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, 2018		December 31, 2017
Commercial and agricultural:
Commercial and industrial	$	192,093	$	198,463
Agricultural	287		544
Commercial mortgages:
Construction	50,353		45,558
Commercial mortgages, other	615,221		598,772
Residential mortgages	188,636		194,440
Consumer loans:
Credit cards	1,393		1,517
Home equity lines and loans	98,239		100,591
Indirect consumer loans	157,123		153,060
Direct consumer loans	17,293		18,879
Total loans, net of deferred origination fees and costs	1,320,638		1,311,824
Interest receivable on loans	3,884		3,758
Total recorded investment in loans	$	1,324,522	$	1,315,582

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 and nine-month periods ended September 30, 2018 and 2017 (in thousands):



	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



	Three Months Ended September 30, 2017
Allowance for loan losses	Commercial and Agricultural			Commercial Mortgages			Residential Mortgages			Consumer Loans			Total
Beginning balance	$	1,883		$	7,778		$	1,517		$	3,926		$	15,104
Charge-offs	(89		)	(154		)	(133		)	(440		)	(816		)
Recoveries	34			1			—			82			117
Net recoveries (charge-offs)	(55		)	(153		)	(133		)	(358		)	(699		)
Provision	99			758			12			420			1,289
Ending balance	$	1,927		$	8,383		$	1,396		$	3,988		$	15,694



	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



	Nine Months Ended September 30, 2017
Allowance for loan losses	Commercial and Agricultural			Commercial Mortgages			Residential Mortgages			Consumer Loans			Total
Beginning balance:	$	1,589		$	7,270		$	1,523		$	3,871		$	14,253
Charge-offs:	(96		)	(154		)	(193		)	(1,265		)	(1,708		)
Recoveries:	95			4			30			270			399
Net recoveries (charge-offs)	(1		)	(150		)	(163		)	(995		)	(1,309		)
Provision	339			1,263			36			1,112			2,750
Ending balance	$	1,927		$	8,383		$	1,396		$	3,988		$	15,694

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, 2018 and December 31, 2017 (in thousands):



	September 30, 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	$	1,713	$	496	$	—	$	—	$	2,209
Collectively evaluated for impairment	3,554		8,153		1,396		4,323		17,426
Total ending allowance balance	$	5,267	$	8,649	$	1,396	$	4,323	$	19,635



	December 31, 2017
Allowance for loan losses:	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	5,135	$	802	$	—	$	—	$	5,937
Collectively evaluated for impairment	1,841		7,683		1,316		4,355		15,195
Loans acquired with deteriorated credit quality	—		29		—		—		29
Total ending allowance balance	$	6,976	$	8,514	$	1,316	$	4,355	$	21,161



	September 30, 2018
Loans:	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Loans individually evaluated for impairment	$	2,181	$	6,572	$	410	$	58	$	9,221
Loans collectively evaluated for impairment	190,777		661,003		188,751		274,770		1,315,301
Total ending loans balance	$	192,958	$	667,575	$	189,161	$	274,828	$	1,324,522



	December 31, 2017
Loans:	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Loans individually evaluated for impairment	$	6,133	$	7,302	$	427	$	64	$	13,926
Loans collectively evaluated for impairment	193,443		638,080		194,510		274,831		1,300,864
Loans acquired with deteriorated credit quality	—		792		—		—		792
Total ending loans balance	$	199,576	$	646,174	$	194,937	$	274,895	$	1,315,582

The following table presents loans individually evaluated for impairment recognized by class of loans as of September 30, 2018 and December 31, 2017 (in thousands):



	September 30, 2018						December 31, 2017
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	$	405	$	405	$	—	$	861	$	867	$	—
Commercial mortgages:
Construction	322		323		—		364		365		—
Commercial mortgages, other	4,342		4,309		—		4,135		4,138		—
Residential mortgages	432		410		—		450		427		—
Consumer loans:
Home equity lines and loans	57		58		—		64		64		—
With an allowance recorded:
Commercial and agricultural:
Commercial and industrial	1,773		1,776		1,713		5,231		5,266		5,135
Commercial mortgages:
Commercial mortgages, other	1,939		1,940		496		2,989		2,799		802
Total	$	9,270	$	9,221	$	2,209	$	14,094	$	13,926	$	5,937

The following table presents the average recorded investment and interest income of loans individually evaluated for impairment recognized by class of loans as of the three and nine-month periods ended September 30, 2018 and 2017 (in thousands):



	Three Months Ended September 30, 2018				Three Months Ended September 30, 2017				Nine Months Ended September 30, 2018				Nine Months Ended September 30, 2017
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	$	526	$	1	$	661	$	8	$	673	$	11	$	666	$	24
Commercial mortgages:
Construction	330		3		974		3		344		8		946		9
Commercial mortgages, other	4,339		5		4,946		5		4,257		16		5,973		73
Residential mortgages	413		2		439		2		420		6		416		6
Consumer loans:
Home equity lines & loans	59		1		68		1		61		2		76		2
With an allowance recorded:
Commercial and agricultural:
Commercial and industrial	1,573		1		291		3		3,359		2		145		4
Commercial mortgages:
Commercial mortgages, other	2,040		1		4,721		4		2,419		4		3,989		10
Consumer loans:
Home equity lines and loans	—		—		—		—		—		—		180		—
Total	$	9,280	$	14	$	12,100	$	26	$	11,533	$	49	$	12,391	$	128

(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, 2018 and December 31, 2017 (in thousands):



	Non-accrual				Loans Past Due 90 Days or More and Still Accruing
	September 30, 2018		December 31, 2017		September 30, 2018		December 31, 2017
Commercial and agricultural:
Commercial and industrial	$	2,075	$	5,250	$	—	$	5
Commercial mortgages:
Construction	115		135		—		—
Commercial mortgages, other	5,849		6,520		—		—
Residential mortgages	2,654		3,160		—		—
Consumer loans:
Credit cards	—		—		14		24
Home equity lines and loans	1,289		1,310		—		—
Indirect consumer loans	616		935		—		—
Direct consumer loans	31		14		—		—
Total	$	12,629	$	17,324	$	14	$	29

The following tables present the aging of the recorded investment in loans as of September 30, 2018 and December 31, 2017 (in thousands):



	September 30, 2018
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or More Past Due		Total Past Due		Loans Acquired with Deteriorated Credit Quality		Loans Not Past Due		Total
Commercial and agricultural:
Commercial and industrial	$	5,894	$	121	$	14	$	6,029	$	—	$	186,641	$	192,670
Agricultural	—		—		—		—		—		288		288
Commercial mortgages:
Construction	—		—		—		—		—		50,504		50,504
Commercial mortgages, other	2,137		25		436		2,598		—		614,473		617,071
Residential mortgages	1,324		510		946		2,780		—		186,381		189,161
Consumer loans:
Credit cards	5		4		14		23		—		1,370		1,393
Home equity lines and loans	244		111		816		1,171		—		97,366		98,537
Indirect consumer loans	1,424		240		305		1,969		—		155,557		157,526
Direct consumer loans	59		21		23		103		—		17,269		17,372
Total	$	11,087	$	1,032	$	2,554	$	14,673	$	—	$	1,309,849	$	1,324,522



	December 31, 2017
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or More Past Due		Total Past Due		Loans Acquired with Deteriorated Credit Quality		Loans Not Past Due		Total
Commercial and agricultural:
Commercial and industrial	$	1,689	$	999	$	20	$	2,708	$	—	$	196,322	$	199,030
Agricultural	—		—		—		—		—		546		546
Commercial mortgages:
Construction	—		—		—		—		—		45,688		45,688
Commercial mortgages, other	2,399		115		748		3,262		792		596,432		600,486
Residential mortgages	1,399		939		1,474		3,812		—		191,125		194,937
Consumer loans:
Credit cards	17		9		24		50		—		1,466		1,516
Home equity lines and loans	265		31		983		1,279		—		99,599		100,878
Indirect consumer loans	1,822		484		581		2,887		—		150,645		153,532
Direct consumer loans	48		28		2		78		—		18,891		18,969
Total	$	7,639	$	2,605	$	3,832	$	14,076	$	792	$	1,300,714	$	1,315,582

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, 2018 and December 31, 2017, the Corporation has a recorded investment in TDRs of $6.6 million and $7.7 million, respectively. There were specific reserves of $0.5 million and $0.7 million allocated for TDRs at September 30, 2018 and December 31, 2017, respectively. As of September 30, 2018, TDRs totaling $0.9 million were accruing interest under the modified terms and $5.7 million were on non-accrual status. As of December 31, 2017, TDRs totaling $1.7 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, 2018 and December 31, 2017, to customers with outstanding loans that are classified as TDRs.

There were no loans modified as TDRs during the three month period ended September 30, 2018 while the terms of certain loans were modified as TDRs during the three month period ended September 30, 2017. The modification of the terms of two commercial and industrial term loans during the three months ended September 30, 2017 included a reduction of the schedule amortized payments for greater than a three month period, the release of collateral related to one of the loans, and the extension of a maturity date.

During the nine months ended September 30, 2018 and 2017, the terms of certain loans were modified as TDRs. 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. In addition to the modification noted above, the modification of two commercial and industrial term loans and one line of credit during the nine months ended September 30, 2017 included consolidating the loans into one commercial and industrial loan, extending the maturity date by approximately two years, and lowering the monthly payment. An additional piece of equipment was taken as collateral, but was not considered to be of greater value than the concession given. The modification of the terms of one commercial mortgage loan during the nine months ended September 30, 2017 included a reduction of the scheduled amortized payments of the loan for greater than a three month period. The modification of the terms of a residential mortgage loan during the nine months ended September 30, 2017 included an extension of the maturity date by approximately five years and a postponement of the scheduled amortized past due payments to the end of the loan.

The following table presents loans by class modified as TDRs that occurred during the three month period ended September 30, 2017 (dollars in thousands):



September 30, 2017	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled debt restructurings:
Commercial and agricultural:
Commercial and industrial	2	$	506	$	506
Total	2	$	506	$	506

The TDRs described above increased the allowance for loan losses by $0.1 million and resulted in no charge-offs during the three month period ended September 30, 2017.

The following tables present loans by class modified as TDRs that occurred during the nine months ended September 30, 2018 and 2017 (dollars in thousands):



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



September 30, 2017	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled debt restructurings:
Commercial and agricultural:
Commercial and industrial	3	$	677	$	677
Commercial mortgages:
Commercial mortgages	1	$	166	$	166
Residential mortgages	1	105		105
Total	5	$	948	$	948

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. The TDRs described above increased the allowance for loan losses by $0.2 million and resulted in no charge-offs during the nine months ended September 30, 2017.

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, 2018 and 2017.

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, 2018 and December 31, 2017, the risk category of the recorded investment of loans by class of loans is as follows (in thousands):



	September 30, 2018
	Not Rated		Pass		Special Mention		Substandard		Doubtful		Loans acquired with deteriorated credit quality		Total
Commercial and agricultural:
Commercial and industrial	$	—	$	179,502	$	9,421	$	2,021	$	1,726	$	—	$	192,670
Agricultural	—		288		—		—		—		—		288
Commercial mortgages:
Construction	—		50,389		—		115		—		—		50,504
Commercial mortgages	—		592,724		10,793		12,252		1,302		—		617,071
Residential mortgages	186,507		—		—		2,654		—		—		189,161
Consumer loans:
Credit cards	1,393		—		—		—		—		—		1,393
Home equity lines and loans	97,248		—		—		1,289		—		—		98,537
Indirect consumer loans	156,910		—		—		616		—		—		157,526
Direct consumer loans	17,341		—		—		31		—		—		17,372
Total	$	459,399	$	822,903	$	20,214	$	18,978	$	3,028	$	—	$	1,324,522



	December 31, 2017
	Not Rated		Pass		Special Mention		Substandard		Doubtful		Loans acquired with deteriorated credit quality		Total
Commercial and agricultural:
Commercial and industrial	$	—	$	186,556	$	4,447	$	6,605	$	1,422	$	—	$	199,030
Agricultural	—		546		—		—		—		—		546
Commercial mortgages:
Construction	—		45,553		—		135		—		—		45,688
Commercial mortgages	—		575,321		9,665		13,331		1,377		792		600,486
Residential mortgages	191,777		—		—		3,160		—		—		194,937
Consumer loans:
Credit cards	1,516		—		—		—		—		—		1,516
Home equity lines and loans	99,568		—		—		1,310		—		—		100,878
Indirect consumer loans	152,598		—		—		934		—		—		153,532
Direct consumer loans	18,955		—		—		14		—		—		18,969
Total	$	464,414	$	807,976	$	14,112	$	25,489	$	2,799	$	792	$	1,315,582

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 table presents the recorded investment in residential and consumer loans based on payment activity as of September 30, 2018 and December 31, 2017 (in thousands):



	September 30, 2018
			Consumer Loans
	Residential Mortgages		Credit Card		Home Equity Lines and Loans		Indirect Consumer Loans		Other Direct Consumer Loans
Performing	$	186,507	$	1,393	$	97,248	$	156,910	$	17,341
Non-Performing	2,654		—		1,289		616		31
	$	189,161	$	1,393	$	98,537	$	157,526	$	17,372



	December 31, 2017
			Consumer Loans
	Residential Mortgages		Credit Card		Home Equity Lines and Loans		Indirect Consumer Loans		Other Direct Consumer Loans
Performing	$	191,777	$	1,516	$	99,568	$	152,598	$	18,955
Non-Performing	3,160		—		1,310		934		14
	$	194,937	$	1,516	$	100,878	$	153,532	$	18,969