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Loans

3 Months Ended

Mar. 31, 2021

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 March 31, 2021 and December 31, 2020, 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 March 31, 2021 and December 31, 2020 (in thousands):

March 31, 2021	Total Loans		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Collectively evaluated for impairment
Real estate loans:
Residential	$	203,273	$	969	$	20	$	202,284
Commercial		605,547		9,321		2,911		593,315
Agricultural		315,313		4,561		1,664		309,088
Construction		42,651		-		-		42,651
Consumer		26,181		1		-		26,180
Other commercial loans		109,168		1,127		132		107,909
Other agricultural loans		41,378		1,118		-		40,260
State and political subdivision loans		60,890		-		-		60,890
Total		1,404,401		17,097		4,727		1,382,577
Allowance for loan losses		16,560		485		-		16,075
Net loans	$	1,387,841	$	16,612	$	4,727	$	1,366,502

December 31, 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

During 2021 the Company continued its participation 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 March 31, 2021 and December 31, 2020, the Company had outstanding principal balances of $28.3 million and $37.2 million, respectively, of PPP loans that are included in other commercial loans. During 2021, the Company originated $18.5 million of loans that remain outstanding as of March 31, 2021. 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. The SBA has issued guidance for forgiveness with a streamlined approach for loans of $150,000 or less.

In accordance with the SBA terms and conditions on these PPP loans, the Company received approximately $1.4 million in fees associated with the processing of the loans outstanding as of March 31, 2021. 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 March 31, 2021, $1.2 million of deferred fees related to the PPP loans remain to be amortized.

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 March 31, 2021. 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 $4,034,000 at March 31, 2021.

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 the April 17, 2020 Acquisition date (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 months ended March 31, 2021 and 2020, respectively (in thousands):

	Three months ended March 31
	2021			2020
Balance at beginning of period	$	788		$	89
Accretion		(100	)		(1	)
Balance at end of period	$	688		$	88

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

	March 31, 2021		December 31, 2020
Outstanding balance	$	8,747	$	8,958
Carrying amount		4,727		4,875

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):

March 31, 2021	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
Real estate loans:
Mortgages	$	1,059	$	724	$	122	$	846	$	9
Home Equity		147		69		54		123		8
Commercial		10,100		8,408		913		9,321		101
Agricultural		4,791		2,777		1,784		4,561		12
Consumer		1		1		-		1		-
Other commercial loans		1,793		889		238		1,127		170
Other agricultural loans		1,301		17		1,101		1,118		185
Total	$	19,192	$	12,885	$	4,212	$	17,097	$	485

December 31, 2020	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
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
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

The following tables includes the average balance of impaired loan receivables by class and the income recognized on these receivables for the three month periods ended March 31, 2021 and 2020 (in thousands):

	For the Three Months Ended
	March 31, 2021						March 31, 2020
	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	$	851	$	5	$	-	$	1,031	$	5	$	-
Home Equity		124		1		-		146		2		-
Commercial		9,238		67		7		11,486		104		2
Agricultural		4,590		22		-		3,777		21		-
Consumer		1		-		-		3		-		-
Other commercial loans		1,121		1		-		1,839		1		-
Other agricultural loans		1,103		2		-		1,276		2		-
Total	$	17,028	$	98	$	7	$	19,558	$	135	$	2

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 March 31, 2021 and December 31, 2020 (in thousands):

March 31, 2021	Pass		Special Mention		Substandard		Doubtful		Loss		Ending Balance
Real estate loans:
Commercial	$	567,989	$	28,936	$	8,622	$	-	$	-	$	605,547
Agricultural		288,128		15,603		11,582		-		-		315,313
Construction		42,651		-		-		-		-		42,651
Other commercial loans		102,276		3,134		3,675		83		-		109,168
Other agricultural loans		38,114		1,849		1,415		-		-		41,378
State and political subdivision loans		56,245		4,372		273		-		-		60,890
Total	$	1,095,403	$	53,894	$	25,567	$	83	$	-	$	1,174,947

December 31, 2020
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

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 March 31, 2021 and December 31, 2020 (in thousands):

March 31, 2021	Performing		Non-performing		PCI		Total
Real estate loans:
Mortgages	$	148,560	$	1,023	$	20	$	149,603
Home Equity		53,648		22		-		53,670
Consumer		26,181		-		-		26,181
Total	$	228,389	$	1,045	$	20	$	229,454

December 31, 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

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 March 31, 2021 and December 31, 2020 (in thousands):

March 31, 2021	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	$	288	$	29	$	517	$	834	$	148,749	$	20	$	149,603	$	251
Home Equity		49		11		8		68		53,602		-		53,670		-
Commercial		848		190		1,440		2,478		600,158		2,911		605,547		-
Agricultural		356		25		1,330		1,711		311,938		1,664		315,313		150
Construction		-		-		-		-		42,651		-		42,651		-
Consumer		149		4		-		153		26,028		-		26,181		-
Other commercial loans		919		-		160		1,079		107,957		132		109,168		27
Other agricultural loans		224		-		50		274		41,104		-		41,378		50
State and political subdivision loans		-		-		-		-		60,890		-		60,890		-
Total	$	2,833	$	259	$	3,505	$	6,597		1,393,077	$	4,727	$	1,404,401	$	478

Loans considered non-accrual	$	539		171	$	3,027	$	3,737	$	6,943	$	-	$	10,680
Loans still accruing		2,294		88		478		2,860		1,386,134		4,727		1,393,721
Total	$	2,833	$	259	$	3,505	$	6,597	$	1,393,077	$	4,727	$	1,404,401

December 31, 2020
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

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 March 31, 2021 and December 31, 2020, respectively. The balances are presented by class of loan receivable (in thousands):

	March 31, 2021		December 31, 2020
Real estate loans:
Mortgages	$	772	$	787
Home Equity		22		25
Commercial		4,853		4,529
Agricultural		3,064		3,133
Other commercial loans		1,050		1,284
Other agricultural loans		919		974
	$	10,680	$	10,732

Loan Modifications Related to COVID-19

The Company continues 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 January 1 , 2022 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 during 2021, with balances as of the December 31, 2021 and March 31, 2021, as well as the balance by modification type as of March 31, 2021.

	Number of loans		Balance as of December 31, 2020		Number of loans		Balance as of March 31, 2021		Principal and Interest Deferral		Principal Deferral		% of loans as of March 31, 2021
Real estate loans:
Mortgages		1	$	209		-	$	-	$	-	$	-		0.00	%
Home Equity		1		49		-		-		-		-		0.00	%
Commercial		12		26,039		4		13,864		6,205		7,659		2.29	%
Agricultural		3		181		-		-		-		-		0.00	%
Construction		-		-		-		-		-		-		0.00	%
Consumer		-		-		-		-		-		-		0.00	%
Other commercial loans		2		249		-		-		-		-		0.00	%
Other agricultural loans		-		-		-		-		-		-		0.00	%
Total		19	$	26,727		4	$	13,864	$	6,205	$	7,659		0.99	%

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 March 31, 2021 and December 31, 2020, included within the allowance for loan losses are reserves of $160,000 and $257,000 respectively, that are associated with loans modified as TDRs.

Loan modifications that are considered TDRs completed during the three months ended March 31, 2021 and 2020 were as follows (dollars in thousands):

	For the Three Months Ended March 31, 2021
	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		-		2	$	-	$	290	$	-	$	290
Total		-		2	$	-	$	290	$	-	$	290

	For the Three Months Ended March 31, 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:
Agricultural		-		1	$	-	$	150	$	-	$	150
Total		-		1	$	-	$	150	$	-	$	150

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.

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 March 31, 2021 and December 31, 2020, respectively (in thousands):

	March 31, 2021						December 31, 2020
	Individually evaluated for impairment		Collectively evaluated for impairment		Total		Individually evaluated for impairment		Collectively evaluated for impairment		Total
Real estate loans:
Residential	$	17	$	1,150	$	1,167	$	18	$	1,156	$	1,174
Commercial		101		6,582		6,683		95		6,121		6,216
Agricultural		12		4,905		4,917		83		4,870		4,953
Construction		-		151		151		-		122		122
Consumer		-		237		237		-		321		321
Other commercial loans		170		1,334		1,504		170		1,056		1,226
Other agricultural loans		185		604		789		144		720		864
State and political subdivision loans		-		470		470		-		479		479
Unallocated		-		642		642		-		460		460
Total	$	485	$	16,075	$	16,560	$	510	$	15,305	$	15,815

The following tables roll forward the balance of the ALLL by portfolio segment for the three months ended March 31, 2021 and 2020, respectively (in thousands):

	For the three months ended March 31, 2021
	Balance at December 31, 2020		Charge-offs			Recoveries		Provision			Balance at March 31, 2021
Real estate loans:
Residential	$	1,174	$	-		$	-	$	(7	)	$	1,167
Commercial		6,216		-			89		378			6,683
Agricultural		4,953		-			-		(36	)		4,917
Construction		122		-			-		29			151
Consumer		321		(4	)		6		(86	)		237
Other commercial loans		1,226		-			4		274			1,504
Other agricultural loans		864		-			-		(75	)		789
State and political subdivision loans		479		-			-		(9	)		470
Unallocated		460		-			-		182			642
Total	$	15,815	$	(4	)	$	99	$	650		$	16,560

	For the three months ended March 31, 2020
	Balance at December 31, 2019		Charge-offs			Recoveries		Provision			Balance at March 31, 2020
Real estate loans:
Residential	$	1,114	$	-		$	-	$	40		$	1,154
Commercial		4,549		(1	)		1		180			4,729
Agricultural		5,022		-			-		(144	)		4,878
Construction		43		-			-		13			56
Consumer		112		(8	)		8		5			117
Other commercial loans		1,255		-			2		40			1,297
Other agricultural loans		961		-			-		(126	)		835
State and political subdivision loans		536		-			-		22			558
Unallocated		253		-			-		370			623
Total	$	13,845	$	(9	)	$	11	$	400		$	14,247

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 March 31, 2021, the allowance for commercial real estate and other commercial loans increased due to loans acquired as part of the MidCoast acquisition maturing and then renewed and becoming subject to the Company’s allowance calculation. The factor related to level of past due loans for residential real estate was decreased due to a decrease in past due loans. The factor related to the volume and severity of classified, adversely or graded loans was decreased for other agricultural loans due to a decrease in classified loans

For the three months ended March 31, 2020, the allowance for all categories was increased due to a general deterioration in economic activity and unemployment as a result of the Covid-19 pandemic. In addition, commercial real estate was increased due to an increase in past due 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 March 31, 2020 compared to December 31, 2019.

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 March 31, 2021 and December 31, 2020, included within other assets are $1,720,000 and $1,836,000, respectively, of foreclosed assets. As of March 31, 2021, included within the foreclosed assets are $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 March 31, 2021, the Company had initiated formal foreclosure proceedings on $545,000 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.