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Loans

9 Months Ended

Sep. 30, 2022

Note 5 – Loans

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 September 30, 2022 and December 31, 2021, 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, 2022 and December 31, 2021 (in thousands):

September 30, 2022	Total Loans		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Collectively evaluated for impairment
Real estate loans:
Residential	$	203,673	$	344	$	9	$	203,320
Commercial		857,314		5,736		1,902		849,676
Agricultural		317,761		5,174		1,523		311,064
Construction		79,154		-		-		79,154
Consumer		124,375		4		-		124,371
Other commercial loans		66,241		135		-		66,106
Other agricultural loans		29,509		801		-		28,708
State and political subdivision loans		59,926		-		-		59,926
Total		1,737,953		12,194		3,434		1,722,325
Allowance for loan losses		18,291		107		-		18,184
Net loans	$	1,719,662	$	12,087	$	3,434	$	1,704,141

December 31, 2021	Total Loans		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Collectively evaluated for impairment
Real estate loans:
Residential	$	201,097	$	620	$	14	$	200,463
Commercial		687,338		8,381		2,145		676,812
Agricultural		312,011		5,355		1,643		305,013
Construction		55,036		-		-		55,036
Consumer		25,858		-		-		25,858
Other commercial loans		74,585		186		-		74,399
Other agricultural loans		39,852		991		-		38,861
State and political subdivision loans		45,756		-		-		45,756
Total		1,441,533		15,533		3,802		1,422,198
Allowance for loan losses		17,304		121		-		17,183
Net loans	$	1,424,229	$	15,412	$	3,802	$	1,405,015

During 2022 the Company continued its participation in the Paycheck Protection Program (“PPP”), administered directly by the U.S. Small Business Administration (the “SBA”) through the processing of forgiveness of PPP loans. During 2021, the Company originated $24.3 million of PPP loans. There were no outstanding principal balances of PPA loans as of September 30, 2022. As of December 31, 2021, the Company had outstanding principal balances of $6.8 million of PPP loans that were included in other commercial loans. As of September 30, 2022, all PPP loans had either been forgiven or repaid. The PPP loans were fully guaranteed by the SBA and were 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 was made as long as certain conditions were met regarding employee retention and compensation levels. PPP loans deemed eligible for forgiveness by the SBA were repaid by the SBA to the Company. The SBA issued guidance for forgiveness with a streamlined approach for loans of $150,000 or less.

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 (“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. One loan was upgraded and cashflows for the loan were expected to increase during the quarter. For the other loans, 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, 2022. The fair value of PCI 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 $3,171,000 at September 30, 2022.

Changes in the accretable yield for PCI loans were as follows for the three and nine months ended September 30, 2022 and 2021 (in thousands):

	Three months ended September 30,						Nine months ended September 30,
	2022			2021			2022			2021
Balance at beginning of period	$	278		$	584		$	370		$	788
Acquisition of Midcoast		-			-			-			-
Reclassification of non-accretable discount		774			29			1,002			29
Accretion		(105	)		(135	)		(425	)		(339	)
Balance at end of period	$	947		$	478		$	947		$	478

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, 2022		December 31, 2021
Outstanding balance	$	6,207	$	6,159
Carrying amount		3,434		3,802

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, 2022	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
Real estate loans:
Mortgages	$	430	$	248	$	41	$	289	$	5
Home Equity		73		40		15		55		1
Commercial		6,850		5,372		364		5,736		60
Agricultural		5,637		4,986		188		5,174		24
Consumer		4		-		4		4		4
Other commercial loans		798		62		73		135		13
Other agricultural loans		1,159		801		-		801		-
Total	$	14,951	$	11,509	$	685	$	12,194	$	107

December 31, 2021
Real estate loans:
Mortgages	$	697	$	495	$	45	$	540	$	6
Home Equity		97		37		43		80		6
Commercial		9,330		8,096		285		8,381		61
Agricultural		5,694		5,167		188		5,355		14
Other commercial loans		813		92		94		186		34
Other agricultural loans		1,274		991		-		991		-
Total	$	17,905	$	14,878	$	655	$	15,533	$	121

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, 2022 and 2021 (in thousands):

	For the Nine Months Ended
	September 30, 2022						September 30, 2021
	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	$	466	$	9	$	-	$	727	$	12	$	-
Home Equity		68		2		-		106		4		-
Commercial		6,372		141		6		8,902		211		23
Agricultural		5,253		90		-		4,513		64		-
Consumer		-		-		-		1		-		-
Other commercial loans		313		2		-		876		2		-
Other agricultural loans		886		3		-		1,069		3		-
Total	$	13,358	$	247	$	6	$	16,194	$	296	$	23

	For the Three Months Ended
	September 30, 2022						September 30, 2021
	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	$	321	$	4	$	-	$	613	$	4	$	-
Home Equity		50		1		-		84		1		-
Commercial		5,778		43		3		8,688		77		8
Agricultural		5,194		33		-		4,454		21		-
Consumer		1		-		-		-		-		-
Other commercial loans		157		1		-		486		-		-
Other agricultural loans		822		1		-		1,022		1		-
Total	$	12,323	$	83	$	3	$	15,347	$	104	$	8

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, 2022 and December 31, 2021 (in thousands):

September 30, 2022	Pass		Special Mention		Substandard		Doubtful		Loss		Ending Balance
Real estate loans:
Commercial	$	816,081	$	34,150	$	7,083	$	-	$	-	$	857,314
Agricultural		302,861		10,342		4,558		-		-		317,761
Construction		73,330		5,824		-		-		-		79,154
Other commercial loans		62,915		3,015		279		32		-		66,241
Other agricultural loans		27,820		1,304		385		-		-		29,509
State and political subdivision loans		59,926		-		-		-		-		59,926
Total	$	1,342,933	$	54,635	$	12,305	$	32	$	-	$	1,409,905

December 31, 2021
Real estate loans:
Commercial	$	646,137	$	35,332	$	5,869	$	-	$	-	$	687,338
Agricultural		291,537		15,105		5,369		-		-		312,011
Construction		55,036		-		-		-		-		55,036
Other commercial loans		70,932		3,289		316		48		-		74,585
Other agricultural loans		37,800		1,351		701		-		-		39,852
State and political subdivision loans		45,588		168		-		-		-		45,756
Total	$	1,147,030	$	55,245	$	12,255	$	48	$	-	$	1,214,578

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, 2022 and December 31, 2021 (in thousands):

September 30, 2022	Performing		Non-performing		PCI		Total
Real estate loans:
Mortgages	$	155,163	$	570	$	9	$	155,742
Home Equity		47,902		29		-		47,931
Consumer		124,375		-		-		124,375
Total	$	327,440	$	599	$	9	$	328,048

December 31, 2021	Performing		Non-performing		PCI		Total
Real estate loans:
Mortgages	$	150,320	$	608	$	14	$	150,942
Home Equity		50,122		33		-		50,155
Consumer		25,858		-		-		25,858
Total	$	226,300	$	641	$	14	$	226,955

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, 2022 and December 31, 2021 (in thousands):

September 30, 2022	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		PCI		Total Loans Receivables		90 Days or Greater and Accruing
Real estate loans:
Mortgages	$	1,495	$	77	$	229	$	1,801	$	153,932	$	9	$	155,742	$	21
Home Equity		71		-		29		100		47,831		-		47,931		-
Commercial		548		185		2,181		2,914		852,498		1,902		857,314		72
Agricultural		-		-		1,367		1,367		314,871		1,523		317,761		-
Construction		-		-		-		-		79,154		-		79,154		-
Consumer		98		10		-		108		124,267		-		124,375		-
Other commercial loans		107		-		62		169		66,072		-		66,241		-
Other agricultural loans		-		199		-		199		29,310		-		29,509		-
State and political subdivision loans		-		-		-		-		59,926		-		59,926		-
Total	$	2,319	$	471	$	3,868	$	6,658	$	1,727,861	$	3,434	$	1,737,953	$	93

Loans considered non-accrual	$	41	$	133	$	3,775	$	3,949	$	3,169	$	-	$	7,118
Loans still accruing		2,278		338		93		2,709		1,724,692		3,434		1,730,835
Total	$	2,319	$	471	$	3,868	$	6,658	$	1,727,861	$	3,434	$	1,737,953

December 31, 2021	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		PCI		Total Loans Receivables		90 Days or Greater and Accruing
Real estate loans:
Mortgages	$	220	$	170	$	209	$	599	$	150,329	$	14	$	150,942	$	13
Home Equity		103		-		33		136		50,019		-		50,155		33
Commercial		127		115		1,969		2,211		682,982		2,145		687,338		-
Agricultural		31		-		1,367		1,398		308,970		1,643		312,011		-
Construction		-		-		-		-		55,036		-		55,036		-
Consumer		163		1		-		164		25,694		-		25,858		-
Other commercial loans		17		10		92		119		74,466		-		74,585		-
Other agricultural loans		10		-		-		10		39,842		-		39,852		-
State and political subdivision loans		-		-		-		-		45,756		-		45,756		-
Total	$	671	$	296	$	3,670	$	4,637	$	1,433,094	$	3,802	$	1,441,533	$	46

Loans considered non-accrual	$	-	$	-	$	3,624	$	3,624	$	3,992	$	-	$	7,616
Loans still accruing		671		296		46		1,013		1,429,102		3,802		1,433,917
Total	$	671	$	296	$	3,670	$	4,637	$	1,433,094	$	3,802	$	1,441,533

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, 2022 and December 31, 2021, respectively. The balances are presented by class of loan receivable (in thousands):

	September 30, 2022		December 31, 2021
Real estate loans:
Mortgages	$	549	$	595
Home Equity		29		-
Commercial		2,833		2,945
Agricultural		3,295		3,133
Other commercial loans		94		140
Other agricultural loans		318		803
	$	7,118	$	7,616

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, 2022 and December 31, 2021, included within the allowance for loan losses are reserves of $16,000 and $26,000 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, 2022 and the nine months ended September 30, 2021 were as follows (dollars in thousands). There were no loan modifications that were considered TDRs during the three months ended September 30, 2021.

	For the Three Months Ended September 30, 2022
	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:
Home Equity		-		1		$	-		$	8		$	-		$	8
Agricultural		-		2			-			1,137			-			1,137
Total		-		3		$	-		$	1,145		$	-		$	1,145

	For the Nine Months Ended September 30, 2022
	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:
Home Equity		-		1		$	-		$	8		$	-		$	8
Commercial		-		3			-			1,430			-			1,430
Agricultural		-		2			-			1,137			-			1,137
Total		-		6		$	-		$	2,575		$	-		$	2,575

	For the Nine Months Ended September 30, 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		-		3		-		1,407		-		1,407
Total		-		3	$	-	$	1,407	$	-	$	1,407

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 September 30, 2022 and December 31, 2021, respectively (in thousands):

	September 30, 2022								December 31, 2021
	Individually evaluated for impairment		Collectively evaluated for impairment			Total			Individually evaluated for impairment		Collectively evaluated for impairment		Total
Real estate loans:
Residential	$	6	$	999		$	1,005		$	12	$	1,135	$	1,147
Commercial		60		9,877			9,937			61		8,038		8,099
Agricultural		24		4,514			4,538			14		4,715		4,729
Construction		-		678			678			-		434		434
Consumer		4		228			232			-		262		262
Other commercial loans		13		380			393			34		989		1,023
Other agricultural loans		-		1,359			1,359			-		558		558
State and political subdivision loans		-		325			325			-		281		281
Unallocated		-		(176	)		(176	)		-		771		771
Total	$	107	$	18,184		$	18,291		$	121	$	17,183	$	17,304

The following tables roll forward the balance of the ALLL by portfolio segment for the three and nine months ended September 30, 2022 and 2021, respectively (in thousands):

	For the three months ended September 30, 2022
	Balance at June 30, 2022			Charge-offs			Recoveries		Provision			Balance at September 30, 2022			Individually evaluated for impairment		Collectively evaluated for impairment
Real estate loans:
Residential	$	1,015		$	-		$	-	$	(10	)	$	1,005		$	6	$	999
Commercial		9,216			-			-		721			9,937			60		9,877
Agricultural		4,484			-			-		54			4,538			24		4,514
Construction		563			-			-		115			678			-		678
Consumer		464			(13	)		5		(224	)		232			4		228
Other commercial loans		1,173			-			4		(784	)		393			13		380
Other agricultural loans		446			-			-		913			1,359			-		1,359
State and political subdivision loans		323			-			-		2			325			-		325
Unallocated		(114	)		-			-		(62	)		(176	)		-		(176	)
Total	$	17,570		$	(13	)	$	9	$	725		$	18,291		$	107	$	18,184

	For the three months ended September 30, 2021
	Balance at June 30, 2021		Charge-offs			Recoveries		Provision			Balance at September 30, 2021		Individually evaluated for impairment		Collectively evaluated for impairment
Real estate loans:
Residential	$	1,174	$	-		$	-	$	16		$	1,190	$	16	$	1,174
Commercial		7,106		-			-		572			7,678		97		7,581
Agricultural		4,706		-			-		40			4,746		12		4,734
Construction		496		-			-		42			538		-		538
Consumer		85		(7	)		4		236			318		-		318
Other commercial loans		1,328		-			6		(203	)		1,131		35		1,096
Other agricultural loans		583		-			-		(135	)		448		109		339
State and political subdivision loans		404		-			-		(108	)		296		-		296
Unallocated		1,049		-			-		(60	)		989		-		989
Total	$	16,931	$	(7	)	$	10	$	400		$	17,334	$	269	$	17,065

	For the nine months ended September 30, 2022
	Balance at December 31, 2021		Charge-offs			Recoveries		Provision			Balance at September 30, 2022			Individually evaluated for impairment		Collectively evaluated for impairment
Real estate loans:
Residential	$	1,147	$	-		$	-	$	(142	)	$	1,005		$	6	$	999
Commercial		8,099		-			-		1,838			9,937			60		9,877
Agricultural		4,729		-			-		(191	)		4,538			24		4,514
Construction		434		-			-		244			678			-		678
Consumer		262		(30	)		15		(15	)		232			4		228
Other commercial loans		1,023		(434	)		11		(207	)		393			13		380
Other agricultural loans		558		-			-		801			1,359			-		1,359
State and political subdivision loans		281		-			-		44			325			-		325
Unallocated		771		-			-		(947	)		(176	)		-		(176	)
Total	$	17,304	$	(464	)	$	26	$	1,425		$	18,291		$	107	$	18,184

	For the nine months ended September 30, 2021
	Balance at December 31, 2020		Charge-offs			Recoveries		Provision			Balance at September 30, 2021		Individually evaluated for impairment		Collectively evaluated for impairment
Real estate loans:
Residential	$	1,174	$	-		$	-	$	16		$	1,190	$	16	$	1,174
Commercial		6,216		-			89		1,373			7,678		97		7,581
Agricultural		4,953		-			-		(207	)		4,746		12		4,734
Construction		122		-			-		416			538		-		538
Consumer		321		(16	)		16		(3	)		318		-		318
Other commercial loans		1,226		(133	)		13		25			1,131		35		1,096
Other agricultural loans		864		-			-		(416	)		448		109		339
State and political subdivision loans		479		-			-		(183	)		296		-		296
Unallocated		460		-			-		529			989		-		989
Total	$	15,815	$	(149	)	$	118	$	1,550		$	17,334	$	269	$	17,065

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 and severity 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, 2022, the qualitative factors for levels and trends in delinquency, levels and trends in charge-offs and recoveries and general economic conditions and unemployment were reduced for consumer loans due to the significant change in the composition of the consumer loan portfolio. Due to this composition change, the qualitative factor the nature of the portfolio was increased. The provision for commercial real estate and construction loans was driven by loan growth in these pools. The provision for other commercial loans was driven by an increase in the historical loss factor due to losses in 2022. The negative provision for other agricultural loans was due to a decrease in the loan balances during 2022.

For the nine months ended September 30, 2022, the qualitative factors for general economic conditions and unemployment were reduced for all loan categories due to a return to a more normalized activity level since the Covid-19 pandemic began during which the factors were increased. The change in these factors explains the negative provision for residential and agricultural real estate loans. The qualitative factors for levels and trends in delinquency, levels and trends in charge-offs and recoveries and general economic conditions and unemployment were reduced for consumer loans due to the significant change in the composition of the consumer loan portfolio. Due to this composition change, the qualitative factor the nature of the portfolio was increased. The provision for commercial real estate, construction, and state and political loans was driven by loan growth in these pools. The provision for other commercial loans was driven by an increase in the historical loss factor due to losses in 2022. The negative provision for other agricultural loans was due to a decrease in the loan balances during 2022.

For the three months ended September 30, 2021, the allowance for commercial real estate 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 volume and severity of past due loans was decreased for other commercial loans 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 state and political loans due to a decrease in classified loans.

For the nine months ended September 30, 2021, the allowance for commercial real estate loans 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 loans and other commercial loans was decreased due to a decrease in past due loans. The factor related to volume of non-accrual loans was decreased for commercial real estate loans due to a decrease in the volume of non-accrual loans. The factor related to the volume and severity of classified, adversely or graded loans was decreased for agricultural real estate, other agricultural and state and political loans due to a decrease in classified loans. The factors for trends in volume, terms and nature of the portfolio, experience and depth of lending management and relevant staff, and changes in value of underlying value of collateral were increased for the construction loan portfolio due to the increase in the overall size of the portfolio, the increase in the size of individual construction loans and the complexity of the construction projects funded.

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, 2022 and December 31, 2021, included within other assets are $877,000 and $1,180,000, respectively, of foreclosed assets. As of September 30, 2022, included within the foreclosed assets are $316,000 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, 2022, the Company had initiated formal foreclosure proceedings on $185,000 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.