LOANS AND ALLOWANCE FOR LOAN LOSSES

The composition of the loan portfolio, net of deferred origination fees and costs, is summarized as follows (in thousands):



	September 30, 2019		December 31, 2018
Commercial and agricultural:
Commercial and industrial	$	226,884	$	202,526
Agricultural	214		328
Commercial mortgages:
Construction	48,635		54,476
Commercial mortgages, other	602,970		606,694
Residential mortgages	184,013		182,724
Consumer loans:
Credit cards	—		1,449
Home equity lines and loans	92,456		98,145
Indirect consumer loans	136,502		149,380
Direct consumer loans	14,964		16,184
Total loans, net of deferred origination fees and costs	1,306,638		1,311,906
Interest receivable on loans	3,682		3,703
Total recorded investment in loans	$	1,310,320	$	1,315,609

The Corporation's concentrations of credit risk by loan type are reflected in the preceding table. The concentrations of credit risk with standby letters of credit, committed lines of credit and commitments to originate new loans generally follow the loan classifications in the table above.

The following tables present the activity in the allowance for loan losses by portfolio segment for the three month periods ended September 30, 2019 and 2018 (in thousands):



	Three Months Ended September 30, 2019
Allowance for loan losses	Commercial and Agricultural		Commercial Mortgages			Residential Mortgages			Consumer Loans			Total
Beginning balance	$	5,476	$	9,545		$	1,229		$	3,406		$	19,656
Charge-offs	—		—			(19		)	(283		)	(302		)
Recoveries	29		—			—			99			128
Net recoveries (charge-offs)	29		—			(19		)	(184		)	(174		)
Provision	4,651		(285		)	(26		)	101			4,441
Ending balance	$	10,156	$	9,260		$	1,184		$	3,323		$	23,923



	Three Months Ended September 30, 2018
Allowance for loan losses	Commercial and Agricultural		Commercial Mortgages			Residential Mortgages			Consumer Loans			Total
Beginning balance	$	4,969	$	8,740		$	1,445		$	4,491		$	19,645
Charge-offs			—			(60		)	(380		)	(440		)
Recoveries	13		—			—			117			130
Net recoveries (charge-offs)	13		—			(60		)	(263		)	(310		)
Provision	285		(91		)	11			95			300
Ending balance	$	5,267	$	8,649		$	1,396		$	4,323		$	19,635

The following tables present the activity in the allowance for loan losses by portfolio segment for the nine month periods ended September 30, 2019 and 2018 (in thousands):



	Nine Months Ended September 30, 2019
Allowance for loan losses	Commercial and Agricultural			Commercial Mortgages		Residential Mortgages			Consumer Loans			Total
Beginning balance:	$	5,383		$	8,184	$	1,226		$	4,151		$	18,944
Charge-offs:	(55		)	—		(60		)	(1,040		)	(1,155		)
Recoveries:	44			2		45			359			450
Net recoveries (charge-offs)	(11		)	2		(15		)	(681		)	(705		)
Provision	4,784			1,074		(27		)	(147		)	5,684
Ending balance	$	10,156		$	9,260	$	1,184		$	3,323		$	23,923



	Nine Months Ended September 30, 2018
Allowance for loan losses	Commercial and Agricultural			Commercial Mortgages			Residential Mortgages			Consumer Loans			Total
Beginning balance:	$	6,976		$	8,514		$	1,316		$	4,355		$	21,161
Charge-offs:	(3,644		)	(145		)	(225		)	(1,301		)	(5,315		)
Recoveries:	34			2			5			377			418
Net recoveries (charge-offs)	(3,610		)	(143		)	(220		)	(924		)	(4,897		)
Provision	1,901			278			300			892			3,371
Ending balance	$	5,267		$	8,649		$	1,396		$	4,323		$	19,635

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2019 and December 31, 2018 (in thousands):



	September 30, 2019
Allowance for loan losses:	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	6,141	$	2,519	$	—	$	—	$	8,660
Collectively evaluated for impairment	4,015		6,741		1,184		3,323		15,263
Total ending allowance balance	$	10,156	$	9,260	$	1,184	$	3,323	$	23,923



	December 31, 2018
Allowance for loan losses:	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	1,743	$	446	$	—	$	—	$	2,189
Collectively evaluated for impairment	3,640		7,738		1,226		4,151		16,755
Total ending allowance balance	$	5,383	$	8,184	$	1,226	$	4,151	$	18,944



	September 30, 2019
Loans:	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Loans individually evaluated for impairment	$	6,349	$	13,708	$	407	$	153	$	20,617
Loans collectively evaluated for impairment	221,376		639,697		184,162		244,468		1,289,703
Total ending loans balance	$	227,725	$	653,405	$	184,569	$	244,621	$	1,310,320



	December 31, 2018
Loans:	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Loans individually evaluated for impairment	$	2,128	$	6,146	$	402	$	55	$	8,731
Loans collectively evaluated for impairment	201,284		656,842		182,823		265,929		1,306,878
Total ending loans balance	$	203,412	$	662,988	$	183,225	$	265,984	$	1,315,609

The following table presents loans individually evaluated for impairment recognized by class of loans as of September 30, 2019 and December 31, 2018 (in thousands):



	September 30, 2019						December 31, 2018
With no related allowance recorded:	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
Commercial and agricultural:
Commercial and industrial	$	184	$	184	$	—	$	345	$	346	$	—
Commercial mortgages:
Construction	262		263		—		307		308		—
Commercial mortgages, other	3,305		3,306		—		4,007		3,935		—
Residential mortgages	436		407		—		424		402		—
Consumer loans:
Home equity lines and loans	176		153		—		54		55		—
With an allowance recorded:
Commercial and agricultural:
Commercial and industrial	6,164		6,165		6,141		1,780		1,782		1,743
Commercial mortgages:
Commercial mortgages, other	10,221		10,139		2,519		1,902		1,903		446
Total	$	20,748	$	20,617	$	8,660	$	8,819	$	8,731	$	2,189

The following table presents the average recorded investment and interest income of loans individually evaluated for impairment recognized by class of loans for the three and nine-month periods ended September 30, 2019 and 2018 (in thousands):



	Three Months Ended September 30, 2019				Three Months Ended September 30, 2018				Nine Months Ended September 30, 2019				Nine Months Ended September 30, 2018
With no related allowance recorded:	Average Recorded Investment		Interest Income Recognized (1)		Average Recorded Investment		Interest Income Recognized (1)		Average Recorded Investment		Interest Income Recognized (1)		Average Recorded Investment		Interest Income Recognized (1)
Commercial and agricultural:
Commercial and industrial	$	228	$	—	$	526	$	1	$	277	$	1	$	673	$	11
Commercial mortgages:
Construction	270		2		330		3		285		7		344		8
Commercial mortgages, other	3,372		3		4,339		5		3,630		9		4,257		16
Residential mortgages	396		36		413		2		396		40		420		6
Consumer loans:
Home equity lines & loans	156		3		59		1		134		4		61		2
With an allowance recorded:
Commercial and agricultural:
Commercial and industrial	3,983		—		1,573		1		2,508		—		3,359		2
Commercial mortgages:
Commercial mortgages, other	10,240		—		2,040		1		6,881		—		2,419		4
Total	$	18,645	$	44	$	9,280	$	14	$	14,111	$	61	$	11,533	$	49

(1)Cash basis interest income approximates interest income recognized.

The following table presents the recorded investment in non-accrual and loans past due 90 days or more and still accruing by class of loans as of September 30, 2019 and December 31, 2018 (in thousands):



	Non-accrual				Loans Past Due 90 Days or More and Still Accruing
	September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
Commercial and agricultural:
Commercial and industrial	$	6,335	$	2,048	$	53	$	10
Commercial mortgages:
Construction	87		109		—		—
Commercial mortgages, other	13,250		5,529		—		—
Residential mortgages	2,455		2,655		—		—
Consumer loans:
Credit cards	—		—		—		9
Home equity lines and loans	722		1,183		—		—
Indirect consumer loans	613		693		—		—
Direct consumer loans	6		37		—		—
Total	$	23,468	$	12,254	$	53	$	19

The following tables present the aging of the recorded investment in loans as of September 30, 2019 and December 31, 2018 (in thousands):



	September 30, 2019
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or More Past Due		Total Past Due		Loans Not Past Due		Total
Commercial and agricultural:
Commercial and industrial	$	1,782	$	249	$	302	$	2,333	$	225,177	$	227,510
Agricultural	—		—		—		—		215		215
Commercial mortgages:
Construction	279		—		—		279		48,490		48,769
Commercial mortgages, other	2,176		402		1,993		4,571		600,065		604,636
Residential mortgages	1,906		674		1,258		3,838		180,731		184,569
Consumer loans:
Home equity lines and loans	36		15		496		547		92,205		92,752
Indirect consumer loans	1,356		305		349		2,010		134,830		136,840
Direct consumer loans	63		14		4		81		14,948		15,029
Total	$	7,598	$	1,659	$	4,402	$	13,659	$	1,296,661	$	1,310,320



	December 31, 2018
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or More Past Due		Total Past Due		Loans Not Past Due		Total
Commercial and agricultural:
Commercial and industrial	$	284	$	61	$	71	$	416	$	202,667	$	203,083
Agricultural	16		—		—		16		313		329
Commercial mortgages:
Construction	—		—		—		—		54,626		54,626
Commercial mortgages, other	6,273		158		169		6,600		601,762		608,362
Residential mortgages	2,204		516		1,026		3,746		179,479		183,225
Consumer loans:
Credit cards	1		3		9		13		1,437		1,450
Home equity lines and loans	279		97		730		1,106		97,360		98,466
Indirect consumer loans	1,511		319		436		2,266		147,540		149,806
Direct consumer loans	120		53		31		204		16,058		16,262
Total	$	10,688	$	1,207	$	2,472	$	14,367	$	1,301,242	$	1,315,609

Troubled Debt Restructurings:

A modification of a loan may result in classification as a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Corporation offers various types of modifications which may involve a change in the schedule of payments, a reduction in the interest rate, an extension of the maturity date, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, requesting additional collateral, releasing collateral for consideration, substituting or adding a new borrower or guarantor, a permanent reduction of the recorded investment in the loan or a permanent reduction of the interest on the loan.

As of September 30, 2019 and December 31, 2018, the Corporation has a recorded investment in TDRs of $9.3 million and $6.8 million, respectively. There were specific reserves of $2.4 million and $0.9 million allocated for TDRs at September 30, 2019 and December 31, 2018, respectively. As of September 30, 2019, TDRs totaling $0.9 million were accruing interest under the modified terms and $8.4 million were on non-accrual status. As of December 31, 2018, TDRs totaling $0.8 million were accruing interest under the modified terms and $6.0 million were on non-accrual status. The Corporation had committed no additional amounts as of both September 30, 2019 and December 31, 2018, to customers with outstanding loans that are classified as TDRs.

During the three months ended September 30, 2019, the terms of a loan was modified as a TDR, while there were no loans modified as TDRs during the three months ended September 30, 2018. The modification of the terms of one commercial real estate term loan during the three months ended September 30, 2019 included a reduction of the scheduled amortized payments for greater than a three month period.

During the nine months ended September 30, 2019 and 2018, the terms of certain loans were modified as TDRs. In addition to the modification noted above, the modification of the terms of one home equity loan during the nine months ended September 30, 2019 included a reduction in the stated interest rate for the remaining life of the loan, an extension of the maturity date for approximately three years, and a reduction of the scheduled amortized payment of the loan for greater than a three month period. The modification of the terms of one commercial and industrial term loan during the nine months ended September 30, 2018 included an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk.

The following tables present loans by class modified as TDRs that occurred during the three months ended September 30, 2019 and 2018 (dollars in thousands):



September 30, 2019	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled debt restructurings:
Commercial mortgages:
Commercial mortgages, other	1	$	4,223	$	4,223
Total	1	$	4,223	$	4,223

The TDR described above did not increase the allowance for loan losses and resulted in no charge-offs during the three month period ended September 30, 2019.

The following tables present loans by class modified as TDRs that occurred during the nine months ended September 30, 2019 and 2018 (dollars in thousands):



September 30, 2019	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled debt restructurings:
Commercial mortgages:
Commercial mortgages	1	$	4,223	$	4,223
Home equity lines and loans	1	137		137
Total	2	$	4,360	$	4,360



September 30, 2018	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled debt restructurings:
Commercial and agricultural:
Commercial and industrial	1	$	100	$	100
Total	1	$	100	$	100

The TDRs described above increased the allowance for loan losses by $1.7 million and resulted in no charge-offs during the nine month period ended September 30, 2019. The TDRs described above did not increase the allowance for loan losses and resulted in no charge-offs during the nine months ended September 30, 2018.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. There were no payment defaults on any loans previously modified as TDRs within twelve months following the modification during the three and nine month periods ended September 30, 2019 and 2018.

Credit Quality Indicators

The Corporation establishes a risk rating at origination for all commercial loans. The main factors considered in assigning risk ratings include, but are not limited to: historic and future debt service coverage, collateral position, operating performance, liquidity, leverage, payment history, management ability, and the customer’s industry. Commercial relationship managers monitor all loans in their respective portfolios for any changes in the borrower’s ability to service its debt and affirm the risk ratings for the loans at least annually.

For the retail loans, which include residential mortgages, indirect and direct consumer loans, home equity lines and loans, and credit cards, once a loan is properly approved and closed, the Corporation evaluates credit quality based upon loan repayment.

The Corporation uses the risk rating system to identify criticized and classified loans. Commercial relationships within the criticized and classified risk ratings are analyzed quarterly. The Corporation uses the following definitions for criticized and classified loans (which are consistent with regulatory guidelines):

Special Mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the institution’s credit position at some future date.

Substandard – Loans classified as substandard are inadequately protected by the current net worth and paying capability of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Commercial loans not meeting the criteria above to be considered criticized or classified are considered to be pass rated loans. Loans listed as not rated are included in groups of homogeneous loans performing under terms of the loan notes. Based on the analyses performed as of September 30, 2019 and December 31, 2018, the risk category of the recorded investment of loans by class of loans is as follows (in thousands):



	September 30, 2019
	Not Rated		Pass		Special Mention		Substandard		Doubtful		Total
Commercial and agricultural:
Commercial and industrial	$	—	$	210,620	$	4,250	$	10,997	$	1,643	$	227,510
Agricultural	—		215		—		—		—		215
Commercial mortgages:
Construction	—		48,682		—		87		—		48,769
Commercial mortgages	—		572,663		10,976		16,522		4,475		604,636
Residential mortgages	182,114		—		—		2,455		—		184,569
Consumer loans:
Home equity lines and loans	92,030		—		—		722		—		92,752
Indirect consumer loans	136,227		—		—		613		—		136,840
Direct consumer loans	15,023		—		—		6		—		15,029
Total	$	425,394	$	832,180	$	15,226	$	31,402	$	6,118	$	1,310,320



	December 31, 2018
	Not Rated		Pass		Special Mention		Substandard		Doubtful		Total
Commercial and agricultural:
Commercial and industrial	$	—	$	190,666	$	4,452	$	6,222	$	1,743	$	203,083
Agricultural	—		329		—		—		—		329
Commercial mortgages:
Construction	—		54,517		—		109		—		54,626
Commercial mortgages	—		574,221		16,830		15,948		1,363		608,362
Residential mortgages	180,570		—		—		2,655		—		183,225
Consumer loans:
Credit cards	1,450		—		—		—		—		1,450
Home equity lines and loans	97,283		—		—		1,183		—		98,466
Indirect consumer loans	149,113		—		—		693		—		149,806
Direct consumer loans	16,225		—		—		37		—		16,262
Total	$	444,641	$	819,733	$	21,282	$	26,847	$	3,106	$	1,315,609

The Corporation considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, the Corporation also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following tables present the recorded investment in residential and consumer loans based on payment activity as of September 30, 2019 and December 31, 2018 (in thousands):



	September 30, 2019
			Consumer Loans
	Residential Mortgages		Credit Card		Home Equity Lines and Loans		Indirect Consumer Loans		Other Direct Consumer Loans
Performing	$	182,114	$	—	$	92,030	$	136,227	$	15,023
Non-Performing	2,455		—		722		613		6
	$	184,569	$	—	$	92,752	$	136,840	$	15,029



	December 31, 2018
			Consumer Loans
	Residential Mortgages		Credit Card		Home Equity Lines and Loans		Indirect Consumer Loans		Other Direct Consumer Loans
Performing	$	180,570	$	1,450	$	97,283	$	149,113	$	16,225
Non-Performing	2,655		—		1,183		693		37
	$	183,225	$	1,450	$	98,466	$	149,806	$	16,262