amounted to approximately 2.9% of total loans outstanding, including $38.4 million in commercial real estate loans, $738,000 in commercial loans and $2.2 million in mortgage loans. As the economic slowdown continues to evolve due to COVID-19 restrictions, our customers may experience decreased cash flows, which may correlate to an inability to make timely loan payments. This, in turn, may require further increases in our allowance for loan losses and increases in the level of charge-offs in our loan portfolio.

The following table summarizes the primary segments of the ALL, segregated into two categories, the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of March 31, 2021 and September 30, 2020 (in thousands):

											Home
									Obligations of		Equity
									States and		Loans and
	Real Estate Loans						Commercial		Political		Lines of				Other
	Residential		Construction		Commercial		Loans		Subdivisions		Credit		Auto Loans		Loans		Unallocated		Total
Individually evaluated for impairment	$	19	$	—	$	66	$	1,121	$	—	$	—	$	13	$	—	$	—	$	1,219
Collectively evaluated for impairment		4,280		117		8,877		649		487		337		426		20		742		15,935
ALL balance at March 31, 2021	$	4,299	$	117	$	8,943	$	1,770	$	487	$	337	$	439	$	20	$	742	$	17,154
Individually evaluated for impairment	$	26	$	—	$	132	$	20	$	—	$	—	$	43	$	—	$	—	$	221
Collectively evaluated for impairment		4,275		127		7,077		854		555		337		737		25		1,192		15,179
ALL balance at September 30, 2020	$	4,301	$	127	$	7,209	$	874	$	555	$	337	$	780	$	25	$	1,192	$	15,400

The allowance for loan losses is based on estimates, and actual losses will vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date. Despite the above allocations, the allowance for loan losses is general in nature and is available to absorb losses from any loan segment.

The following is a summary of troubled debt restructuring granted during the three months ended March 31, 2021 (dollars in thousands):

There were no new troubled debt restructurings granted for the three months ended March 31, 2020.

The following is a summary of troubled debt restructuring granted during the six months ended March 31, 2021 and 2020 (dollars in thousands):

The one new troubled debt restructuring granted for the three and six months ended March 31, 2021, totaled $75,000 and was granted interest rate and terms concessions. The one troubled debt restructuring granted for the six months ended March 31, 2020, totaled $540,000 and was granted an interest rate concession.

For the three and six months ended March 31, 2021 and 2020, no loans defaulted on a restructuring agreement within one year of modification.

The Company continues to closely monitor all customer credit positions, particularly loans requesting payment relief. As of March 31, 2021, approximately 23 of our commercial clients had requested loan payment deferrals or payments of interest only on loans totaling $39.2 million. We have had similar requests from approximately 12 mortgage customers totaling $2.2 million. In accordance with interagency guidance issued in March 2020, these short-term deferrals are not considered troubled debt restructurings (“TDRs”) unless the borrower was previously experiencing financial difficulty. As the economic slowdown continues to evolve due to COVID-19 restrictions, our customers may experience decreased cash flows, which may correlate to an inability to make timely loan payments. This, in turn may require further increases in our allowance for loan losses and increases in the level of chargeoffs in our loan portfolio.

There can be no assurance that our non-performing assets will not increase in the future due to the impact of COVID-19 or otherwise. We will continue to closely monitor credit risk and our exposure to increased loan losses resulting from the impact of COVID-19 on our commercial and consumer clients.