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LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES

12 Months Ended

Dec. 31, 2022

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, 2022 and 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, as well as how those segments are analyzed within the allowance for loan losses as of December 31, 2022 and 2021 (in thousands):

2022	Total Loans		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Collectively evaluated for impairment
Real estate loans:
Residential	$	210,213	$	335	$	9	$	209,869
Commercial		876,569		5,675		1,856		869,038
Agricultural		313,614		5,380		1,441		307,055
Construction		80,691		-		-		80,691
Consumer		86,650		4		-		86,646
Other commercial loans		63,222		102		-		63,120
Other agricultural loans		34,832		473		-		34,097
State and political subdivision loans		59,208		-		-		59,208
Total		1,724,999		11,969		3,306		1,709,724
Allowance for loan losses		18,552		102		-		18,450
Net loans	$	1,706,447	$	11,867	$	3,306	$	1,691,274

2021
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 PPP loans as of December 31, 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 December 31, 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.

As of December 31, 2022 and 2021, net unamortized loan fees, including PPP fees, and costs of $2,573,000 and $2,038,000, 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 $3,306,000 and $3,802,000 at December 31, 2022 and 2021, 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, 2022 and 2021 (in thousands):

	December 31, 2022			December 31, 2021
Balance at beginning of period	$	370		$	788
Accretion		(759	)		(499	)
Reclassification of non-accretable discount		1,212			81
Balance at end of period	$	823		$	370

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

	December 31, 2022		December 31, 2021
Outstanding balance	$	5,758	$	6,159
Carrying amount		3,306		3,802

Real estate loans serviced for Freddie Mac, Fannie Mae and the FHLB, which are not included in the Consolidated Balance Sheet, totaled $187,754,000 and $197,037,000 at December 31, 2022 and 2021, respectively. Loans sold to Freddie Mac and Fannie Mae were sold without recourse and total $177,575,000 and $184,897,000 at December 31, 2022 and 2021, 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 2022 or 2021. The MPF portfolio balance was $10,179,000 and $12,140,000 at December 31, 2022 and 2021, respectively. The FHLB maintains a first-loss position for the MPF portfolio that totals $161,000. Should the FHLB exhaust its first-loss position, recourse to the Bank’s credit enhancement would be up to the next $348,000 of losses. The Bank did not experience any losses for the MPF portfolio during 2022, 2021 or 2020.

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 consist 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, 2022 and 2021, if applicable (in thousands):

	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
2022
Real estate loans:
Mortgages	$	395	$	242	$	39	$	281	$	4
Home Equity		71		39		15		54		-
Commercial		6,655		5,314		361		5,675		57
Agricultural		6,062		5,192		188		5,380		24
Consumer		4		-		4		4		4
Other commercial loans		797		32		70		102		13
Other agricultural loans		669		473		-		473		-
Total	$	14,653	$	11,292	$	677	$	11,969	$	102


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 table includes the average investment in impaired loans and the income recognized on impaired loans for 2022, 2021 and 2020 (in thousands):

					Interest
	Average		Interest		Income
	Recorded		Income		Recognized
2022	Investment		Recognized		Cash Basis
Real estate loans:
Mortgages	$	421	$	12	$	-
Home Equity		64		4		-
Commercial		6,216		207		10
Agricultural		5,540		126		-
Consumer		1		-		-
Other commercial loans		260		3		-
Other agricultural loans		538		4		-
Total	$	13,040	$	356	$	10

2021
Real estate loans:
Mortgages	$	682	$	16	$	-
Home Equity		99		4		-
Commercial		8,789		288		31
Agricultural		4,562		82		-
Other commercial loans		704		2		-
Other agricultural loans		1,044		3		-
Total	$	15,880	$	395	$	31

					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

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

2022	Pass		Special Mention		Substandard		Doubtful		Loss		Ending Balance
Real estate loans:
Commercial	$	842,912	$	28,047	$	5,610	$	-	$	-	$	876,569
Agricultural		295,443		11,960		6,211		-		-		313,614
Construction		75,703		2,642		2,346		-		-		80,691
Other commercial loans		59,902		2,953		337		30		-		63,222
Other agricultural loans		32,708		1,307		817		-		-		34,832
State and political subdivision loans		59,208		-		-		-		-		59,208
Total	$	1,365,876	$	46,909	$	15,321	$	30	$	-	$	1,428,136


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 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, 2022 and 2021 (in thousands):

2022	Performing		Non-performing		PCI		Total
Real estate loans:
Mortgages	$	161,998	$	562	$	9	$	162,569
Home Equity		47,615		29		-		47,644
Consumer		86,643		7		-		86,650
Total	$	296,256	$	598	$	9	$	296,863


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 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, 2022 and 2021 (in thousands):

	30-59 Days		60-89 Days		90 Days		Total Past						Total Financing		90 Days and
2022	Past Due		Past Due		Or Greater		Due		Current		PCI		Receivables		Accruing
Real estate loans:
Mortgages	$	356	$	132	$	229	$	717	$	161,843	$	9	$	162,569	$	-
Home Equity		48		9		29		86		47,558		-		47,644		-
Commercial		1,065		115		1,788		2,968		871,745		1,856		876,569		-
Agricultural		-		-		1,368		1,368		310,805		1,441		313,614		-
Construction		-		-		-		-		80,691		-		80,691		-
Consumer		147		-		7		154		86,496		-		86,650		7
Other commercial loans		1,660		35		32		1,727		61,495		-		63,222		-
Other agricultural loans		-		-		-		-		34,832		-		34,832		-
State and political
subdivision loans		-		-		-		-		59,208		-		59,208		-
Total	$	3,276	$	291	$	3,453	$	7,020	$	1,714,673	$	3,306	$	1,724,999	$	7

Loans considered non-accrual	$	46	$	76	$	3,446	$	3,568	$	3,370	$	-	$	6,938
Loans still accruing		3,230		215		7		3,452		1,711,303		3,306		1,718,061
Total	$	3,276	$	291	$	3,453	$	7,020	$	1,714,673	$	3,306	$	1,724,999


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

	2022		2021
Real estate loans:
Mortgages	$	562	$	595
Home Equity		29		-
Commercial		2,778		2,945
Agricultural		3,222		3,133
Other commercial loans		62		140
Other agricultural loans		285		803
	$	6,938	$	7,616

Interest income on loans would have increased by approximately $676,000, $573,000 and $756,000 during 2022, 2021 and 2020, respectively, if these loans had performed in accordance with their terms.

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, 2022, 2021 and 2020, included within the allowance for loan losses are reserves of $15,000, $26,000 and $257,000, respectively, that are associated with loans modified as TDRs.

Loan modifications that are considered TDRs completed during the years ended December 31, 2022, 2021 and 2020 were as follows (dollars in thousands):

	Number of contracts				Pre-modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
2022	Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification
Real estate loans:
Home Equity		-		1	$	-	$	8	$	-	$	8
Commercial		-		4		-		2,301		-		2,301
Agricultural		-		2		-		1,137		-		1,137
Total		-		7	$	-	$	3,446	$	-	$	3,446

2021
Real estate loans:
Commercial	-	4	$	-	$	1,469	$	-	$	1,469
Agricultural	-	4		-		2,090		-		2,090
Total	-	8	$	-	$	3,559	$	-	$	3,559

2020
Real estate loans:
Mortgages	-	1	$	-	$	2	$	-	$	2
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

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, 2022, 2021 and 2020, respectively, and that subsequently defaulted during these reporting periods (dollars in thousands):

	December 31, 2022				December 31, 2021				December 31, 2020
	Number of contracts		Recorded investment		Number of contracts		Recorded investment		Number of contracts		Recorded investment
Real estate loans:
Commercial		-	$	-		-	$	-		1	$	110
Total recidivism		-	$	-		-	$	-		1	$	110

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, 2022 and 2021 included with other assets are $543,000 and $1,180,000, respectively, of foreclosed assets. As of December 31, 2022, included within the foreclosed assets is $241,000 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, 2022, the Company has initiated formal foreclosure proceedings on $185,000 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, 2022, 2021 and 2020 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, 2022, 2021 and 2020 (in thousands):

	Balance at December 31, 2021		Charge-offs			Recoveries		Provision			Balance at December 31, 2022		Individually evaluated for impairment		Collectively evaluated for impairment
Real estate loans:
Residential	$	1,147	$	-		$	-	$	(91	)	$	1,056	$	4	$	1,052
Commercial		8,099		-			3		2,018			10,120		57		10,063
Agricultural		4,729		-			-		(140	)		4,589		24		4,565
Construction		434		-			-		367			801		-		801
Consumer		262		(37	)		21		(111	)		135		4		131
Other commercial loans		1,023		(435	)		13		439			1,040		13		1,027
Other agricultural loans		558		-			-		(69	)		489		-		489
State and political subdivision loans		281		-			-		41			322		-		322
Unallocated		771		-			-		(771	)		-		-		-
Total	$	17,304	$	(472	)	$	37	$	1,683		$	18,552	$	102	$	18,450

	Balance at December 31, 2020		Charge-offs			Recoveries		Provision			Balance at December 31, 2021		Individually evaluated for impairment		Collectively evaluated for impairment
Real estate loans:
Residential	$	1,174	$	-		$	-	$	(27	)	$	1,147	$	12	$	1,135
Commercial		6,216		(54	)		89		1,848			8,099		61		8,038
Agricultural		4,953		-			-		(224	)		4,729		14		4,715
Construction		122		-			-		312			434		-		434
Consumer		321		(27	)		21		(53	)		262		-		262
Other commercial loans		1,226		(133	)		43		(113	)		1,023		34		989
Other agricultural loans		864		-			-		(306	)		558		-		558
State and political subdivision loans		479		-			-		(198	)		281		-		281
Unallocated		460		-			-		311			771		-		771
Total	$	15,815	$	(214	)	$	153	$	1,550		$	17,304	$	121	$	17,183

	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

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:

2022

Residential - There was a decrease in the historical loss factor for residential loans when comparing 2022 and 2021 and a slight decrease in the specific reserve for residential loans between 2022 and 2021. The qualitative factor for national, state, regional and local economic trends and business conditions was decreased for residential loan categories due to a general improvement in economic activity and decrease in unemployment as a result of the reduced impact of the Covid-19 pandemic during 2022. The increase in the provision for commercial loans was due to the organic loan growth experienced in 2022.

Commercial real estate– There was a decrease in the historical loss factor and the specific reserve for commercial real estate loans from 2021 to 2022. The qualitative factor for national, state, regional and local economic trends and business conditions was decreased for commercial real estate loan categories due to a general improvement in economic activity and decrease in unemployment as a result of the reduced impact of the Covid-19 pandemic during 2022.

Agricultural real estate – There was a decrease in the historical loss factor for agricultural real estate loans from 2021 to 2022. The specific reserve for agricultural real estate loans increased slightly from 2021 to 2022. The qualitative factor for national, state, regional and local economic trends and business conditions was decreased for agricultural real estate loan categories due to a general improvement in economic activity and decrease in unemployment as a result of the reduced impact of the Covid-19 pandemic during 2022.

Construction - There was no change in the historical loss factor or specific reserve for construction loans from 2021 to 2022. The qualitative factor for the volume and severity of classified, adversely or graded loans was increased for construction loans during 2022 due to an increase in special mention and substandard loans. The qualitative factor for national, state, regional and local economic trends and business conditions was decreased for construction loan categories due to a general improvement in economic activity and decrease in unemployment as a result of the reduced impact of the Covid-19 pandemic during 2022.

Consumer - There was a decrease in the historical loss factor for consumer loans from 2021 to 2022. There was a change in the composition of the loan portfolio with a large increase in short term student loans, which requires a lower provision. The qualitative factor for national, state, regional and local economic trends and business conditions was decreased for consumer loan categories due to a general improvement in economic activity and decrease in unemployment as a result of the reduced impact of the Covid-19 pandemic during 2022.

Other commercial - There was an increase in the historical loss factor for other commercial loans when comparing 2021 and 2022. The specific reserve for other commercial loans decreased from 2021 to 2022. The qualitative factor for national, state, regional and local economic trends and business conditions was decreased for other commercial loan categories due to a general improvement in economic activity and decrease in unemployment as a result of the reduced impact of the Covid-19 pandemic during 2022.

Other agricultural - There was no change in the historical loss factor or specific reserve for other agricultural loans from 2021 to 2022. The qualitative factor for national, state, regional and local economic trends and business conditions was decreased for agricultural real estate loan categories due to a general improvement in economic activity and decrease in unemployment as a result of the reduced impact of the Covid-19 pandemic during 2022.

Municipal loans - There was no change in the historical loss factor or specific reserve for municipal loans from 2021 to 2022. The qualitative factor for national, state, regional and local economic trends and business conditions was decreased for municipal loan categories due to a general improvement in economic activity and decrease in unemployment as a result of the reduced impact of the Covid-19 pandemic during 2022.

2021

Residential - There was a decrease in the historical loss factor for residential loans when comparing 2020 and 2021 and a slight decrease in the specific reserve for residential loans between 2020 and 2021. The qualitative factor for the level of past due loans for residential real estate loans was decreased due to a decrease in past due loans during 2021.

Commercial real estate – There was a decrease in the historical loss factor and the specific reserve for commercial real estate loans from 2020 to 2021. The qualitative factor for the volume of non-accrual loans was decreased for commercial real estate loans due to a decrease in the volume of non-accrual loans during 2021. The decrease in the qualitative factors was offset by the increase in the commercial real estate portfolio, which resulted in the provision for 2021.

Agricultural real estate – There was no change in the historical loss factor for agricultural real estate loans from 2020 to 2021 The specific reserve for agricultural real estate loans decreased from 2020 to 2021. The qualitative factor for the volume and severity of classified, adversely or graded loans was decreased for agricultural real estate loans during 2021 due to a decrease in substandard loans.

Construction - There was no change in the historical loss factor or specific reserve for construction loans from 2020 to 2021. The qualitative 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 during 2021 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.

Consumer - There was a decrease in the historical loss factor for consumer loans from 2020 to 2021. The negative provision was due to a decrease in consumer loans.

Other commercial - There was an increase in the historical loss factor for other commercial loans when comparing 2020 and 2021. The specific reserve for other commercial loans decreased from 2020 to 2021. The qualitative factors for the level of past due loans, the volume of non-accrual loans and the volume and severity of classified, adversely or graded loans were decreased for other commercial loans due to a decrease in past due loans, non-accrual loans and substandard loans during 2021.

Other agricultural - There was a decrease in the historical loss factor for other agricultural loans from 2020 to 2021. The specific reserve for other agricultural loans decreased from 2020 to 2021. The qualitative factor for the volume and severity of classified, adversely or graded loans was decreased for other agricultural loans during 2021 due to a decrease in substandard loans. The negative provision was primarily due to the overall decrease in other agricultural loans.

Municipal loans - There was no change in the historical loss factor or specific reserve for municipal loans from 2020 to 2021. The qualitative factor for the volume and severity of classified, adversely or graded loans was decreased for municipal loans during 2021 due to a decrease in substandard loans. The negative provision was primarily due to the overall decrease in other municipal loans during 2021.