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LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES

12 Months Ended

Dec. 31, 2020

5. LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES

The Company grants commercial, industrial, agricultural, residential, and consumer loans primarily to customers throughout north central, central and south central Pennsylvania, southern New York and Wilmington and Dover, Delaware. Although the Company had a diversified loan portfolio at December 31, 2020 and 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, as well as how those segments are analyzed within the allowance for loan losses as of December 31, 2020 and 2019 (in thousands):

2020	Total Loans		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Collectively evaluated for impairment
Real estate loans:
Residential	$	201,911	$	990	$	20	$	200,901
Commercial		596,255		9,183		2,937		584,135
Agricultural		315,158		4,645		1,686		308,827
Construction		35,404		-		-		35,404
Consumer		30,277		2		-		30,275
Other commercial loans		114,169		1,335		232		112,602
Other agricultural loans		48,779		1,122		-		47,657
State and political subdivision loans		63,328		-		-		63,328
Total		1,405,281		17,277		4,875		1,383,129
Allowance for loan losses		15,815		510		-		15,305
Net loans	$	1,389,466	$	16,767	$	4,875	$	1,367,824

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. The Company originated $54.3 million of loans under this program. The PPP loans are fully guaranteed by the SBA, have an interest rate of 1.0% per annum, 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. The SBA has issued guidance for forgiveness with a streamlined approach for loans of $150,000 or less. During 2020, we received payments and forgiveness on 192 loans totaling $17.1 million with 140 loans being completely paid off or forgiven by December 31, 2020. PPP loans are included in the other commercial loan category and total $37.2 million as of December 31, 2020.

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. As of December 31, 2020, $1.1 million of deferred fees remain to be amortized related to the PPP loans.

As of December 31, 2020 and 2019, net unamortized loan fees, including PPP fees, and costs of $2,344,000 and $937,000, respectively, were included in the carrying value of loans. Purchased loans acquired in connection with the FNB acquisition, the State College branch acquisition and the MidCoast acquisition were recorded at fair value on their acquisition date without a carryover of the related allowance for loan losses.

Upon acquisition, the Company evaluated whether an acquired loan was within the scope of ASC 310-30, Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality. PCI loans 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. The fair value of PCI loans, on the acquisition date, was determined, primarily based on the fair value of the loans’ collateral. The carrying value of PCI loans was $4,875,000 and $1,282,000 at December 31, 2020 and 2019, respectively. The carrying value of the PCI loans was determined by projected discounted contractual cash flows.

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 discount for PCI loans were as follows for the years ended December 31, 2020 and 2019 (in thousands):

	December 31, 2020			December 31, 2019
Balance at beginning of period	$	89		$	104
Addition due to MidCoast Acquisition		966			-
Accretion		(267	)		(15	)
Balance at end of period	$	788		$	89

The following table presents additional information regarding PCI loans (in thousands):

	December 31, 2020		December 31, 2019
Outstanding balance	$	8,958	$	4,072
Carrying amount		4,875		1,282

Real estate loans serviced for Freddie Mac, Fannie Mae and the FHLB, which are not included in the Consolidated Balance Sheet, totaled $178,986,000 and $148,889,000 at December 31, 2020 and 2019, respectively. Loans sold to Freddie Mac and Fannie Mae were sold without recourse and total $162,050,000 and $127,402,000 at December 31, 2020 and 2019, respectively. Additionally, the Bank acquired a portfolio of loans sold to the FHLB during the acquisition of FNB, which were sold under the Mortgage Partnership Finance Program ("MPF"). The Bank was not an active participant in the MPF program in 2020 or 2019. The MPF portfolio balance was $16,936,000 and $21,487,000 at December 31, 2020 and 2019, respectively. The FHLB maintains a first-loss position for the MPF portfolio that totals $151,000. Should the FHLB exhaust its first-loss position, recourse to the Bank's credit enhancement would be up to the next $764,000 of losses. The Bank did not experience any losses for the MPF portfolio during 2020, 2019 or 2018.

The segments of the Bank’s loan portfolio are disaggregated into classes to a level that allows management to monitor risk and performance. Residential real estate mortgages consists of 15 to 30 year first mortgages on residential real estate, while residential real estate home equities are consumer purpose installment loans or lines of credit secured by a mortgage which is often a second lien on residential real estate with terms of 15 years or less. Commercial real estate are business purpose loans secured by a mortgage on commercial real estate. Agricultural real estate are loans secured by a mortgage on real estate used in agriculture production. Construction real estate are loans secured by residential or commercial real estate used during the construction phase of residential and commercial projects. Consumer loans are typically unsecured or primarily secured by collateral other than real estate and overdraft lines of credit connected with 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 subdivisions are loans for 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, commercial and agricultural real estate loans and state and political subdivision loans which are 90 days or more past due to be impaired. Certain residential mortgages, home equity and consumer loans that are cross collateralized with commercial relationships determined to be impaired may be classified as impaired as well. These 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 allowance allocation or a charge-off to the allowance.

The following table includes the recorded investment and unpaid principal balances for impaired loans by class, with the associated allowance amount as of December 31, 2020 and 2019, if applicable (in thousands):

	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
2020
Real estate loans:
Mortgages	$	1,070	$	740	$	123	$	863	$	9
Home Equity		150		70		57		127		9
Commercial		9,847		8,323		860		9,183		95
Agricultural		4,811		2,799		1,846		4,645		83
Construction		-		-		-		-		-
Consumer		2		2		-		2		-
Other commercial loans		1,908		1,094		241		1,335		170
Other agricultural loans		1,262		19		1,103		1,122		144
Total	$	19,050	$	13,047	$	4,230	$	17,277	$	510

	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
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
Construction		-		-		-		-		-
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 table includes the average investment in impaired loans and the income recognized on impaired loans for 2020, 2019 and 2018 (in thousands):

					Interest
	Average		Interest		Income
	Recorded		Income		Recognized
2020	Investment		Recognized		Cash Basis
Real estate loans:
Mortgages	$	956	$	20	$	-
Home Equity		139		6		-
Commercial		10,354		358		27
Agricultural		3,918		75		-
Consumer		3		-		-
Other commercial loans		1,671		3		-
Other agricultural loans		1,237		6		-
Total	$	18,278	$	468	$	27

2019	Average Recorded Investment		Interest Income Recognized		Interest Income Recognized Cash Basis
Real estate loans:
Mortgages	$	1,062	$	16	$	-
Home Equity		119		6		-
Commercial		11,756		453		24
Agricultural		4,899		78		-
Consumer		2		-		-
Other commercial loans		2,056		1		-
Other agricultural loans		1,400		4		-
Total	$	21,294	$	558	$	24

2018	Average Recorded Investment		Interest Income Recognized		Interest Income Recognized Cash Basis
Real estate loans:
Mortgages	$	944	$	13	$	-
Home Equity		95		4		-
Commercial		13,907		506		20
Agricultural		4,736		151		-
Consumer		1		-		-
Other commercial loans		3,659		89		-
Other agricultural loans		1,401		23		-
Total	$	24,743	$	786	$	20

Credit Quality Information

For commercial real estate loans, agricultural real estate loans, construction loans, other commercial loans, other agricultural loans and state and political subdivision loans, management uses a nine point internal risk rating system to monitor the 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 are 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 and agricultural loans 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. The external consultant is engaged to 1) review a minimum of 50% of the dollar volume of the commercial loan portfolio on an annual basis, 2) review new loans originated over $1.0 million in the last years, 3) review a majority 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 December 31, 2020 and 2019 (in thousands):

2020	Pass		Special Mention		Substandard		Doubtful		Loss		Ending Balance
Real estate loans:
Commercial	$	563,121	$	24,329	$	8,805	$	-	$	-	$	596,255
Agricultural		289,216		14,307		11,635		-		-		315,158
Construction		35,404		-		-		-		-		35,404
Other commercial loans		106,604		3,808		3,672		85		-		114,169
Other agricultural loans		45,758		1,431		1,590		-		-		48,779
State and political
subdivision loans		58,649		4,372		307		-		-		63,328
Total	$	1,098,752	$	48,247	$	26,009	$	85	$	-	$	1,173,093

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 equities 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. The following table presents the recorded investment in those loan classes based on payment activity as of December 31, 2020 and 2019 (in thousands):

2020	Performing		Non-performing		PCI		Total
Real estate loans:
Mortgages	$	145,843	$	1,039	$	20	$	146,902
Home Equity		54,961		48		-		55,009
Consumer		30,247		30		-		30,277
Total	$	231,051	$	1,117	$	20	$	232,188

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 Loans by Class

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 loans as of December 31, 2020 and 2019 (in thousands):


	30-59 Days		60-89 Days		90 Days		Total Past						Total Financing		90 Days Past due
2020	Past Due		Past Due		Or Greater		Due		Current		PCI		Receivables		Accruing
Real estate loans:
Mortgages	$	864	$	414	$	518	$	1,796	$	145,086	$	20	$	146,902	$	252
Home Equity		152		62		34		248		54,761		-		55,009		23
Commercial		836		439		1,822		3,097		590,221		2,937		596,255		70
Agricultural		2,283		-		1,329		3,612		309,860		1,686		315,158		150
Construction		-		-		-		-		35,404		-		35,404		-
Consumer		147		9		30		186		30,091		-		30,277		30
Other commercial loans		930		-		133		1,063		112,874		232		114,169		-
Other agricultural loans		1,044		-		-		1,044		47,735		-		48,779		-
State and political
subdivision loans		-		-		-		-		63,328		-		63,328		-
Total	$	6,256	$	924	$	3,866	$	11,046	$	1,389,360	$	4,875	$	1,405,281	$	525
Loans considered non-accrual	$	3,032	$	28	$	3,341	$	6,401	$	4,331	$	-	$	10,732
Loans still accruing		3,224		896		525		4,645		1,385,029		4,875		1,394,549
Total	$	6,256	$	924	$	3,866	$	11,046	$	1,389,360	$	4,875	$	1,405,281

2019	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		PCI		Total Financing Receivables		90 Days Past due 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 nonaccrual status upon reaching 90 days delinquency, unless the loan is well secured and in the process of collection, 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.

The following table reflects the loans on nonaccrual status as of December 31, 2020 and 2019, respectively. The balances are presented by class of loan (in thousands):

	2020		2019
Real estate loans:
Mortgages	$	787	$	903
Home Equity		25		59
Commercial		4,529		5,080
Agricultural		3,133		2,578
Consumer		-		6
Other commercial loans		1,284		1,837
Other agricultural loans		974		1,073
	$	10,732	$	11,536

Interest income on loans would have increased by approximately $756,000, $647,000 and $961,000 during 2020, 2019 and 2018, respectively, if these loans had performed in accordance with their terms.

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. In addition, the risk-rating on COVID-19 modified loans did not change, and these loans will not be considered past due until after the deferral period is over and scheduled payments resume. The credit quality of these loans will be reevaluated after the deferral period ends. 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 December 31, 2020, as well as the balance by modification type as of December 31, 2020.

	Number of loans		Balance as of Modification date		Number of loans		Balance as of December 31, 2020		Principal and Interest Deferral		Principal Deferral		% of loans as of December 31, 2020
Real estate loans:
Mortgages		50	$	10,056		1	$	3,397	$	3,397	$	-		2.31	%
Home Equity		30		1,419		-		-		-		-		0.00	%
Commercial		259		144,647		2		5,201		704		4,497		0.87	%
Agricultural		52		22,209		-		-		-		-		0.00	%
Construction		3		1,178		-		-		-		-		0.00	%
Consumer		10		68		-		-		-		-		0.00	%
Other commercial loans		88		24,077		1		140		140		-		0.12	%
Other agricultural loans		47		3,432		-		-		-		-		0.00	%
Total		539	$	207,086		4	$	8,738	$	4,241	$	4,497		0.62	%

Troubled Debt Restructurings (TDRs)

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 TDR. Management strives to identify borrowers in financial difficulty early and work with them to modify more affordable terms before their loan reaches nonaccrual status. These modified 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 either interest or principal, 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. Based on this evaluation management would no longer consider a loan to be a TDR when the relevant facts support such a conclusion. As of December 31, 2020, 2019 and 2018, included within the allowance for loan losses are reserves of $257,000, $345,000 and $255,000, respectively, that are associated with loans modified as TDRs.

Loan modifications that are considered TDRs completed during the years ended December 31, 2020, 2019 and 2018 were as follows (dollars in thousands):

	Number of contracts				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
2020	Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification
Real estate loans:
Mortgages		-		1	$	-	$	2	$	-	$	2
Home Equity		-		-		-		-		-		-
Commercial		-		10		-		2,456		-		2,456
Agricultural		-		2		-		494		-		494
Consumer		-		1		-		3				3
Other commercial loans		-		2		-		1,094				1,094
Other agricultural loans		-		1		-		19		-		19
Total		-		17	$	-	$	4,068	$	-	$	4,068

	Number of contracts				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
2019	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		-		6		-		918		-		918
Agricultural		-		5		-		1,731		-		1,731
Consumer		-		1		-		3				3
Other commercial loans		-		1		-		55				55
Other agricultural loans		-		5		-		1,054		-		1,054
Total		-		20	$	-	$	3,805	$	-	$	3,805

	Number of contracts				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
2018	Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification
Real estate loans:
Mortgages		-		1	$	-	$	7	$	-	$	7
Home Equity		-		1		-		1		-		1
Commercial		-		2		-		683		-		683
Agricultural		-		5		-		3,209		-		3,209
Other agricultural loans		-		4		-		176		-		176
Total		-		13	$	-	$	4,076	$	-	$	4,076

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 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 begin January 1, 2020, 2019 and 2018, respectively, and that subsequently defaulted during these reporting periods (dollars in thousands):

	December 31, 2020				December 31, 2019				December 31, 2018
	Number of contracts		Recorded investment		Number of contracts		Recorded investment		Number of contracts		Recorded investment
Real estate loans:
Commercial		1	$	110		-	$	-		2	$	683
Agricultural		-		-		1		1,439		2		1,325
Other agricultural loans		-		-		3		137		1		161
Total recidivism		1	$	110		4	$	1,576		5	$	2,169

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 December 31, 2020 and 2019 included with other assets are $1,836,000, and $3,404,000, respectively, of foreclosed assets. As of December 31, 2020, included within the foreclosed assets is $359,000 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of December 31, 2020, the Company has initiated formal foreclosure proceedings on $303,000 of consumer residential mortgages, which have not yet been transferred into foreclosed assets.

Allowance for Loan Losses

The following tables roll forward the balance of the allowance for loan and lease losses for the years ended December 31, 2020, 2019 and 2018 and is segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of December 31, 2020, 2019 and 2018 (in thousands):

	Balance at December 31, 2019		Charge-offs			Recoveries		Provision			Balance at December 31, 2020		Individually evaluated for impairment		Collectively evaluated for impairment
Real estate loans:
Residential	$	1,114	$	-		$	14	$	46		$	1,174	$	18	$	1,156
Commercial		4,549		(435	)		37		2,065			6,216		95		6,121
Agricultural		5,022		(4	)		19		(84	)		4,953		83		4,870
Construction		43		-			-		79			122		-		122
Consumer		112		(50	)		21		238			321		-		321
Other commercial loans		1,255		(44	)		12		3			1,226		170		1,056
Other agricultural loans		961		-			-		(97	)		864		144		720
State and political subdivision loans		536		-			-		(57	)		479		-		479
Unallocated		253		-			-		207			460		-		460
Total	$	13,845	$	(533	)	$	103	$	2,400		$	15,815	$	510	$	15,305

	Balance at December 31, 2018		Charge-offs			Recoveries		Provision			Balance at December 31, 2019		Individually evaluated for impairment		Collectively evaluated for impairment
Real estate loans:
Residential	$	1,105	$	(32	)	$	-	$	41		$	1,114	$	32	$	1,082
Commercial		4,115		(578	)		-		1,012			4,549		251		4,298
Agricultural		4,264		-			-		758			5,022		151		4,871
Construction		58		-			-		(15	)		43		-		43
Consumer		120		(49	)		33		8			112		-		112
Other commercial loans		1,354		(38	)		10		(71	)		1,255		147		1,108
Other agricultural loans		752		(60	)		-		269			961		154		807
State and political subdivision loans		762		-			-		(226	)		536		-		536
Unallocated		354		-			-		(101	)		253		-		253
Total	$	12,884	$	(757	)	$	43	$	1,675		$	13,845	$	735	$	13,110

	Balance at December 31, 2017		Charge-offs			Recoveries		Provision			Balance at December 31, 2018		Individually evaluated for impairment		Collectively evaluated for impairment
Real estate loans:
Residential	$	1,049	$	(118	)	$	69	$	105		$	1,105	$	24	$	1,081
Commercial		3,867		(66	)		3		311			4,115		216		3,899
Agricultural		3,143		-			-		1,121			4,264		84		4,180
Construction		23		-			-		35			58		-		58
Consumer		124		(40	)		31		5			120		-		120
Other commercial loans		1,272		(91	)		30		143			1,354		193		1,161
Other agricultural loans		492		(50	)		1		309			752		159		593
State and political subdivision loans		816		-			-		(54	)		762		-		762
Unallocated		404		-			-		(50	)		354		-		354
Total	$	11,190	$	(365	)	$	134	$	1,925		$	12,884	$	676	$	12,208

As discussed in Footnote 1, management evaluates various qualitative factors on a quarterly basis. The following are explanations for the changes in the allowance by portfolio segments:

2020

Residential - There was a slight decrease in the historical loss factor for residential loans when comparing 2019 and 2020 and a slight decrease in the specific reserve for residential loans between 2019 and 2020. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for residential loan categories due to a general deterioration in economic activity and increase in unemployment as a result of the Covid-19 pandemic during 2020.

Commercial real estate– There was an increase in the historical loss factor for commercial real estate loans from 2019 to 2020. The specific reserve for commercial real estate loans decreased from 2019 to 2020. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for commercial real estate loan categories due to a general deterioration in economic activity and increase in unemployment as a result of the Covid-19 pandemic during 2020.

Agricultural real estate – There was a decrease in the historical loss factor for agricultural real estate loans from 2019 to 2020. The specific reserve for agricultural real estate loans decreased from 2019 to 2020. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for agricultural real estate loans due to a general deterioration in economic activity and increase in unemployment as a result of the Covid-19 pandemic during 2020.

Consumer - There was a slight decrease in the historical loss factor for consumer loans from 2019 to 2020. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for consumer loan categories due to a general deterioration in economic activity and increase in unemployment as a result of the Covid-19 pandemic during 2020.

Other commercial - There was an increase in the historical loss factor for other commercial loans when comparing 2019 and 2020. The specific reserve for other commercial loans increased from 2019 to 2020. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for other commercial loans due to a general deterioration in economic activity and increase in unemployment as a result of the Covid-19 pandemic during 2020. The majority of the increase in other commercial loans was attributable to PPP loans, which are guaranteed by the SBA and therefore do not have an associated allowance and loans acquired in the MidCoast acquisition, which are not subject to the allowance.

Other agricultural - There was a slight decrease in the historical loss factor for other agricultural loans from 2019 to 2020. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for other agricultural loan categories due to a general deterioration in economic activity and increase in unemployment as a result of the Covid-19 pandemic during 2020.

Municipal loans - There was no change in the historical loss factor or specific reserve for municipal loans from 2019 to 2020. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for municipal loans due to a general deterioration in economic activity and increase in unemployment as a result of the Covid-19 pandemic during 2020. The negative provision for state and political loans in 2020 is due to the decrease in the amount of state and political loans outstanding from 2019 to 2020.

2019

Residential - There was a slight increase in the historical loss factor for residential loans when comparing 2018 and 2019. The specific reserve for residential loans decreased slightly between 2018 and 2019. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for residential loan categories due to an increase in the unemployment rates in the local economy during 2019.

Commercial real estate– There was an increase in the historical loss factor for commercial real estate loans from 2018 to 2019. The specific reserve for commercial real estate loans increased from 2018 to 2019. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for all commercial real estate loans due to an increase in the unemployment rates in the local economy during 2019. The qualitative factors for changes in the levels of and trends in delinquencies, impaired and classified loans was decreased due to a lower amount of classified and past due loans.

Agricultural real estate – There was an increase in the historical loss factor for agricultural real estate loans from 2018 to 2019. The specific reserve for agricultural real estate loans increased from 2018 to 2019. The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans was increased for agricultural real estate due to an increase in classified loans. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for agricultural real estate loans due to an increase in the unemployment rates in the local economy during 2019.

Other commercial - There was a slight decrease in the historical loss factor for other commercial loans when comparing 2018 and 2019. The specific reserve for other commercial loans decreased from 2018 to 2019. The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans was decreased for other commercial loans due to a decrease in classified and non-accrual loans. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for other commercial loans due to an increase in the unemployment rates in the local economy during 2019.

Other agricultural - There was a slight increase in the historical loss factor for other agricultural loans from 2018 to 2019. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for other agricultural loan categories due to an increase in the unemployment rates in the local economy during 2019.

Municipal loans - There was no change in the historical loss factor or specific reserve for municipal loans from 2018 to 2019. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for municipal loans due to an increase in the unemployment rates in the local economy during 2019. The qualitative factors for changes in the levels of and trends in delinquencies, impaired and classified loans was decreased due to a lower amount of special mention loans.

2018

Residential - There was a slight increase in the historical loss factor for residential loans when comparing 2017 and 2018. The specific reserve for residential loans decreased slightly between 2017 and 2018. The qualitative factor for national, state, regional and local economic trends and business conditions was decreased for residential loan categories due to a decrease in the unemployment rates in the local economy during 2018.

Commercial real estate– There was no change in the historical loss factor for commercial real estate loans from 2017 to 2018. The qualitative factor for national, state, regional and local economic trends and business conditions was decreased for all commercial real estate loans due to a decrease in the unemployment rates in the local economy during 2018. The qualitative factors for changes in the levels of and trends in delinquencies, impaired and classified loans was decreased due to a lower amount of substandard loans.

Agricultural real estate – There was no change in the historical loss factor for agricultural real estate loans from 2017 to 2018. The specific reserve for agricultural real estate loans increased from 2017 to 2018. The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans was increased for agricultural real estate due to an increase in classified and past due loans. The qualitative factor for industry conditions, including the effects of external factors such as competition, legal, and regulatory requirements on the level of estimated credit losses, was increased for agricultural real estate due to the prices received for products sold in relation to costs to produce, specifically in the dairy economy in 2018 which negatively affected customer earnings. The qualitative factor for national, state, regional and local economic trends and business conditions was decreased for agricultural real estate loans due to a decrease in the unemployment rates in the local economy during 2018.

Other commercial - There was an increase in the historical loss factor for other commercial loans when comparing 2017 and 2018. The specific reserve for other commercial loans decreased from 2017 to 2018. The qualitative factor for national, state, regional and local economic trends and business conditions was decreased for other commercial loans due to a decrease in the unemployment rates in the local economy during 2018.

Other agricultural - There was an increase in the historical loss factor for other agricultural loans from 2017 to 2018. The specific reserve for other agricultural loans increased from 2017 to 2018. The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans were increased for other agricultural loans due to an increase in past due loans. The qualitative factor for industry conditions, including the effects of external factors such as competition, legal, and regulatory requirements on the level of estimated credit losses, was increased for other agricultural loans due to the prices received for products sold in relation to costs to produce, specifically in the dairy economy in 2018 which negatively affected customer earnings. The qualitative factor for national, state, regional and local economic trends and business conditions was decreased for other agricultural loan categories due to a decrease in the unemployment rates in the local economy during 2018.

Municipal loans - There was no change in the historical loss factor or specific reserve for municipal loans from 2017 to 2018. The qualitative factor for national, state, regional and local economic trends and business conditions was decreased for municipal loans due to a decrease in the unemployment rates in the local economy during 2018.