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Loans

9 Months Ended

Sep. 30, 2020

Note 5 – Loans

The Company grants loans primarily to customers throughout north central, central and south central Pennsylvania and the southern tier of New York. The recently completed MidCoast acquisition has expanded our lending market into Wilmington and Dover, Delaware. Although the Company had a diversified loan portfolio at September 30, 2020 and December 31, 2019, a substantial portion of its debtors’ ability to honor their contracts is dependent on the economic conditions within these regions. The following table summarizes the primary segments of the loan portfolio and how those segments are analyzed within the allowance for loan losses as of September 30, 2020 and December 31, 2019 (in thousands):

September 30, 2020	Total Loans		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Collectively evaluated for impairment
Real estate loans:
Residential	$	208,084	$	1,041	$	20	$	207,023
Commercial		535,456		9,465		3,306		522,685
Agricultural		310,702		4,398		1,722		304,582
Construction		28,656		-		-		28,656
Consumer		30,625		15		-		30,610
Other commercial loans		129,731		1,603		-		128,128
Other agricultural loans		40,790		1,246		306		39,238
State and political subdivision loans		81,835		-		-		81,835
Total		1,365,879		17,768		5,354		1,342,757
Allowance for loan losses		15,169		791		-		14,378
Net loans	$	1,350,710	$	16,977	$	5,354	$	1,328,379

December 31, 2019	Total Loans		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Collectively evaluated for impairment
Real estate loans:
Residential	$	217,088	$	1,166	$	23	$	215,899
Commercial		342,023		11,537		1,210		329,276
Agricultural		311,464		3,782		-		307,682
Construction		15,519		-		-		15,519
Consumer		9,947		4		-		9,943
Other commercial loans		69,970		1,902		49		68,019
Other agricultural loans		55,112		1,281		-		53,831
State and political subdivision loans		94,446		-		-		94,446
Total		1,115,569		19,672		1,282		1,094,615
Allowance for loan losses		13,845		735		-		13,110
Net loans	$	1,101,724	$	18,937	$	1,282	$	1,081,505

During 2020 the Company participated in the Paycheck Protection Program (“PPP”), administered directly by the U.S. SBA. The PPP provides loans to small businesses who were affected by economic conditions as a result of COVID-19 to provide cash-flow assistance to employers who maintain their payroll (including healthcare and certain related expenses), mortgage interest, rent, leases, utilities and interest on existing debt during the COVID-19 emergency. As of September 30, 2020, the Company had outstanding principal balances of $53.9 million. The PPP loans are fully guaranteed by the SBA and may be eligible for forgiveness by the SBA to the extent that the proceeds are used to cover eligible payroll costs, interest costs, rent, and utility costs over a period of up to 24 weeks after the loan is made as long as certain conditions are met regarding employee retention and compensation levels. PPP loans deemed eligible for forgiveness by the SBA will be repaid by the SBA to the Company. PPP loans are included in the other commercial loan category.

In accordance with the SBA terms and conditions on these PPP loans, the Company received approximately $2.1 million in fees associated with the processing of these loans. Upon funding of the loan, these fees were deferred and will be amortized over the life of the loan as an adjustment to yield in accordance with FASB ASC 310-20-25-2.

The Company evaluated whether loans acquired as part of the MidCoast acquisition were within the scope of ASC 310-30, Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality. Purchased credit-impaired loans (“PCI”) are loans that have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. There were no material increases or decreases in the expected cash flows of these loans between April 17, 2020 (the “acquisition date”) and September 30, 2020. The fair value of purchased credit-impaired loans, on the acquisition date, was determined, primarily based on the fair value of loan collateral. The carrying value of purchased loans acquired with deteriorated credit quality as a result of the MidCoast acquisition was $4,654,000 at September 30, 2020.

On the acquisition date, the preliminary estimate of the unpaid principal balance for all loans evidencing credit impairment acquired in the MidCoast acquisition was $8,005,000 and the estimated fair value of the loans was $4,869,000. Total contractually required payments on these loans, including interest, at the acquisition date was $8,801,000. However, the Company’s preliminary estimate of expected cash flows was $5,835,000 at the acquisition date. At the acquisition date, the Company established a credit risk related non-accretable discount (a discount representing amounts which are not expected to be collected from the customer nor liquidation of collateral) of $2,966,000 relating to these impaired loans, reflected in the recorded net fair value. Such amount is reflected as a non-accretable fair value adjustment to loans. The Company further estimated the timing and amount of expected cash flows in excess of the estimated fair value and established an accretable discount of $966,000 on the acquisition date relating to these impaired loans.

The table below presents the components of the purchase accounting adjustments related to the purchased impaired loans acquired in the MidCoast Acquisition as of April 17, 2020 (in thousands):

	April 17, 2020
Contractually required principal and interest at acquisition	$	8,801
Non-accretable discount		(2,966	)
Expected cash flows		5,835
Accretable discount	$	(966	)
Estimated fair value	$	4,869

Changes in the accretable yield for PCI loans were as follows for the three and nine months ended September 30, 2020 and 2019, respectively (in thousands):

	Three months ended September 30,						Nine months ended September 30,
	2020			2019			2020			2019
Balance at beginning of period	$	987		$	100		$	89		$	104
Acquisition of Midcoast		-			-			966			-
Accretion		(100	)		(10	)		(168	)		(14	)
Balance at end of period	$	887		$	90		$	887		$	90

The following table presents additional information regarding loans acquired with specific evidence of deterioration in credit quality under ASC 310-30 (in thousands):

	September 30, 2020		December 31, 2019
Outstanding balance	$	9,479	$	4,072
Carrying amount		5,354		1,282

The segments of the Company’s loan portfolio are disaggregated into classes to a level that allows management to monitor risk and performance. Residential real estate mortgages consist primarily of 15 to 30 year first mortgages on residential real estate, while residential real estate home equity loans are consumer purpose installment loans or lines of credit with terms of 15 years or less secured by a mortgage which is often a second lien on residential real estate. Commercial real estate loans are business purpose loans secured by a mortgage on commercial real estate. Agricultural real estate loans are loans secured by a mortgage on real estate used in agriculture production. Construction real estate loans are loans secured by residential, commercial or agricultural real estate used during the construction phase of residential, commercial or agricultural projects. Consumer loans are typically unsecured or primarily secured by assets other than real estate and overdraft lines of credit are typically secured by customer deposit accounts. Other commercial loans are loans for commercial purposes primarily secured by non-real estate collateral. Other agricultural loans are loans for agricultural purposes primarily secured by non-real estate collateral. State and political subdivision loans are loans to state and local municipalities for capital and operating expenses or tax free loans used to finance commercial development.

Management considers other commercial loans, other agricultural loans, state and political subdivision loans, commercial real estate loans and agricultural real estate loans which are 90 days or more past due to be impaired. Management will also consider a loan impaired based on other factors it becomes aware of, including the customer’s results of operations and cash flows or if the loan is modified in a troubled debt restructuring. In addition, certain residential mortgages, home equity and consumer loans that are cross collateralized with commercial relationships that are determined to be impaired may also be classified as impaired. Impaired loans are analyzed to determine if it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allocation to the allowance for loan losses or a charge-off to the allowance for loan losses.

The following table includes the recorded investment and unpaid principal balances for impaired loan receivables by class, excluding PCI loans, with the associated allowance amount, if applicable (in thousands):

September 30, 2020	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
Real estate loans:
Mortgages	$	1,125	$	609	$	296	$	905	$	20
Home Equity		159		77		59		136		9
Commercial		10,053		8,325		1,140		9,465		341
Agricultural		4,614		2,526		1,872		4,398		79
Consumer		15		3		12		15		12
Other commercial loans		2,225		1,243		360		1,603		181
Other agricultural loans		1,368		123		1,123		1,246		149
Total	$	19,559	$	12,906	$	4,862	$	17,768	$	791

December 31, 2019
Real estate loans:
Mortgages	$	1,212	$	794	$	223	$	1,017	$	20
Home Equity		170		83		66		149		12
Commercial		12,070		10,723		814		11,537		251
Agricultural		3,900		1,580		2,202		3,782		151
Consumer		4		4		-		4		-
Other commercial loans		2,517		1,555		347		1,902		147
Other agricultural loans		1,347		126		1,155		1,281		154
Total	$	21,220	$	14,865	$	4,807	$	19,672	$	735

The following tables includes the average balance of impaired loan receivables by class and the income recognized on these receivables for the three and nine month periods ended September 30, 2020 and 2019 (in thousands):

	For the Nine Months Ended
	September 30, 2020						September 30, 2019
	Average Recorded Investment		Interest Income Recognized		Interest Income Recognized Cash Basis		Average Recorded Investment		Interest Income Recognized		Interest Income Recognized Cash Basis
Real estate loans:
Mortgages	$	998	$	15	$	-	$	1,075	$	12	$	-
Home Equity		142		5		-		108		4		-
Commercial		10,836		294		20		11,768		342		11
Agricultural		3,718		58		-		5,068		61		-
Consumer		3		-		-		2		-		-
Other commercial loans		1,757		2		-		2,088		1		-
Other agricultural loans		1,275		6		-		1,419		4		-
Total	$	18,729	$	380	$	20	$	21,528	$	424	$	11

	For the Three Months Ended
	September 30, 2020						September 30, 2019
	Average Recorded Investment		Interest Income Recognized		Interest Income Recognized Cash Basis		Average Recorded Investment		Interest Income Recognized		Interest Income Recognized Cash Basis
Real estate loans:
Mortgages	$	900	$	5	$	-	$	1,048	$	3	$	-
Home Equity		138		2		-		143		2		-
Commercial		9,436		75		18		11,906		112		-
Agricultural		3,633		18		-		4,795		5		-
Consumer		5		-		-		4		-		-
Other commercial loans		1,626		-		-		2,073		-		-
Other agricultural loans		1,259		2		-		1,408		-		-
Total	$	16,997	$	102	$	18	$	21,377	$	122	$	-

Credit Quality Information

For commercial real estate, agricultural real estate, construction, other commercial, other agricultural and state and political subdivision loans, management uses a nine grade internal risk rating system to monitor and assess credit quality. The first five categories are considered not criticized and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The definitions of each rating are defined below:

•

Pass (Grades 1-5) – These loans are to customers with credit quality ranging from an acceptable to very high quality and are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral.

•

Special Mention (Grade 6) – This loan grade is in accordance with regulatory guidance and includes loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected.

•

Substandard (Grade 7) – This loan grade is in accordance with regulatory guidance and includes loans that have a well-defined weakness based on objective evidence and be characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

•

Doubtful (Grade 8) – This loan grade is in accordance with regulatory guidance and includes loans that have all the weaknesses inherent in a substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.

•

Loss (Grade 9) – This loan grade is in accordance with regulatory guidance and includes loans that are considered uncollectible, or of such value that continuance as an asset is not warranted.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay the loan as agreed, the Company’s loan rating process includes several layers of internal and external oversight. The Company’s loan officers are responsible for the timely and accurate risk rating of the loans in each of their portfolios at origination and on an ongoing basis under the supervision of management. All commercial, agricultural and state and political relationships over $500,000 are reviewed annually to ensure the appropriateness of the loan grade. In addition, the Company engages an external consultant on at least an annual basis to: 1) review a minimum of 50% of the dollar volume of the commercial, agricultural and municipal loan portfolios on an annual basis, 2) review a sample of new loans originated for over $1.0 million in the last year, 3) review a sample of borrowers with commitments greater than or equal to $1.0 million, 4) review selected loan relationships over $750,000 which are over 30 days past due or classified Special Mention, Substandard, Doubtful, or Loss, and 5) such other loans which management or the consultant deems appropriate.

The following tables represent credit exposures by internally assigned grades as of September 30, 2020 and December 31, 2019 (in thousands):

September 30, 2020	Pass		Special Mention		Substandard		Doubtful		Loss		Ending Balance
Real estate loans:
Commercial	$	514,291	$	10,727	$	10,400	$	38	$	-	$	535,456
Agricultural		287,998		11,882		10,822		-		-		310,702
Construction		28,656		-		-		-		-		28,656
Other commercial loans		124,563		1,239		3,843		86		-		129,731
Other agricultural loans		37,529		1,593		1,668		-		-		40,790
State and political subdivision loans		81,493		-		342		-		-		81,835
Total	$	1,074,530	$	25,441	$	27,075	$	124	$	-	$	1,127,170

December 31, 2019	Pass		Special Mention		Substandard		Doubtful		Loss		Ending Balance
Real estate loans:
Commercial	$	329,831	$	4,305	$	7,848	$	39	$	-	$	342,023
Agricultural		287,044		14,261		10,159		-		-		311,464
Construction		15,519		-		-		-		-		15,519
Other commercial loans		66,880		984		2,042		64		-		69,970
Other agricultural loans		51,711		1,077		2,324		-		-		55,112
State and political subdivision loans		93,993		-		453		-		-		94,446
Total	$	844,978	$	20,627	$	22,826	$	103	$	-	$	888,534

For residential real estate mortgages, home equity and consumer loans, credit quality is monitored based on whether the loan is performing or non-performing, which is typically based on the aging status of the loan and payment activity, unless a specific action, such as bankruptcy, repossession, death or significant delay in payment occurs to raise awareness of a possible credit event. Non-performing loans include those loans that are considered nonaccrual, described in more detail below, and all loans past due 90 or more days and still accruing. The following table presents the recorded investment in those loan classes based on payment activity as of September 30, 2020 and December 31, 2019 (in thousands):

September 30, 2020	Performing		Non-performing		PCI		Total
Real estate loans:
Mortgages	$	149,171	$	1,466	$	20	$	150,657
Home Equity		57,407		20		-		57,427
Consumer		30,613		12		-		30,625
Total	$	237,191	$	1,498	$	20	$	238,709

December 31, 2019	Performing		Non-performing		PCI		Total
Real estate loans:
Mortgages	$	156,151	$	904	$	23	$	157,078
Home Equity		59,950		60		-		60,010
Consumer		9,939		8		-		9,947
Total	$	226,040	$	972	$	23	$	227,035

Aging Analysis of Past Due Loan Receivables

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 includes an aging analysis of the recorded investment of past due loan receivables as of September 30, 2020 and December 31, 2019 (in thousands):

September 30, 2020	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		PCI		Total Loan Receivables		90 Days or Greater and Accruing
Real estate loans:
Mortgages	$	736	$	208	$	811	$	1,755	$	148,882	$	20	$	150,657	$	622
Home Equity		100		43		18		161		57,266		-		57,427		-
Commercial		1,651		78		4,805		6,534		525,616		3,306		535,456		413
Agricultural		116		215		1,327		1,658		307,322		1,722		310,702		147
Construction		-		-		-		-		28,656		-		28,656		-
Consumer		142		33		12		187		30,438		-		30,625		12
Other commercial loans		169		-		1,491		1,660		128,071		-		129,731		-
Other agricultural loans		9		-		136		145		40,339		306		40,790		-
State and political subdivision loans		-		-		-		-		81,835		-		81,835		-
Total	$	2,923	$	577	$	8,600	$	12,100	$	1,348,425	$	5,354	$	1,365,879	$	1,194

Loans considered non-accrual	$	53	$	-	$	7,406	$	7,459	$	4,252	$	-	$	11,711
Loans still accruing		2,870		577		1,194		4,641		1,344,173		5,354		1,354,168
Total	$	2,923	$	577	$	8,600	$	12,100	$	1,348,425	$	5,354	$	1,365,879

December 31, 2019	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		PCI		Total Loan Receivables		90 Days or Greater and Accruing
Real estate loans:
Mortgages	$	581	$	57	$	319	$	957	$	156,098	$	23	$	157,078	$	1
Home Equity		334		11		56		401		59,609		-		60,010		1
Commercial		750		573		3,720		5,043		335,770		1,210		342,023		-
Agricultural		118		-		785		903		310,561		-		311,464		299
Construction		-		-		-		-		15,519		-		15,519		-
Consumer		113		10		8		131		9,816		-		9,947		2
Other commercial loans		217		71		1,946		2,234		67,687		49		69,970		184
Other agricultural loans		29		32		-		61		55,051		-		55,112		-
State and political subdivision loans		-		-		-		-		94,446		-		94,446		-
Total	$	2,142	$	754	$	6,834	$	9,730	$	1,104,557	$	1,282	$	1,115,569	$	487

Loans considered non-accrual	$	90	$	95	$	6,347	$	6,532	$	5,004	$	-	$	11,536
Loans still accruing		2,052		659		487		3,198		1,099,553		1,282		1,104,033
Total	$	2,142	$	754	$	6,834	$	9,730	$	1,104,557	$	1,282	$	1,115,569

Nonaccrual Loans

Loans are considered for non-accrual status upon reaching 90 days delinquency, although the Company may be receiving partial payments of interest and partial repayments of principal on such loans, or if full payment of principal and interest is not expected. Additionally, if management is made aware of other information including bankruptcy, repossession, death, or legal proceedings, the loan may be placed on non-accrual status. If a loan is 90 days or more past due and is well secured and in the process of collection, it may still be considered accruing.

The following table reflects the loan receivables, excluding PCI loans, on non-accrual status as of September 30, 2020 and December 31, 2019, respectively. The balances are presented by class of loan receivable (in thousands):

	September 30, 2020		December 31, 2019
Real estate loans:
Mortgages	$	844	$	903
Home Equity		20		59
Commercial		5,141		5,080
Agricultural		3,161		2,578
Consumer		-		6
Other commercial loans		1,551		1,837
Other agricultural loans		994		1,073
	$	11,711	$	11,536

Loan Modifications Related to COVID-19

The Company has elected to follow the loan modification guidance under Section 4013 of the CARES Act with regard to COVID-19 modifications made between March 1, 2020 and the earlier of either December 31, 2020 or the 60th day after the end of the COVID-19 national emergency. Under section 4013 of the CARES Act, loans less than 30 days past due as of December 31, 2019 will be considered current for COVID-19 modifications. A financial institution can then suspend the requirements under GAAP for loan modifications related to COVID-19 that would otherwise be categorized as a TDR, and suspend any determination of a loan modified as a result of COVID-19 as being a TDR, including the requirement to determine impairment for accounting purposes. Similarly, the Financial Accounting Standards Board has confirmed that short-term modifications made on a good-faith basis in response to COVID-19 to loan customers who were current prior to any relief are not TDRs. A modification of six months or less is considered to be a short-term loan modification. In response to the COVID-19 pandemic, the Company has prudently executed loan modifications for existing loan customers, which includes deferrals of interest and in certain cases deferrals of principal and interest. The following table presents information regarding loans which were subject to a loan modification related to COVID-19, with balances as of the date of modification and September 30, 2020, as well as the balance by modification type as of September 30, 2020.

	Number of loans		Balance as of Modification date		Number of loans as of September 30, 2020		Balance as of September 30, 2020		Principal and Interest Deferral		Principal Deferral		% of loans as of September 30, 2020
Real estate loans:
Mortgages		49	$	9,996		1	$	75	$	75	$	-		0.05	%
Home Equity		29		1,389		-		-		-		-		0.00	%
Commercial		259		144,647		9		17,712		13,039		4,673		3.31	%
Agricultural		50		20,421		2		2,368		-		2,368		0.76	%
Construction		3		1,178		-		-		-		-		0.00	%
Consumer		10		68		-		-		-		-		0.00	%
Other commercial loans		88		24,077		-		-		-		-		0.00	%
Other agricultural loans		46		3,347		-		-		-		-		0.00	%
Total		534	$	205,123		12	$	20,155	$	13,114	$	7,041		1.48	%

Troubled Debt Restructurings

In situations where, for economic or legal reasons related to a borrower’s financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a Troubled Debt Restructuring (TDR). Management strives to identify borrowers in financial difficulty early and work with them to structure more affordable terms before their loan reaches nonaccrual status. These restructured terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of interest or principal, or both, management measures any impairment on the restructuring by calculating the present value of the revised loan terms and comparing this balance to the Company’s investment in the loan prior to the restructuring. As these loans are individually evaluated, they are excluded from pooled portfolios when calculating the allowance for loan and lease losses and a separate allocation within the allowance for loan and lease losses is provided. Management continually evaluates loans that are considered TDRs, including payment history under the modified loan terms, the borrower’s ability to continue to repay the loan based on continued evaluation of their operating results and cash flows from operations. As of September 30, 2020 and December 31, 2019, included within the allowance for loan losses are reserves of $293,000 and $345,000 respectively, that are associated with loans modified as TDRs.

Loan modifications that are considered TDRs completed during the three and nine months ended September 30, 2020 and 2019 were as follows (dollars in thousands):

	For the Three Months Ended September 30, 2020
	Number of contracts				Pre-modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
	Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification

Real estate loans:
Commercial		-		1	$	-	$	276	$	-	$	276
Consumer		-		1		-		3		-		3
Total		-		2	$	-	$	279	$	-	$	279

	For the Nine Months Ended September 30, 2020
	Number of contracts				Pre-modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
	Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification

Real estate loans:
Commercial		-		3		-		682		-		682
Agricultural		-		1		-		150		-		150
Consumer		-		1		-		3		-		3
Total		-		5	$	-	$	835	$	-	$	835

	For the Three Months Ended September 30, 2019
	Number of contracts				Pre-modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
	Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification
Real estate loans:
Commercial		-		1	$	-	$	118	$	-	$	118
Consumer		-		1		-		3		-		3
Total		-		2	$	-	$	121	$	-	$	121

	For the Nine Months Ended September 30, 2019
	Number of contracts				Pre-modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
	Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification
Real estate loans:
Mortgages		-		1	$	-	$	4	$	-	$	4
Home Equity		-		1		-		40		-		40
Commercial		-		5		-		918		-		918
Consumer		-		1		-		3		-		3
Total		-		8	$	-	$	965	$	-	$	965

Recidivism, or the borrower defaulting on its obligation pursuant to a modified loan, results in the loan once again becoming a non-accrual loan. Recidivism on modified loans occurs at a notably higher rate than do defaults on new origination loans, so modified loans present a higher risk of loss than do new origination loans. The following table presents the recorded investment in loans that were modified as TDRs during each 12-month period prior to the current reporting periods, which began January 1, 2020 and 2019 (9 month periods) and July 1, 2020 and 2019 (3 month periods), respectively, and that subsequently defaulted during these reporting periods (dollars in thousands):

	For the Three Months Ended								For the Nine Months Ended
	September 30, 2020				September 30, 2019				September 30, 2020				September 30, 2019
	Number of contracts		Recorded investment		Number of contracts		Recorded investment		Number of contracts		Recorded investment		Number of contracts		Recorded investment
Real estate loans:
Commercial		1	$	110		-	$	-		1	$	110		1	$	542
Agricultural		-		-		-		-		-		-		1		1,439
Other agricultural loans		-		-		-		-		-		-		4		261
Total recidivism		1	$	110		-	$	-		1	$	110		6	$	2,242

Allowance for Loan Losses

The following table segregates the allowance for loan losses (ALLL) into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of September 30, 2020 and December 31, 2019, respectively (in thousands):

	September 30, 2020						December 31, 2019
	Individually evaluated for impairment		Collectively evaluated for impairment		Total		Individually evaluated for impairment		Collectively evaluated for impairment		Total
Real estate loans:
Residential	$	29	$	1,190	$	1,219	$	32	$	1,082	$	1,114
Commercial		341		4,965		5,306		251		4,298		4,549
Agricultural		79		4,727		4,806		151		4,871		5,022
Construction		-		85		85		-		43		43
Consumer		12		340		352		-		112		112
Other commercial loans		181		1,049		1,230		147		1,108		1,255
Other agricultural loans		149		586		735		154		807		961
State and political subdivision loans		-		514		514		-		536		536
Unallocated		-		922		922		-		253		253
Total	$	791	$	14,378	$	15,169	$	735	$	13,110	$	13,845

The following tables roll forward the balance of the ALLL by portfolio segment for the three and nine months ended September 30, 2020 and 2019, respectively (in thousands):

	For the three months ended September 30, 2020
	Balance at June 30, 2020		Charge-offs			Recoveries		Provision			Balance at September 30, 2020
Real estate loans:
Residential	$	1,206	$	-		$	-	$	13		$	1,219
Commercial		4,944		(220	)		3		579			5,306
Agricultural		5,061		(4	)		19		(270	)		4,806
Construction		81		-			-		4			85
Consumer		362		(12	)		3		(1	)		352
Other commercial loans		1,201		(1	)		4		26			1,230
Other agricultural loans		821		-			-		(86	)		735
State and political subdivision loans		547		-			-		(33	)		514
Unallocated		604		-			-		318			922
Total	$	14,827	$	(237	)	$	29	$	550		$	15,169

	For the three months ended September 30, 2019
	Balance at June 30, 2019		Charge-offs			Recoveries		Provision			Balance at September 30, 2019
Real estate loans:
Residential	$	1,066	$	(24	)	$	-	$	49		$	1,091
Commercial		4,400		-			-		241			4,641
Agricultural		4,532		-			-		180			4,712
Construction		36		-			-		(17	)		19
Consumer		118		(10	)		6		5			119
Other commercial loans		1,328		-			3		18			1,349
Other agricultural loans		741		-			-		128			869
State and political subdivision loans		539		-			-		(3	)		536
Unallocated		544		-			-		(201	)		343
Total	$	13,304	$	(34	)	$	9	$	400		$	13,679

	For the nine months ended September 30, 2020
	Balance at December 31, 2019		Charge-offs			Recoveries		Provision			Balance at September 30, 2020
Real estate loans:
Residential	$	1,114	$	-		$	-	$	105		$	1,219
Commercial		4,549		(221	)		37		941			5,306
Agricultural		5,022		(4	)		19		(231	)		4,806
Construction		43		-			-		42			85
Consumer		112		(30	)		15		255			352
Other commercial loans		1,255		(1	)		9		(33	)		1,230
Other agricultural loans		961		-			-		(226	)		735
State and political subdivision loans		536		-			-		(22	)		514
Unallocated		253		-			-		669			922
Total	$	13,845	$	(256	)	$	80	$	1,500		$	15,169

	For the nine months ended September 30, 2019
	Balance at December 31, 2018		Charge-offs			Recoveries		Provision			Balance at September 30, 2019
Real estate loans:
Residential	$	1,105	$	(24	)	$	-	$	10		$	1,091
Commercial		4,115		(293	)		-		819			4,641
Agricultural		4,264		-			-		448			4,712
Construction		58		-			-		(39	)		19
Consumer		120		(32	)		24		7			119
Other commercial loans		1,354		(38	)		8		25			1,349
Other agricultural loans		752		-			-		117			869
State and political subdivision loans		762		-			-		(226	)		536
Unallocated		354		-			-		(11	)		343
Total	$	12,884	$	(387	)	$	32	$	1,150		$	13,679

The Company allocates the ALLL based on the factors described below, which conform to the Company’s loan classification policy and credit quality measurements. In reviewing risk within the Company’s loan portfolio, management has determined there to be several different risk categories within the loan portfolio. The ALLL consists of amounts applicable to: (i) residential real estate loans; (ii) residential real estate home equity loans; (iii) commercial real estate loans; (iv) agricultural real estate loans; (v) real estate construction loans; (vi) other commercial and agricultural loans; (vii) consumer loans; (viii) other agricultural loans and (ix) state and political subdivision loans. Factors considered in this process include general loan terms, collateral, and availability of historical data to support the analysis. Historical loss percentages are calculated and used as the basis for calculating allowance allocations. Certain qualitative factors are evaluated to determine additional inherent risks in the loan portfolio, which are not necessarily reflected in the historical loss percentages. These factors are then added to the historical allocation percentage to get the adjusted factor to be applied to non-classified loans. The following qualitative factors are analyzed:

•

Level of and trends in delinquencies and impaired/classified loans

▪

Change in volume and severity of past due loans

▪

Volume of non-accrual loans

▪

Volume and severity of classified, adversely or graded loans;

•

Level of and trends in charge-offs and recoveries;

•

Trends in volume, terms and nature of the loan portfolio;

•

Effects of any changes in risk selection and underwriting standards and any other changes in lending and recovery policies, procedures and practices;

•

Changes in the quality of the Company’s loan review system;

•

Experience, ability and depth of lending management and other relevant staff;

•

National, state, regional and local economic trends and business conditions

▪

General economic conditions

▪

Unemployment rates

▪

Inflation rate/ Consumer Price Index

▪

Changes in values of underlying collateral for collateral-dependent loans;

•

Industry conditions including the effects of external factors such as competition, legal, and regulatory requirements on the level of estimated credit losses;

•

Existence and effect of any credit concentrations, and changes in the level of such concentrations; and

•

Any change in the level of board oversight.

The Company analyzes its loan portfolio at least each quarter to determine the adequacy of its ALLL.

Loans determined to be TDRs are impaired and for purposes of estimating the ALLL must be individually evaluated for impairment. In calculating the impairment, the Company calculates the present value utilizing an analysis of discounted cash flows. If the present value calculated is below the recorded investment of the loan, impairment is recognized by a charge to the provision for loan and lease losses and a credit to the ALLL.

For the three months ended September 30, 2020, the allowance for commercial real estate, agricultural real estate and other agricultural loans was increased due to a general deterioration in economic activity as a result of the Covid-19 pandemic. In addition, residential real estate was increased due to an increase in past due loans. The factor related to the volume and severity of classified, adversely or graded loans was decreased for municipal loans, agriculture real estate loans and other agricultural loans due to a decrease in classified loans. The decrease in the provision for agricultural real estate loans and other agricultural loans is due to the decrease in outstanding loans in these loan portfolios as of September 30, 2020 compared to June 30, 2020.

For the nine months ended September 30, 2020, the allowance for all categories was increased due to a general deterioration in economic activity and increase in unemployment as a result of the Covid-19 pandemic. In addition, commercial real estate was increased due to an increase in past due and nonaccrual loans. Factors related to residential real estate were increased due to an increase in past due loans. The factor related to the volume and severity of classified, adversely or graded loans was decreased for municipal loans, agriculture real estate loans and other agricultural loans due to a decrease in classified loans. The decrease in the provision for other agricultural loans is due to the decrease in outstanding loans in these loan portfolios as of September 30, 2020 compared to December 31, 2019.

For the three months ended September 30, 2019, the allowance for commercial real estate was increased in general reserves due to an increase in the size of the portfolio and an increase in the historical loss percentage of the portfolio. This was represented as an increase in the provision. The allowance for agricultural real estate loans was increased in general reserves as a result of overall growth in the portfolio. The result of this was represented as an increase in the provision. The allowance for other agricultural loans was increased as a result of a general increase in the size of the portfolio. The result of these changes was represented as an increase in the provision.

For the nine months ended September 30, 2019, the allowance for commercial real estate was increased in general reserves due to general increase in the size of the portfolio and an increase in the historical loss percentage of the portfolio. There also was an increase in specific reserves for commercial real estate, which was partially offset by the decrease in substandard loans. The total change was represented as an increase in the provision. The allowance for agricultural real estate loans was increased in general reserves as a result of higher loan balances. Additionally, there was an increase in specific reserves. The allowance for other agricultural loans was increased as a result of a general increase in the size of the portfolio. The result of these changes was represented as an increase in the provision. These resulted in an increase in the provision. The allowance for state and political subdivision was decreased as a result a decrease in the volume of classified loans. The result of this change was represented as a decrease in the provision.

Foreclosed Assets Held For Sale

Foreclosed assets acquired in settlement of loans are carried at fair value, less estimated costs to sell, and are included in other assets on the Consolidated Balance Sheet. As of September 30, 2020 and December 31, 2019, included within other assets are $2,726,000 and $3,404,000, respectively, of foreclosed assets. As of September 30, 2020, included within the foreclosed assets are $199,000 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of September 30, 2020, the Company had initiated formal foreclosure proceedings on $723,000 of consumer residential mortgages, which had not yet been transferred into foreclosed assets In accordance with various state regulations, foreclosure actions have been suspended into the fourth quarter.