5.	Loans Receivable and Related Allowance for Loan Losses

The Corporation’s loans receivable as of the respective dates are summarized as follows:

(Dollar amounts in thousands)	September 30,		December 31,
	2018		2017

Mortgage loans on real estate:
Residential first mortgages	$	237,106	$	221,823
Home equity loans and lines of credit		99,668		99,940
Commercial real estate		200,169		193,068
Total		536,943		514,831
Other loans:
Commercial business		52,594		58,941
Consumer		8,948		9,589
Total		61,542		68,530
Total loans, gross		598,485		583,361
Less allowance for loan losses		6,360		6,127
Total loans, net	$	592,125	$	577,234

Included in total loans above are net deferred costs o

$1.9

million a

$1.5

million at

September 30, 2018

and

December

31,

2017,

respectively.

An allowance for loan losses (ALL) is maintained to absorb probable incurred 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 loss experience and the amount of nonperforming loans.

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 ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.

The allowance for loan losses is based on estimates and actual losses

may

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.

September 30, 2018,

there was

allowance for loan losses allocated to loans acquired in the

April 2016

acquisition of United American Savings Bank or the

September 2017

acquisition of Northern Hancock Bank and Trust Co.

The following table details activity in the ALL and the recorded investment by portfolio segment based on impairment method:

(Dollar amounts in thousands)

			Home Equity
	Residential		& Lines		Commercial		Commercial
	Mortgages		of Credit		Real Estate		Business		Consumer		Total
Three months ended September 30, 2018:
Allowance for loan losses:
Beginning Balance	$	2,033	$	650	$	2,882	$	499	$	54	$	6,118
Charge-offs		-		(26)		(6)		-		(44)		(76)
Recoveries		-		1		13		-		4		18
Provision		128		34		81		11		46		300
Ending Balance	$	2,161	$	659	$	2,970	$	510	$	60	$	6,360

Nine months ended September 30, 2018:
Allowance for loan losses:
Beginning Balance	$	2,090	$	646	$	2,753	$	585	$	53	$	6,127
Charge-offs		(61)		(109)		(424)		-		(213)		(807)
Recoveries		3		12		32		1		12		60
Provision		129		110		609		(76)		208		980
Ending Balance	$	2,161	$	659	$	2,970	$	510	$	60	$	6,360

At September 30, 2018:
Ending ALL balance attributable to loans:
Individually evaluated for impairment	$	7	$	-	$	-	$	-	$	-	$	7
Acquired loans		-		-		-		-		-		-
Collectively evaluated for impairment		2,154		659		2,970		510		60		6,353
Total	$	2,161	$	659	$	2,970	$	510	$	60	$	6,360
Total loans:
Individually evaluated for impairment	$	401	$	6	$	2,512	$	39	$	-	$	2,958
Acquired loans		17,767		9,817		22,784		1,778		1,080		53,226
Collectively evaluated for impairment		218,938		89,845		174,873		50,777		7,868		542,301
Total	$	237,106	$	99,668	$	200,169	$	52,594	$	8,948	$	598,485

At December 31, 2017:
Ending ALL balance attributable to loans:
Individually evaluated for impairment	$	7	$	-	$	-	$	-	$	-	$	7
Acquired loans		-		-		-		-		-		-
Collectively evaluated for impairment		2,083		646		2,753		585		53		6,120
Total	$	2,090	$	646	$	2,753	$	585	$	53	$	6,127
Total loans:
Individually evaluated for impairment	$	425	$	8	$	914	$	569	$	-	$	1,916
Acquired loans		20,300		10,873		27,404		1,451		2,893		62,921
Collectively evaluated for impairment		201,098		89,059		164,750		56,921		6,696		518,524
Total	$	221,823	$	99,940	$	193,068	$	58,941	$	9,589	$	583,361

Three months ended September 30, 2017:
Allowance for loan losses:
Beginning Balance	$	1,994	$	639	$	2,460	$	621	$	53	$	5,767
Charge-offs		(2)		(33)		(36)		(4)		(26)		(101)
Recoveries		-		1		2		-		1		4
Provision		46		20		200		(21)		25		270
Ending Balance	$	2,038	$	627	$	2,626	$	596	$	53	$	5,940

Nine months ended September 30, 2017:
Allowance for loan losses:
Beginning Balance	$	1,846	$	633	$	2,314	$	700	$	52	$	5,545
Charge-offs		(38)		(44)		(126)		(14)		(53)		(275)
Recoveries		-		21		6		-		10		37
Provision		230		17		432		(90)		44		633
Ending Balance	$	2,038	$	627	$	2,626	$	596	$	53	$	5,940

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was

not

necessary as of

September 30, 2018:

(Dollar amounts in thousands)

	Impaired Loans with Specific Allowance
							For the three months
	As of September 30, 2018						ended September 30, 2018
											Cash Basis
	Unpaid						Average		Interest Income		Interest
	Principal		Recorded		Related		Recorded		Recognized		Recognized
	Balance		Investment		Allowance		Investment		in Period		in Period
Residential first mortgages	$	74	$	74	$	7	$	74	$	1	$	1
Home equity and lines of credit		6		6		-		7		-		-
Commercial real estate		-		-		-		-		-		-
Commercial business		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
Total	$	80	$	80	$	7	$	81	$	1	$	1

	For the nine months
	ended September 30, 2018
					Cash Basis
	Average		Interest Income		Interest
	Recorded		Recognized		Recognized
	Investment		in Period		in Period
Residential first mortgages	$	75	$	2	$	2
Home equity and lines of credit		7		-		-
Commercial real estate		-		-		-
Commercial business		-		-		-
Consumer		-		-		-
Total	$	82	$	2	$	2

	Impaired Loans with No Specific Allowance
					For the three months
	As of September 30, 2018				ended September 30, 2018
									Cash Basis
	Unpaid				Average		Interest Income		Interest
	Principal		Recorded		Recorded		Recognized		Recognized
	Balance		Investment		Investment		in Period		in Period
Residential first mortgages	$	438	$	327	$	330	$	2	$	2
Home equity and lines of credit		-		-		-		-		-
Commercial real estate		2,512		2,512		1,278		83		2
Commercial business		39		39		39		1		1
Consumer		-		-		-		-		-
Total	$	2,989	$	2,878	$	1,647	$	86	$	5

	For the nine months
	ended September 30, 2018
					Cash Basis
	Average		Interest Income		Interest
	Recorded		Recognized		Recognized
	Investment		in Period		in Period
Residential first mortgages	$	338	$	3	$	3
Home equity and lines of credit		-		-		-
Commercial real estate		952		125		42
Commercial business		300		74		74
Consumer		-		-		-
Total	$	1,590	$	202	$	119

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was

not

necessary as of

December

31,

2017:

(Dollar amounts in thousands)

	Impaired Loans with Specific Allowance
							For the year ended
	As of December 31, 2017						December 31, 2017
											Cash Basis
	Unpaid						Average		Interest Income		Interest
	Principal		Recorded		Related		Recorded		Recognized		Recognized
	Balance		Investment		Allowance		Investment		in Period		in Period
Residential first mortgages	$	75	$	75	$	7	$	88	$	3	$	3
Home equity and lines of credit		8		8		-		2		-		-
Commercial real estate		-		-		-		111		-		-
Commercial business		-		-		-		118		-		-
Consumer		-		-		-		-		-		-
Total	$	83	$	83	$	7	$	319	$	3	$	3

	Impaired Loans with No Specific Allowance
					For the year ended
	As of December 31, 2017				December 31, 2017
									Cash Basis
	Unpaid				Average		Interest Income		Interest
	Principal		Recorded		Recorded		Recognized		Recognized
	Balance		Investment		Investment		in Period		in Period
Residential first mortgages	$	461	$	350	$	289	$	8	$	8
Home equity and lines of credit		-		-		-		-		-
Commercial real estate		1,089		914		855		3		3
Commercial business		569		569		498		3		3
Consumer		-		-		-		-		-
Total	$	2,119	$	1,833	$	1,642	$	14	$	14

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was

not

necessary as of

September 30, 2017:

(Dollar amounts in thousands)

	Impaired Loans with Specific Allowance
							For the three months
	As of September 30, 2017						ended September 30, 2017
											Cash Basis
	Unpaid						Average		Interest Income		Interest
	Principal		Recorded		Related		Recorded		Recognized		Recognized
	Balance		Investment		Allowance		Investment		in Period		in Period
Residential first mortgages	$	76	$	76	$	8	$	76	$	-	$	-
Home equity and lines of credit		-		-		-		-		-		-
Commercial real estate		-		-		-		-		-		-
Commercial business		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
Total	$	76	$	76	$	8	$	76	$	-	$	-

	For the nine months
	ended September 30, 2017
					Cash Basis
	Average		Interest Income		Interest
	Recorded		Recognized		Recognized
	Investment		in Period		in Period
Residential first mortgages	$	91	$	2	$	2
Home equity and lines of credit		-		-		-
Commercial real estate		139		-		-
Commercial business		147		-		-
Consumer		-		-		-
Total	$	377	$	2	$	2

	Impaired Loans with No Specific Allowance
					For the three months
	As of September 30, 2017				ended September 30, 2017
									Cash Basis
	Unpaid				Average		Interest Income		Interest
	Principal		Recorded		Recorded		Recognized		Recognized
	Balance		Investment		Investment		in Period		in Period
Residential first mortgages	$	469	$	357	$	362	$	1	$	1
Home equity and lines of credit		-		-		-		-		-
Commercial real estate		1,113		939		957		1		1
Commercial business		585		585		592		1		1
Consumer		-		-		-		-		-
Total	$	2,167	$	1,881	$	1,911	$	3	$	3

	For the nine months
	ended September 30, 2017
					Cash Basis
	Average		Interest Income		Interest
	Recorded		Recognized		Recognized
	Investment		in Period		in Period
Residential first mortgages	$	274	$	5	$	5
Home equity and lines of credit		-		-		-
Commercial real estate		840		2		2
Commercial business		481		2		2
Consumer		-		-		-
Total	$	1,595	$	9	$	9

Unpaid principal balance includes any loans that have been partially charged off but

not

forgiven. Accrued interest is

not

included in the recorded investment in loans presented above or in the tables that follow based on the amounts

not

being material.

Troubled debt restructurings (TDR).

The Corporation has certain loans that have been modified in order to maximize collection of loan balances. If, for economic or legal reasons related to the customer’s financial difficulties, management grants a concession compared to the original terms and conditions of the loan that it would

not

have otherwise considered, the modified loan is classified as a TDR. Concessions related to TDRs generally do

not

include forgiveness of principal balances. The Corporation generally does

not

extend additional credit to borrowers with loans classified as TDRs.

September 30, 2018

and

December

31,

2017,

the Corporation had

$407,000

and

$433,000,

respectively, of loans classified as TDRs, which are included in impaired loans above. The Corporation had allocated

$7,000

of specific allowance for these loans at

September 30, 2018

and

December

31,

2017,

respectively.

During the

three

and

nine

month periods ended

September 30, 2018 ,

the Corporation did

not

modify any loans as TDRs. During the

three

month period ended

September 30, 2017,

the Corporation did

not

modify any loans as TDRs. During the

nine

month period ended

September 30, 2017,

the Corporation modified

one

residential mortgage loan with a recorded investment of

$323,000

due to a bankruptcy order. At

September 30, 2017,

the Corporation did

not

have any specific allowance for loan losses allocated to this specific loan.

A loan is considered to be in payment default once it is

days contractually past due under the modified terms. During the

three

and

nine

month periods ended

September 30, 2018

and

2017,

the Corporation did

not

have any loans which were modified as TDRs for which there was a payment default within

twelve

months following the modification.

Credit Quality Indicators.

Management categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors.

Commercial real estate and commercial business loans

not

identified as impaired are evaluated as risk rated pools of loans utilizing a risk rating practice that is supported by a quarterly special asset review. In this review process, strengths and weaknesses are identified, evaluated and documented for each criticized and classified loan and borrower, strategic action plans are developed, risk ratings are confirmed and the loan’s performance status is reviewed.

Management has determined certain portions of the loan portfolio to be homogeneous in nature and assigns like reserve factors for the following loan pool types: residential real estate, home equity loans and lines of credit, and consumer installment and personal lines of credit.

The reserve allocation for risk rated loan pools is developed by applying the following factors:

Historic

: Management utilizes a computer model to develop the historical net charge-off experience which is used to formulate the assumptions employed in the migration analysis applied to estimate losses in the portfolio. Outstanding balance and charge-off information are input into the model and historical loss migration rate assumptions are developed to apply to pass, special mention, substandard and doubtful risk rated loans. A

twelve

-quarter rolling weighted-average is utilized to estimate probable incurred losses in the portfolios.

Qualitative

: Qualitative adjustment factors for pass, special mention, substandard and doubtful ratings are developed and applied to risk rated loans to allow for: quality of lending policies and procedures; national and local economic and business conditions; changes in the nature and volume of the portfolio; experiences, ability and depth of lending management; changes in trends, volume and severity of past due, nonaccrual and classified loans and loss and recovery trends; quality of loan review systems; concentrations of credit and other external factors.

Management uses the following definitions for risk ratings:

Pass

: Loans classified as pass typically exhibit good payment performance and have underlying borrowers with acceptable financial trends where repayment capacity is evident. These borrowers typically would have a sufficient cash flow that would allow them to weather an economic downturn and the value of any underlying collateral could withstand a moderate degree of depreciation due to economic conditions.

Special Mention

: Loans classified as special mention are characterized by potential weaknesses that could jeopardize repayment as contractually agreed. These loans

may

exhibit adverse trends such as increasing leverage, shrinking profit margins and/or deteriorating cash flows. These borrowers would inherently be more vulnerable to the application of economic pressures.

Substandard

: Loans classified as substandard exhibit weaknesses that are well-defined to the point that repayment is jeopardized. Typically, the Corporation is

longer adequately protected by both the apparent net worth and repayment capacity of the borrower.

Doubtful

: Loans classified as doubtful have advanced to the point that collection or liquidation in full, on the basis of currently ascertainable facts, conditions and value, is highly questionable or improbable.

The following table presents the classes of the loan portfolio summarized by the aggregate pass and the criticized categories of special mention, substandard and doubtful within the Corporation’s internal risk rating system as of

September 30, 2018

and

December

31,

2017:

(Dollar amounts in thousands)

					Special
	Not Rated		Pass		Mention		Substandard		Doubtful		Total
September 30, 2018:
Residential first mortgages	$	235,817	$	-	$	-	$	1,289	$	-	$	237,106
Home equity and lines of credit		98,647		-		-		1,021		-		99,668
Commercial real estate		-		189,273		3,785		7,111		-		200,169
Commercial business		-		51,381		150		1,063		-		52,594
Consumer		8,851		-		-		97		-		8,948
Total	$	343,315	$	240,654	$	3,935	$	10,581	$	-	$	598,485

December 31, 2017:
Residential first mortgages	$	220,730	$	-	$	-	$	1,093	$	-	$	221,823
Home equity and lines of credit		98,946		-		-		994		-		99,940
Commercial real estate		-		182,460		2,744		7,864		-		193,068
Commercial business		-		56,960		477		1,504		-		58,941
Consumer		9,443		-		-		146		-		9,589
Total	$	329,119	$	239,420	$	3,221	$	11,601	$	-	$	583,361

Management 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 table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonperforming loans as of

September 30, 2018

and

December

31,

2017:

(Dollar amounts in thousands)

	Performing						Nonperforming
	Accruing		Accruing		Accruing		Accruing
	Loans Not		30-59 Days		60-89 Days		90 Days +				Total
	Past Due		Past Due		Past Due		Past Due		Nonaccrual		Loans
September 30, 2018:
Residential first mortgages	$	233,448	$	2,019	$	427	$	129	$	1,083	$	237,106
Home equity and lines of credit		97,716		906		146		379		521		99,668
Commercial real estate		196,184		737		8		-		3,240		200,169
Commercial business		52,233		322		-		-		39		52,594
Consumer		8,704		97		50		27		70		8,948
Total loans	$	588,285	$	4,081	$	631	$	535	$	4,953	$	598,485

December 31, 2017:
Residential first mortgages	$	218,515	$	1,936	$	357	$	159	$	856	$	221,823
Home equity and lines of credit		98,112		598		370		334		526		99,940
Commercial real estate		190,451		1,026		430		197		964		193,068
Commercial business		58,058		74		225		-		584		58,941
Consumer		9,162		273		81		-		73		9,589
Total loans	$	574,298	$	3,907	$	1,463	$	690	$	3,003	$	583,361

The following table presents the Corporation’s nonaccrual loans by aging category as of

September 30, 2018

and

December

31,

2017:

(Dollar amounts in thousands)

	Not		30-59 Days		60-89 Days		90 Days +		Total
	Past Due		Past Due		Past Due		Past Due		Loans

September 30, 2018:
Residential first mortgages	$	346	$	-	$	74	$	663	$	1,083
Home equity and lines of credit		7		-		-		514		521
Commercial real estate		2,665		-		268		307		3,240
Commercial business		39		-		-		-		39
Consumer		-		-		-		70		70
Total loans	$	3,057	$	-	$	342	$	1,554	$	4,953

December 31, 2017:
Residential first mortgages	$	366	$	-	$	75	$	415	$	856
Home equity and lines of credit		8		-		-		518		526
Commercial real estate		341		-		-		623		964
Commercial business		569		-		-		15		584
Consumer		-		-		-		73		73
Total loans	$	1,284	$	-	$	75	$	1,644	$	3,003