3.	Loans Receivable and Related Allowance for Loan Losses

The following table summarizes the Corporation’s loans receivable as of

December 31:

(Dollar amounts in thousands)	December 31, 2019		December 31, 2018
Mortgage loans on real estate:
Residential first mortgages	$	293,170	$	295,405
Home equity loans and lines of credit		97,541		103,752
Commercial real estate		229,951		238,734
Total real estate loans		620,662		637,891
Other loans:
Commercial business		66,603		66,009
Consumer		14,639		11,272
Total other loans		81,242		77,281
Total loans, gross		701,904		715,172
Less allowance for loan losses		6,556		6,508
Total loans, net	$	695,348	$	708,664

Included in total loans above are net deferred costs of

$2.6

million and

$2.2

million at

December

31,

2019

and

2018,

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.

Following is an analysis of the changes in the ALL for the years ended

December 31:

(Dollar amounts in thousands)	2019			2018
Balance at the beginning of the year	$	6,508		$	6,127
Provision for loan losses		715			1,280
Charge-offs		(913	)		(989	)
Recoveries		246			90
Balance at the end of the year	$	6,556		$	6,508

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

December

31,

2019

and

2018:

				Home Equity
	Residential			& Lines			Commercial			Commercial
(Dollar amounts in thousands)	Mortgages			of Credit			Real Estate			Business			Consumer			Total
December 31, 2019:
Beginning Balance	$	2,198		$	648		$	3,106		$	500		$	56		$	6,508
Charge-offs		(227	)		(61	)		(242	)		(250	)		(133	)		(913	)
Recoveries		40			6			134			—			66			246
Provision		298			33			(100	)		386			98			715
Ending Balance	$	2,309		$	626		$	2,898		$	636		$	87		$	6,556

Ending ALL balance attributable to loans:
Individually evaluated for impairment	$	5		$	—		$	—		$	—		$	—		$	5
Acquired loans collectively evaluated for impairment		—			—			—			—			—			—
Originated loans collectively evaluated for impairment		2,304			626			2,898			636			87			6,551
Total	$	2,309		$	626		$	2,898		$	636		$	87		$	6,556

Total loans:
Individually evaluated for impairment	$	358		$	4		$	81		$	40		$	—		$	483
Acquired loans collectively evaluated for impairment		60,523			10,901			41,993			7,930			1,982			123,329
Originated loans collectively evaluated for impairment		232,289			86,636			187,877			58,633			12,657			578,092
Total	$	293,170		$	97,541		$	229,951		$	66,603		$	14,639		$	701,904

At December 31, 2018:
Beginning Balance	$	2,090		$	646		$	2,753		$	585		$	53		$	6,127
Charge-offs		(71	)		(155	)		(484	)		—			(279	)		(989	)
Recoveries		3			14			48			1			24			90
Provision		176			143			789			(86	)		258			1,280
Ending Balance	$	2,198		$	648		$	3,106		$	500		$	56		$	6,508

Ending ALL balance attributable to loans:
Individually evaluated for impairment	$	12		$	—		$	—		$	—		$	—		$	12
Acquired loans collectively evaluated for impairment		—			—			—			—			—			—
Originated loans collectively evaluated for impairment		2,186			648			3,106			500			56			6,496
Total	$	2,198		$	648		$	3,106		$	500		$	56		$	6,508

Total loans:
Individually evaluated for impairment	$	389		$	6		$	34		$	39		$	—		$	468
Acquired loans collectively evaluated for impairment		72,654			13,750			56,690			12,974			3,306			159,374
Originated loans collectively evaluated for impairment		222,362			89,996			182,010			52,996			7,966			555,330
Total	$	295,405		$	103,752		$	238,734		$	66,009		$	11,272		$	715,172

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.

December 31, 2019

and

2018,

there was

allowance for loan losses allocated to loans acquired from United American Savings Bank (

2016

), Northern Hancock Bank and Trust Co. (

2017

) or Community First Bancorp, Inc (

2018

The following tables present 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:

(Dollar amounts in thousands)
	Impaired Loans with Specific Allowance
	As of December 31, 2019						For the year ended December 31, 2019
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	72	$	72	$	5	$	72	$	3	$	3
Home equity and lines of credit		4		4		—		5		—		—
Commercial real estate		—		—		—		—		—		—
Commercial business		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Total	$	76	$	76	$	5	$	77	$	3	$	3

	Impaired Loans with No Specific Allowance
	As of December 31, 2019				For the year ended December 31, 2019
	Unpaid Principal Balance		Recorded Investment		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	398	$	286	$	301	$	4	$	4
Home equity and lines of credit		—		—		—		—		—
Commercial real estate		81		81		1,019		88		35
Commercial business		40		40		79		7		2
Consumer		—		—		—		—		—
Total	$	519	$	407	$	1,399	$	99	$	41

(Dollar amounts in thousands)
	Impaired Loans with Specific Allowance
	As of December 31, 2018						For the year ended December 31, 2018
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	74	$	74	$	12	$	74	$	2	$	2
Home equity and lines of credit		6		6		—		7		—		—
Commercial real estate		—		—		—		—		—		—
Commercial business		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Total	$	80	$	80	$	12	$	81	$	2	$	2

	Impaired Loans with No Specific Allowance
	As of December 31, 2018				For the year ended December 31, 2018
	Unpaid Principal Balance		Recorded Investment		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	427	$	315	$	334	$	5	$	5
Home equity and lines of credit		—		—		—		—		—
Commercial real estate		34		34		768		156		73
Commercial business		39		39		248		74		74
Consumer		—		—		—		—		—
Total	$	500	$	388	$	1,350	$	235	$	152

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 has

legal obligation to extend additional credit to borrowers with loans classified as TDRs.

December

31,

2019

and

2018,

the Corporation had

$409,000

and

$394,000,

respectively, of loans classified as TDRs, which are included in impaired loans above. At

December

31,

2019

and

2018,

the Corporation had

$5,000

and

$12,000,

respectively, of the allowance for loan losses allocated to these specific loans.

During the year ended

December 31, 2019,

the Corporation modified

one

commercial mortgage loans with a recorded investment of

$67,000.

In order to cure the delinquency on the loan, all interest and fees receivable were capitalized to the loan principal which was re-amortized through the original maturity date at the original interest rate on the loan. The modification did

not

have a material impact on the Corporation’s income statement during the period. At

December 31, 2019,

the Corporation did

not

have any allowance for loan losses allocated to this specific loan. During the year ended

December 31, 2018,

the Corporation did

not

modify any loans as TDRs.

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

days contractually past due under the modified terms. During the year ended

December

31,

2019

and

2018,

there were

loans classified as TDRs which defaulted within

twelve

months of their 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 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. These homogeneous loans are

not

rated unless identified as impaired.

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 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

December

31,

2019

and

2018:

(Dollar amounts in thousands)
	Not Rated		Pass		Special Mention		Substandard		Doubtful		Total
December 31, 2019:
Residential first mortgages	$	291,843	$	—	$	—	$	1,327	$	—	$	293,170
Home equity and lines of credit		97,087		—		—		454		—		97,541
Commercial real estate		—		216,744		5,370		7,837		—		229,951
Commercial business		—		64,636		204		1,763		—		66,603
Consumer		14,557		—		—		82		—		14,639
Total loans	$	403,487	$	281,380	$	5,574	$	11,463	$	—	$	701,904

December 31, 2018:
Residential first mortgages	$	293,919	$	—	$	—	$	1,486	$	—	$	295,405
Home equity and lines of credit		102,869		—		—		883		—		103,752
Commercial real estate		—		222,335		5,942		10,457		—		238,734
Commercial business		—		62,022		542		3,445		—		66,009
Consumer		11,157		—		—		115		—		11,272
Total loans	$	407,945	$	284,357	$	6,484	$	16,386	$	—	$	715,172

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 required 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

December

31,

2019

and

2018:

(Dollar amounts in thousands)
	Performing						Nonperforming
	Accruing Loans Not Past Due		Accruing 30-59 Days Past Due		Accruing 60-89 Days Past Due		Accruing 90+ Days Past Due		Nonaccrual		Total
December 31, 2019:
Residential first mortgages	$	288,462	$	2,405	$	1,039	$	309	$	955	$	293,170
Home equity and lines of credit		95,923		626		553		11		428		97,541
Commercial real estate		226,360		2,141		543		—		907		229,951
Commercial business		66,091		225		72		—		215		66,603
Consumer		14,458		84		15		—		82		14,639
Total loans	$	691,294	$	5,481	$	2,222	$	320	$	2,587	$	701,904

December 31, 2018:
Residential first mortgages	$	289,732	$	3,586	$	747	$	485	$	855	$	295,405
Home equity and lines of credit		101,920		707		351		287		487		103,752
Commercial real estate		232,865		5,013		231		19		606		238,734
Commercial business		65,538		50		247		—		174		66,009
Consumer		10,961		160		36		—		115		11,272
Total loans	$	701,016	$	9,516	$	1,612	$	791	$	2,237	$	715,172

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

December

31,

2019

and

2018:

(Dollar amounts in thousands)
	Not Past Due		30-59 Days Past Due		60-89 Days Past Due		90 Days + Past Due		Total
December 31, 2019:
Residential first mortgages	$	245	$	—	$	72	$	638	$	955
Home equity and lines of credit		4		—		—		424		428
Commercial real estate		28		309		31		539		907
Commercial business		—		—		175		40		215
Consumer		—		—		—		82		82
Total loans	$	277	$	309	$	278	$	1,723	$	2,587

December 31, 2018:
Residential first mortgages	$	335	$	—	$	74	$	446	$	855
Home equity and lines of credit		6		—		—		481		487
Commercial real estate		111		265		—		230		606
Commercial business		—		—		39		135		174
Consumer		—		—		—		115		115
Total loans	$	452	$	265	$	113	$	1,407	$	2,237