4.	LOANS RECEIVABLE

Loans receivable consist of the following (in thousands):

	2017		2016
Real estate loans:
Residential	$	586,708	$	596,645
Construction		3,097		1,733
Commercial		318,323		288,447
Commercial		44,129		39,978
Obligations of states and political subdivisions		58,079		56,923
Home equity loans and lines of credit		46,219		48,163
Auto loans		186,646		193,078
Other		2,845		3,302
		1,246,046		1,228,269
Less allowance for loan losses		9,365		9,056
Net loans	$	1,236,681	$	1,219,213

Included in the September 30, 2017 balances are loans acquired from Eagle National Bank in 2015, First National Community Bank and Franklin Security Bank in 2014 and First Star Bank in 2012.

Upon acquisition, the Company evaluated whether each acquired loan (regardless of size) was within the scope of ASC 310-30, Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality. Purchased credit-impaired loans are loans that have evidence of credit deterioration since origination and for which it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. As of the acquisition dates, none of the loans acquired from First National Community Bank and Franklin Security Bank had evidence of credit deterioration.

Changes in the accretable yield for purchased credit-impaired loans were as follows, since acquisition, for the periods ended September 30, 2017 and 2016 (in thousands):

	September 30, 2017			September 30, 2016
Balance at beginning of period	$	478		$	258
Acquisition of ENB		-			240
Reclassification and other		215			163
Accretion		(222	)		(183	)
Balance at end of period	$	471		$	478

Included in reclassification and other for loans acquired without specific evidence of deterioration in credit quality were $215,000 and $163,000 of reclassifications from nonaccretable discounts to accretable discounts in 2017 and 2016 respectively.

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

	September 30, 2017		September 30, 2016
	Acquired Loans with Specific Evidence or Deterioration in Credit Quality (ASC 310-30)		Acquired Loans with Specific Evidence or Deterioration in Credit Quality (ASC 310-30)
Outstanding balance	$	5,490	$	6,893
Carrying amount		4,388		5,563

There has been $155,000 in allowance for loan losses recorded for acquired loans with or without specific evidence of deterioration in credit quality as of September 30, 2017. There has been $236,000 in allowance for loan losses recorded for acquired loans with or without specific evidence of deterioration in credit quality as of September 30, 2016. In addition, no allowance for loan losses has been reversed.

Loans serviced by the Company for others amounted to $61,167,000 and $78,497,000 at September 30, 2017 and 2016, respectively.

The Company’s primary business activity is with customers located in counties where its branch offices are located and to a lesser extent, the contiguous counties in the Commonwealth of Pennsylvania. Commercial, residential, and consumer loans are granted. The Company also funds commercial and residential loans originated outside its immediate trade area provided such loans meet the Company’s credit policy guidelines. Although the Company has a diversified loan portfolio at September 30, 2017 and 2016, loans outstanding to individuals and businesses are dependent upon the local economic conditions in its immediate trade area.

At September 30, 2017, 2016, and 2015, the Company had nonaccrual loans of $14,263,000, $19,315,000, and $20,105,000,respectively. Additional interest income that would have been recorded under the original terms of the loan agreements amounted to $449,000, $782,000, and $188,000, for the years ended September 30, 2017, 2016, and 2015, respectively.

The following table shows the amount of loans in each category that was 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
September 30, 2017
Real estate loans:
Residential	$	586,708	$	6,202	$	-	$	580,506
Construction		3,097		-		-		3,097
Commercial		318,323		7,211		3,775		307,337
Commercial		44,129		1,385		283		42,461
Obligations of states and political subdivisions		58,079		-		-		58,079
Home equity loans and lines of credit		46,219		176		330		45,713
Auto Loans		186,646		572		-		186,074
Other		2,845		30		-		2,815
Total	$	1,246,046	$	15,576	$	4,388	$	1,226,082

	Total Loans		Individually Evaluated for Impairment		Loans Acquired with Deteriorated Credit Quality		Collectively Evaluated for Impairment
September 30, 2016
Real estate loans:
Residential	$	596,645	$	8,721	$	-	$	587,924
Construction		1,733		-		-		1,733
Commercial		288,447		11,237		4,615		272,595
Commercial		39,978		1,698		411		37,869
Obligations of states and political subdivisions		56,923		-		-		56,923
Home equity loans and lines of credit		48,163		361		537		47,265
Auto Loans		193,078		526		-		192,552
Other		3,302		22		-		3,280
Total	$	1,228,269	$	22,565	$	5,563	$	1,200,141

The Company maintains 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. 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 the Company 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.

The following table includes the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable, excluding purchased impaired credit loans. Also presented are 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).

	Recorded Investment		Unpaid Principal Balance		Associated Allowance		Average Recorded Investment		Interest Income Recognized
September 30, 2017
With no specific allowance recorded:
Real estate loans:
Residential	$	4,392	$	5,730	$	-	$	5,373	$	39
Construction		-		-		-		-		-
Commercial		7,191		9,396		-		8,816		297
Commercial		1,385		1,575		-		1,579		120
Obligations of states and political subdivisions		-		-		-		-		-
Home equity loans and lines of credit		176		258		-		231		-
Auto loans		123		237		-		116		1
Other		30		36		-		8		-
Subtotal		13,297		17,232		-		16,123		457
With an allowance recorded:
Real estate loans:
Residential		1,810		2,264		154		1,814		-
Construction		-		-		-		-		-
Commercial		20		1,193		19		360		-
Commercial		-		-		-		30		-
Obligations of states and political subdivisions		-		-		-		-		-
Home equity loans and lines of credit		-		-		-		3		-
Auto loans		449		468		172		263		7
Other		-		-		-		-		-
Subtotal		2,279		3,925		345		2,470		7
Total:
Real estate loans:
Residential		6,202		7,994		154		7,187		39
Construction		-		-		-		-		-
Commercial		7,211		10,589		19		9,176		297
Commercial		1,385		1,575		-		1,609		120
Obligations of states and political subdivisions		-		-		-		-		-
Home equity loans and lines of credit		176		258		-		234		-
Auto loans		572		705		172		379		8
Other		30		36		-		8		-
Total	$	15,576	$	21,157	$	345	$	18,593	$	464

	Recorded Investment		Unpaid Principal Balance		Associated Allowance		Average Recorded Investment		Interest Income Recognized
September 30, 2016
With no specific allowance recorded:
Real estate loans:
Residential	$	6,721	$	9,016	$	-	$	7,560	$	82
Construction		-		-		-		-		-
Commercial		10,939		12,928		-		12,490		496
Commercial		1,698		1,725		-		1,556		124
Obligations of states and political subdivisions		-		-		-		-		-
Home equity loans and lines of credit		361		432		-		553		2
Auto loans		253		365		-		295		2
Other		22		22		-		6		-
Subtotal		19,994		24,488		-		22,460		706
With an allowance recorded:
Real estate loans:
Residential		2,000		2,151		198		2,314		12
Construction		-		-		-		-		-
Commercial		298		303		36		1,118		-
Commercial		-		-		-		2		-
Obligations of states and political subdivisions		-		-		-		-		-
Home equity loans and lines of credit		-		-		-		90		-
Auto loans		273		273		113		241		10
Other		-		-		-		-		-
Subtotal		2,571		2,727		347		3,765		22
Total:
Real estate loans:
Residential		8,721		11,167		198		9,874		94
Construction		-		-		-		-		-
Commercial		11,237		13,231		36		13,608		496
Commercial		1,698		1,725		-		1,558		124
Obligations of states and political subdivisions		-		-		-		-		-
Home equity loans and lines of credit		361		432		-		643		2
Auto loans		526		638		113		536		12
Other		22		22		-		6		-
Total	$	22,565	$	27,215	$	347	$	26,225	$	728

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 greater than 90 days past due are considered Substandard. Loans in the Doubtful category have all the weaknesses inherent in one classified 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. Loans in the Loss category are considered uncollectible and of little value that their continuance as bankable assets is not warranted.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company 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 Company’s Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. The Company’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 Company engages an external consultant to conduct loan reviews on at least a semiannual 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 evaluated for impairment are given separate consideration in the determination of the allowance.

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 internal risk rating system as of September 30, 2017 and 2016 (in thousands):

	Pass		Special Mention		Substandard		Doubtful		Total
September 30, 2017
Commercial real estate loans	$	300,554	$	3,376	$	14,393	$	-	$	318,323
Commercial		40,996		32		3,101		-		44,129
Obligations of states and political subdivisions		58,079		-		-		-		58,079
Total	$	399,629	$	3,408	$	17,494	$	-	$	420,531

	Pass		Special Mention		Substandard		Doubtful		Total
September 30, 2016
Commercial real estate loans	$	260,088	$	8,886	$	19,473	$	-	$	288,447
Commercial		36,684		180		3,114		-		39,978
Obligations of states and political subdivisions		56,923		-		-		-		56,923
Total	$	353,695	$	9,066	$	22,587	$	-	$	385,348

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 nonperforming.

For residential real estate loans, construction real estate loans, home equity loans and lines of credit, auto loans, and other loans, the Company evaluates credit quality based on the performance of the individual credits. The following table presents the recorded investment in the loan classes based on payment activity as of September 30, 2017 and 2016 (in thousands):

	Performing		Nonperforming		Purchased Credit Impaired		Total
September 30, 2017
Real estate loans:
Residential	$	580,116	$	6,592	$	-	$	586,708
Construction		3,097		-		-		3,097
Home equity loans and lines of credit		45,576		313		330		46,219
Auto Loans		185,910		736		-		186,646
Other		2,807		38		-		2,845
Total	$	817,506	$	7,679	$	330	$	825,515

	Performing		Nonperforming		Purchased Credit Impaired		Total
September 30, 2016
Real estate loans:
Residential	$	587,673	$	8,972	$	-	$	596,645
Construction		1,733		-		-		1,733
Home equity loans and lines of credit		47,213		413		537		48,163
Auto Loans		192,734		344		-		193,078
Other		3,271		31		-		3,302
Total	$	832,624	$	9,760	$	537	$	842,921

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 table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of September 30, 2017 and 2016 (in thousands):

			31-60 Days		61-90 Days		Greater than 90 Days Past Due and				Total		Purchased Credit Impaired				Total
	Current		Past Due		Past Due		Accruing		Nonaccrual		Past Due		Accruing		Nonaccrual		Loans
September 30, 2017
Real estate loans:
Residential	$	577,034	$	2,661	$	421	$	-	$	6,592	$	9,674	$	-	$	-	$	586,708
Construction		3,097		-		-		-		-		-		-		-		3,097
Commercial		312,098		172		-		-		2,278		2,450		612		3,163		318,323
Commercial		43,298		18		-		-		530		548		-		283		44,129
Obligations of states and political subdivisions		58,079		-		-		-		-		-		-		-		58,079
Home equity loans and lines of credit		45,460		101		15		-		313		429		-		330		46,219
Auto loans		185,247		631		32		-		736		1,399		-		-		186,646
Other		2,789		14		4		-		38		56		-		-		2,845
Total	$	1,227,102	$	3,597	$	472	$	-	$	10,487	$	14,556	$	612	$	3,776	$	1,246,046

			31-60 Days		61-90 Days		Greater than 90 Days Past Due and				Total		Purchased Credit Impaired				Total
	Current		Past Due		Past Due		Accruing		Nonaccrual		Past Due		Accruing		Nonaccrual		Loans
September 30, 2016
Real estate loans:
Residential	$	585,517	$	1,496	$	660	$	-	$	8,972	$	11,128	$	-	$	-	$	596,645
Construction		1,733		-		-		-		-		-		-		-		1,733
Commercial		279,019		1,093		191		-		3,529		4,813		-		4,615		288,447
Commercial		38,862		185		57		-		463		705		-		411		39,978
Obligations of states and political subdivisions		56,923		-		-		-		-		-		-		-		56,923
Home equity loans and lines of credit		47,026		40		147		-		413		600		-		537		48,163
Auto loans		191,785		717		232		-		344		1,293		-		-		193,078
Other		3,264		7		-		-		31		38		-		-		3,302
Total	$	1,204,129	$	3,538	$	1,287	$	-	$	13,752	$	18,577	$	-	$	5,563	$	1,228,269

The allowance for loan losses (“ALL”) 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, (2) an allocated allowance based on general economic conditions and other risk factors in our markets and portfolios, and (3) an unallocated allowance not to exceed 10% of total reserves which acts as a contingency against unforeseen future events which may negatively impact the Company’s loan portfolio. 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. 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 September 30, 2017, is 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, as an integral part of their examination process, have periodically reviewed the Company’s allowance for loan losses. The banking regulators may require that the Company recognize additions to the allowance based on their analysis and review of information available to it at the time of their 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 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 the primary segments of the ALL, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of September 30, 2017, 2016 and 2015 (in thousands):

	Real Estate Loans												Obligations of States and Political		Home Equity Loans and Lines of
	Residential			Construction			Commercial			Commercial			Subdivisions		Credit			Auto			Other			Unallocated			Total
ALL balance at September 30, 2014	$	5,573		$	11		$	663		$	528		$	163	$	470		$	459		$	32		$	735		$	8,634
Charge-offs		(1,359	)		-			(65	)		(30	)		-		(27	)		(596	)		(6	)		-			(2,083	)
Recoveries		76			-			84			23			-		15			87			8			-			293
Provision		850			(4	)		(11	)		172			26		3			1,620			(7	)		(574	)		2,075
ALL balance at September 30, 2015	$	5,140		$	7		$	671		$	693		$	189	$	461		$	1,570		$	27		$	161		$	8,919
ALL balance at September 30, 2015	$	5,140		$	7		$	671		$	693		$	189	$	461		$	1,570		$	27		$	161		$	8,919
Charge-offs		(1,040	)		-			(266	)		(18	)		-		(209	)		(1,262	)		-			-			(2,795	)
Recoveries		59			-			52			7			-		9			246			9			-			382
Provision		267			6			395			200			26		194			1,326			(11	)		147			2,550
ALL balance at September 30, 2016	$	4,426		$	13		$	852		$	882		$	215	$	455		$	1,880		$	25		$	308		$	9,056
ALL balance at September 30, 2016	$	4,426		$	13		$	852		$	882		$	215	$	455		$	1,880		$	25		$	308		$	9,056
Charge-offs		(504	)		-			(1,352	)		(31	)		-		(18	)		(2,009	)		(9	)		-			(3,923	)
Recoveries		22			-			27			1			-		8			815			9			-			882
Provision		(66	)		10			2,231			135			33		25			1,150			(4	)		(164	)		3,350
ALL balance at September 30, 2017	$	3,878		$	23		$	1,758		$	987		$	248	$	470		$	1,836		$	21		$	144		$	9,365
Individually evaluated for impairment	$	154		$	-		$	19		$	-		$	-	$	-		$	172		$	-		$	-		$	345
Collectively evaluated for impairment		3,724			23			1,739			987			248		470			1,664			21			144			9,020
ALL balance at September 30, 2017	$	3,878		$	23		$	1,758		$	987		$	248	$	470		$	1,836		$	21		$	144		$	9,365
Individually evaluated for impairment	$	198		$	-		$	36		$	-		$	-	$	-		$	113		$	-		$	-		$	347
Collectively evaluated for impairment		4,228			13			816			882			215		455			1,767			25			308			8,709
ALL balance at September 30, 2016	$	4,426		$	13		$	852		$	882		$	215	$	455		$	1,880		$	25		$	308		$	9,056

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. The Company allocated increased provisions to the construction loan, commercial real estate, commercial, obligations of states and political subdivisions, home equity loans and lines of credit, and auto loan segments for the year ended September 30, 2017, due to either increased loan balances, changes in the loan mix within the pool, and/or charge-off activity in those segments. Commercial real estate loans, which had charge offs of $1.4 million and balance increases of $29.9 million for the year ended September 30, 2017, had the largest increase in provisions. The Company allocated decreased allowance for loan loss provisions to the residential real estate and other loan segments due to either declining loan balances and/or actual loss experience being less than previously estimated. The provision for auto loans declined from $1.3 million to $1.2 million due to declining balances offsetting net (of recoveries) charge off activity.

The Company allocated increased provisions to the construction loan, commercial real estate, commercial, obligations of states and political subdivisions, residential real estate, and indirect auto loan segments for the year ended September 30, 2016, due to either increased loan balances, changes in the loan mix within the pool, and/or charge-off activity in those segments. Auto loans, which had charge offs of $1.3 million and balance increases of $30.9 million for the year ended September 30, 2016, had the largest increase in provisions. The Company allocated decreased allowance for loan loss provisions to the other loan segments due to declining loan balances and actual loss experience being less than previously estimated.

The Company allocated increased provisions to the residential real estate, commercial, obligations of states and political subdivisions, home equity loans and lines of credit, and auto loans segments for the year ended September 30, 2015, due to either increased loans balances and/or charge-off activity in those segments. Outstanding loan balances of auto loans, which increased $61.6 million from September 30, 2014 to September 30, 2015, had the largest increase in provisions. 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 restructurings granted during the periods indicated (in thousands).

	For the Year Ended September 30, 2017
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled debt restructurings
Real estate loans:
Residential		6	$	1,154	$	1,167
Construction		-		-		-
Commercial		2		1,208		1,163
Commercial		-		-		-
Obligations of states and political subdivisions		-		-		-
Home equity loans and lines of credit		-		-		-
Auto loans		2		37		37
Other		1		22		22
Total		11	$	2,421	$	2,389

	For the Year Ended September 30, 2016
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled debt restructurings
Real estate loans:
Residential		12	$	1,701	$	1,701
Construction		-		-		-
Commercial		4		2,139		2,139
Commercial		-		-		-
Obligations of states and political subdivisions		-		-		-
Home equity loans and lines of credit		1		5		5
Auto loans		-		-		-
Other		-		-		-
Total		17	$	3,845	$	3,845

Of the eleven new troubled debt restructurings granted for the year ended September 30, 2017, three loans totaling $1.2 million were granted terms concessions, six loans totaling $832,000 were granted terms and rate concessions and two loans totaling $368,000 were granted rate concessions.

Of the seventeen new troubled debt restructurings granted for the year ended September 30, 2016, eight loans totaling $2.4 million were granted terms and rate concessions and seven loans totaling $1.5 million were granted terms concessions and two loans totaling $29,000 was granted an interest rate concession.

For the year ended September 30, 2017 there were no loan modifications classified as troubled debt restructurings that subsequently defaulted within one year of modification. For the year ended September 30, 2016 there were no loan modifications classified as troubled debt restructurings that subsequently defaulted within one year of modification.

Foreclosed assets acquired in settlement of loans are carried at fair value, less estimated costs to sell, and are included on the Consolidated Balance Sheet. As of September 30, 2017, included within the foreclosed assets is $819,000 of consumer residential mortgages that were foreclosed on or received via a deed in lieu of foreclosure transaction prior to the period end. As of September 30, 2017, the Company has initiated formal foreclosure proceedings on $2.2 million of consumer residential mortgages which have not yet been transferred into foreclosed assets.