4.	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, 2020		December 31, 2019
Mortgage loans on real estate:
Residential first mortgages	$	305,824	$	293,170
Home equity loans and lines of credit		90,764		97,541
Commercial real estate		285,448		229,951
Total real estate loans		682,036		620,662
Other loans:
Commercial business		120,535		66,603
Consumer		37,720		14,639
Total other loans		158,255		81,242
Total loans, gross		840,291		701,904
Less allowance for loan losses		8,905		6,556
Total loans, net	$	831,386	$	695,348

Included in total loans above are net deferred costs of

$1.6

million and

$2.6

million at

September 30, 2020

and

December 31, 2019

, 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. While the Corporation has historically experienced strong trends in asset quality, as a result of the situation regarding the COVID-

pandemic, management has recognized the need to incorporate factors into the allowance evaluation to help compensate for the effects of any credit deterioration due to the current economic situation.

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, 2020

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

(Dollar amounts in thousands)	Residential Mortgages			Home Equity & Lines of Credit			Commercial Real Estate			Commercial Business			Consumer			Total
Three months ended September 30, 2020:
Allowance for loan losses:
Beginning Balance	$	2,582		$	654		$	3,901		$	803		$	219		$	8,159
Charge-offs		—			(51	)		(1	)		—			(28	)		(80	)
Recoveries		5			1			1			36			33			76
Provision		111			57			578			(81	)		85			750
Ending Balance	$	2,698		$	661		$	4,479		$	758		$	309		$	8,905

Nine months ended September 30, 2020:
Allowance for loan losses:
Beginning Balance	$	2,309		$	626		$	2,898		$	636		$	87		$	6,556
Charge-offs		(11	)		(89	)		(75	)		(147	)		(82	)		(404	)
Recoveries		6			12			6			37			50			111
Provision		394			112			1,650			232			254			2,642
Ending Balance	$	2,698		$	661		$	4,479		$	758		$	309		$	8,905

At September 30, 2020:
Ending ALL balance attributable to loans:
Individually evaluated for impairment	$	—		$	—		$	—		$	15		$	—		$	15
Acquired loans collectively evaluated for impairment		—			—			—			—			—			—
Originated loans collectively evaluated for impairment		2,698			661			4,479			743			309			8,890
Total	$	2,698		$	661		$	4,479		$	758		$	309		$	8,905
Total loans:
Individually evaluated for impairment	$	225		$	4		$	1,694		$	182		$	—		$	2,105
Acquired loans collectively evaluated for impairment		48,614			8,713			32,840			5,766			1,126			97,059
Originated loans collectively evaluated for impairment		256,985			82,047			250,914			114,587			36,594			741,127
Total	$	305,824		$	90,764		$	285,448		$	120,535		$	37,720		$	840,291

At December 31, 2019:
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

Three months ended September 30, 2019:
Allowance for loan losses:
Beginning Balance	$	2,225		$	642		$	3,043		$	615		$	55		$	6,580
Charge-offs		—			(22	)		(8	)		—			(39	)		(69	)
Recoveries		—			4			104			—			35			143
Provision		16			11			(185	)		5			8			(145	)
Ending Balance	$	2,241		$	635		$	2,954		$	620		$	59		$	6,509

Nine months ended September 30, 2019:
Allowance for loan losses:
Beginning Balance	$	2,198		$	648		$	3,106		$	500		$	56		$	6,508
Charge-offs		(204	)		(56	)		(36	)		(134	)		(114	)		(544	)
Recoveries		40			5			132			—			63			240
Provision		207			38			(248	)		254			54			305
Ending Balance	$	2,241		$	635		$	2,954		$	620		$	59		$	6,509

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, 2020

(Dollar amounts in thousands)
	Impaired Loans with Specific Allowance
	As of September 30, 2020						For the three months ended September 30, 2020
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	—	$	—	$	—	$	35	$	—	$	—
Home equity and lines of credit		—		—		—		2		—		—
Commercial real estate		—		—		—		—		—		—
Commercial business		69		69		15		70		1		1
Consumer		—		—		—		—		—		—
Total	$	69	$	69	$	15	$	107	$	1	$	1

	For the nine months ended September 30, 2020
	Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	53	$	—	$	—
Home equity and lines of credit		3		—		—
Commercial real estate		37		—		—
Commercial business		47		2		2
Consumer		—		—		—
Total	$	140	$	2	$	2

	Impaired Loans with No Specific Allowance
	As of September 30, 2020				For the three months ended September 30, 2020
	Unpaid Principal Balance		Recorded Investment		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	336	$	225	$	304	$	3	$	3
Home equity and lines of credit		4		4		2		—		—
Commercial real estate		1,694		1,694		1,714		23		23
Commercial business		113		113		127		4		2
Consumer		—		—		—		—		—
Total	$	2,147	$	2,036	$	2,147	$	30	$	28

	For the nine months ended September 30, 2020
	Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	293	$	6	$	6
Home equity and lines of credit		1		—		—
Commercial real estate		1,144		75		59
Commercial business		84		8		5
Consumer		—		—		—
Total	$	1,522	$	89	$	70

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, 2019

(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

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, 2019

(Dollar amounts in thousands)
	Impaired Loans with Specific Allowance
	As of September 30, 2019						For the three months ended September 30, 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	$	4	$	72	$	1	$	1
Home equity and lines of credit		4		4		—		5		—		—
Commercial real estate		—		—		—		—		—		—
Commercial business		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Total	$	76	$	76	$	4	$	77	$	1	$	1

	For the nine months ended September 30, 2019
	Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	73	$	3	$	3
Home equity and lines of credit		5		—		—
Commercial real estate		—		—		—
Commercial business		16		—		—
Consumer		—		—		—
Total	$	94	$	3	$	3

	Impaired Loans with No Specific Allowance
	As of September 30, 2019				For the three months ended September 30, 2019
	Unpaid Principal Balance		Recorded Investment		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	369	$	294	$	298	$	2	$	2
Home equity and lines of credit		—		—		—		—		—
Commercial real estate		2,471		2,471		2,475		34		33
Commercial business		40		40		139		—		—
Consumer		—		—		—		—		—
Total	$	2,880	$	2,805	$	2,912	$	36	$	35

	For the nine months ended September 30, 2019
	Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	305	$	3	$	3
Home equity and lines of credit		—		—		—
Commercial real estate		1,254		87		34
Commercial business		89		7		2
Consumer		—		—		—
Total	$	1,648	$	97	$	39

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, 2020

and

December 31, 2019

, the Corporation had

$340,000

and

$409,000,

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

not

have any specific allowance allocated to these loans at

September 30, 2020

and had

$5,000

of specific allowance allocated for these loans at

December 31, 2019

During the

three

and

nine

months ended

September 30, 2020

, the Corporation did

not

modify any loans as TDRs. During the

three

months ended

September 30, 2019,

the Corporation did

not

modify any loans as TDRs. During the

nine

months ended

September 30, 2019

, the Corporation modified the interest rate and extended the payment amortization on

one

commercial real estate loan with a recorded investment of

$73,000.

September 30, 2019

, the Corporation did

not

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

Under the provisions of the CARES Act, as of

September 30, 2020,

the Corporation has granted modifications on

420

loans with an aggregate balance of

$110.9

million, representing

13.3%

of gross outstanding loan balances. As of

September

30,

2020,

hotel loans comprised

$35.9

million, or

32.3%,

of the total deferrals. Through

November 2, 2020,

loans with an aggregate balance of

$28.6

million remained on deferral while

385

loans with an aggregate balance of

$82.3

million of gross loans outstanding, have resumed normal repayment or paid off. Also, as of

November 2, 2020,

hotel loans comprised

$23.3

million, or

81.2%,

of the loans remaining on deferral. The characteristics of these modifications are considered short-term and do

not

result in a reclassification of these loans to TDR status.

A loan is considered to be in payment d

efault once it is

days contractually past due under the modified terms. During the

three

and

nine

months ended

September 30, 2020

and

2019

, 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, 2020

and

December 31, 2019

(Dollar amounts in thousands)
	Not Rated		Pass		Special Mention		Substandard		Doubtful		Total
September 30, 2020:
Residential first mortgages	$	304,445	$	—	$	—	$	1,379	$	—	$	305,824
Home equity and lines of credit		90,432		—		—		332		—		90,764
Commercial real estate		—		269,335		5,123		10,990		—		285,448
Commercial business		—		118,206		14		2,315		—		120,535
Consumer		37,674		—		—		46		—		37,720
Total loans	$	432,551	$	387,541	$	5,137	$	15,062	$	—	$	840,291

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

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. As of

September 30, 2020,

the Corporation had made short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment for borrowers. Under the CARES Act, borrowers that are considered current are those that are less than

days past due on their contractual payments at the time a modification program is implemented. As such, the modifications made under the CARES Act are

not

included in the Corporation's past due or nonaccrual loans as of

September 30, 2020.

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, 2020

and

December 31, 2019

(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
September 30, 2020:
Residential first mortgages	$	300,880	$	2,550	$	1,014	$	185	$	1,195	$	305,824
Home equity and lines of credit		89,548		756		128		15		317		90,764
Commercial real estate		283,060		530		—		189		1,669		285,448
Commercial business		119,779		233		77		240		206		120,535
Consumer		37,653		21		—		—		46		37,720
Total loans	$	830,920	$	4,090	$	1,219	$	629	$	3,433	$	840,291

December 31, 2019:
Residential first mortgages	$	288,399	$	2,405	$	1,039	$	372	$	955	$	293,170
Home equity and lines of credit		95,908		626		553		26		428		97,541
Commercial real estate		226,133		2,141		543		227		907		229,951
Commercial business		66,087		225		72		4		215		66,603
Consumer		14,458		84		15		—		82		14,639
Total loans	$	690,985	$	5,481	$	2,222	$	629	$	2,587	$	701,904

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

September 30, 2020

and

December 31, 2019

(Dollar amounts in thousands)
	Not Past Due		30-59 Days Past Due		60-89 Days Past Due		90 Days + Past Due		Total
September 30, 2020:
Residential first mortgages	$	227	$	70	$	—	$	898	$	1,195
Home equity and lines of credit		3		—		—		314		317
Commercial real estate		968		118		—		583		1,669
Commercial business		94		—		—		112		206
Consumer		—		—		—		46		46
Total loans	$	1,292	$	188	$	—	$	1,953	$	3,433

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