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Loans (Tables)

6 Months Ended

Jun. 30, 2020

Loan Portfolio and Allowance for Loan Losses

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 June 30, 2020 and December 31, 2019, a substantial portion of its debtors’ ability to honor their contracts is dependent on the economic conditions within these regions. The following table summarizes the primary segments of the loan portfolio and how those segments are analyzed within the allowance for loan losses as of June 30, 2020 and December 31, 2019 (in thousands):

June 30, 2020	Total Loans		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Collectively evaluated for impairment
Real estate loans:
Residential	$	210,789	$	1,194	$	21	$	209,574
Commercial		513,598		11,829		3,820		497,949
Agricultural		313,136		3,470		1,781		307,885
Construction		31,744		-		-		31,744
Consumer		30,973		-		-		30,973
Other commercial loans		132,503		1,741		-		130,762
Other agricultural loans		44,912		1,289		381		43,242
State and political subdivision loans		85,978		-		-		85,978
Total		1,363,633		19,523		6,003		1,338,107
Allowance for loan losses		14,827		888		-		13,939
Net loans	$	1,348,806	$	18,635	$	6,003	$	1,324,168

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

Purchase Accounting Adjustments Related to Purchased Impaired Loans Acquired

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

Accretable Yield for Purchased Credit Impaired Loans

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

	Three months ended June 30,						Six months ended June 30,
	2020			2019			2020			2019
Balance at beginning of period	$	88		$	102		$	89		$	104
Acquisition of Midcoast		966			-			966			-
Accretion		(67	)		(2	)		(68	)		(4	)
Balance at end of period	$	987		$	100		$	987		$	100

Loans Acquired with Specific Evidence of Deterioration in Credit Quality

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

	June 30, 2020		December 31, 2019
Outstanding balance	$	10,589	$	4,072
Carrying amount		6,003		1,282

Impaired Loan Receivables with Associated Allowance Amount

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):

June 30, 2020	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
Real estate loans:
Mortgages	$	1,272	$	756	$	297	$	1,053	$	20
Home Equity		163		79		62		141		10
Commercial		12,402		10,613		1,216		11,829		452
Agricultural		3,628		1,535		1,935		3,470		77
Other commercial loans		2,360		1,375		366		1,741		175
Other agricultural loans		1,377		125		1,164		1,289		154
Total	$	21,202	$	14,483	$	5,040	$	19,523	$	888

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

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

	For the Six Months Ended
	June 30, 2020						June 30, 2019
	Average Recorded Investment		Interest Income Recognized		Interest Income Recognized Cash Basis		Average Recorded Investment		Interest Income Recognized		Interest Income Recognized Cash Basis
Real estate loans:
Mortgages	$	1,047	$	10	$	-	$	1,088	$	9	$	-
Home Equity		144		3		-		90		2		-
Commercial		11,529		219		2		11,699		230		11
Agricultural		3,761		40		-		5,205		56		-
Consumer		3		-		-		1		-		-
Other commercial loans		1,822		2		-		2,096		1		-
Other agricultural loans		1,283		4		-		1,424		4		-
Total	$	19,589	$	278	$	2	$	21,603	$	302	$	11

	For the Three Months Ended
	June 30, 2020						June 30, 2019
Real estate loans:
Mortgages	$	1,062	$	5	$	-	$	1,073	$	5	$	-
Home Equity		142		1		-		95		1		-
Commercial		11,572		115		-		10,849		111		5
Agricultural		3,746		19		-		4,835		24		-
Consumer		2		-		-		2		-		-
Other commercial loans		1,805		1		-		2,056		-		-
Other agricultural loans		1,290		2		-		1,416		2		-
Total	$	19,619	$	143	$	-	$	20,326	$	143	$	5

Financing Receivable Credit Exposures by Internally Assigned Grades

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

June 30, 2020	Pass		Special Mention		Substandard		Doubtful		Loss		Ending Balance
Real estate loans:
Commercial	$	499,279	$	6,022	$	8,258	$	39	$	-	$	513,598
Agricultural		282,906		15,843		14,387		-		-		313,136
Construction		31,744		-		-		-		-		31,744
Other commercial loans		126,757		1,626		4,060		60		-		132,503
Other agricultural loans		41,151		1,027		2,734		-		-		44,912
State and political subdivision loans		85,592		-		386		-		-		85,978
Total	$	1,067,429	$	24,518	$	29,825	$	99	$	-	$	1,121,871

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

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

June 30, 2020	Performing		Non-performing		PCI		Total
Real estate loans:
Mortgages	$	152,008	$	1,061	$	21	$	153,090
Home Equity		57,644		55		-		57,699
Consumer		30,950		23		-		30,973
Total	$	240,602	$	1,139	$	21	$	241,762

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

Aging Analysis of Past Due Loan Receivables

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table includes an aging analysis of the recorded investment of past due loan receivables as of June 30, 2020 and December 31, 2019 (in thousands):

June 30, 2020	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		PCI		Total Financing Receivables		90 Days or Greater and Accruing
Real estate loans:
Mortgages	$	129	$	384	$	511	$	1,024	$	152,045	$	21	$	153,090	$	169
Home Equity		227		47		51		325		57,374		-		57,699		-
Commercial		1,210		913		4,942		7,065		502,713		3,820		513,598		416
Agricultural		1,250		1,928		4		3,182		308,173		1,781		313,136		-
Construction		-		-		-		-		31,744		-		31,744		-
Consumer		136		33		20		189		30,784		-		30,973		20
Other commercial loans		78		2		1,642		1,722		130,781		-		132,503		49
Other agricultural loans		60		1,290		20		1,370		43,161		381		44,912		-
State and political subdivision loans		-		-		-		-		85,978		-		85,978		-
Total	$	3,090	$	4,597	$	7,190	$	14,877	$	1,342,753	$	6,003	$	1,363,633	$	654

Loans considered non-accrual	$	2	$	2,699	$	6,536	$	9,237	$	1,456	$	-	$	10,693
Loans still accruing		3,088		1,898		654		5,640		1,341,297		6,003		1,352,940
Total	$	3,090	$	4,597	$	7,190	$	14,877	$	1,342,753	$	6,003	$	1,363,633

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

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

Loan Receivables on Nonaccrual Status

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

	June 30, 2020		December 31, 2019
Real estate loans:
Mortgages	$	892	$	903
Home Equity		55		59
Commercial		5,005		5,080
Agricultural		2,046		2,578
Consumer		3		6
Other commercial loans		1,657		1,837
Other agricultural loans		1,035		1,073
	$	10,693	$	11,536

Troubled Debt Restructurings on Financing Receivables

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

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

Real estate loans:
Commercial		-		2	$	-	$	406	$	-	$	406
Total		-		2	$	-	$	406	$	-	$	406

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

Real estate loans:
Commercial		-		2	$	-	$	406	$	-	$	406
Agricultural		-		1		-		150		-		150
Total		-		3	$	-	$	556	$	-	$	556

	For the Three Months Ended June 30, 2019
	Number of contracts				Pre-modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
	Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification
Real estate loans:
Mortgages		-		1	$	-	$	4	$	-	$	4
Home Equity		-		1		-		40		-		40
Commercial		-		4		-		222		-		222
Total		-		6	$	-	$	266	$	-	$	266

	For the Six Months Ended June 30, 2019
	Number of contracts				Pre-modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
	Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification
Real estate loans:
Mortgages		-		1	$	-	$	4	$	-	$	4
Home Equity		-		1		-		40		-		40
Commercial		-		5		-		799		-		799
Total		-		7	$	-	$	843	$	-	$	843

Subsequent Default Recorded Investment

Recidivism, or the borrower defaulting on its obligation pursuant to a modified loan, results in the loan once again becoming a non-accrual loan. Recidivism on modified loans occurs at a notably higher rate than do defaults on new origination loans, so modified loans present a higher risk of loss than do new origination loans. The following table presents the recorded investment in loans that were modified as TDRs during each 12-month period prior to the current reporting periods, which began January 1, 2020 and 2019 (6 month periods) and April 1, 2020 and 2019 (3 month periods), respectively, and that subsequently defaulted during these reporting periods (dollars in thousands):

	For the Three Months Ended								For the Six Months Ended
	June 30, 2020				June 30, 2019				June 30, 2020				June 30, 2019
	Number of contracts		Recorded investment		Number of contracts		Recorded investment		Number of contracts		Recorded investment		Number of contracts		Recorded investment
Real estate loans:
Commercial		-	$	-		1	$	542		-	$	-		1	$	542
Agricultural		-		-		1		1,439		-		-		1		1,439
Other agricultural loans		-		-		3		137		-		-		4		261
Total recidivism		-	$	-		5	$	2,118		-	$	-		6	$	2,242

Allowance for Loan Losses by Impairment Method

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 June 30, 2020 and December 31, 2019, respectively (in thousands):

	June 30, 2020						December 31, 2019
	Individually evaluated for impairment		Collectively evaluated for impairment		Total		Individually evaluated for impairment		Collectively evaluated for impairment		Total
Real estate loans:
Residential	$	30	$	1,176	$	1,206	$	32	$	1,082	$	1,114
Commercial		452		4,492		4,944		251		4,298		4,549
Agricultural		77		4,984		5,061		151		4,871		5,022
Construction		-		81		81		-		43		43
Consumer		-		362		362		-		112		112
Other commercial loans		175		1,026		1,201		147		1,108		1,255
Other agricultural loans		154		667		821		154		807		961
State and political subdivision loans		-		547		547		-		536		536
Unallocated		-		604		604		-		253		253
Total	$	888	$	13,939	$	14,827	$	735	$	13,110	$	13,845

Roll forward of Allowance for Loan Losses by Portfolio Segment

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

	For the three months ended June 30, 2020
	Balance at March 31, 2020		Charge-offs			Recoveries		Provision			Balance at June 30, 2020
Real estate loans:
Residential	$	1,154	$	-		$	-	$	52		$	1,206
Commercial		4,729		-			33		182			4,944
Agricultural		4,878		-			-		183			5,061
Construction		56		-			-		25			81
Consumer		117		(10	)		4		251			362
Other commercial loans		1,297		-			3		(99	)		1,201
Other agricultural loans		835		-			-		(14	)		821
State and political subdivision loans		558		-			-		(11	)		547
Unallocated		623		-			-		(19	)		604
Total	$	14,247	$	(10	)	$	40	$	550		$	14,827

	For the three months ended June 30, 2019
	Balance at March 31, 2019		Charge-offs			Recoveries		Provision			Balance at June 30, 2019
Real estate loans:
Residential	$	1,089	$	-		$	-	$	(23	)	$	1,066
Commercial		4,130		(93	)		-		363			4,400
Agricultural		4,392		-			-		140			4,532
Construction		32		-			-		4			36
Consumer		124		(8	)		7		(5	)		118
Other commercial loans		1,283		(38	)		2		81			1,328
Other agricultural loans		756		-			-		(15	)		741
State and political subdivision loans		565		-			-		(26	)		539
Unallocated		713		-			-		(169	)		544
Total	$	13,084	$	(139	)	$	9	$	350		$	13,304

	For the six months ended June 30, 2020
	Balance at December 31, 2019		Charge-offs			Recoveries		Provision			Balance at June 30, 2020
Real estate loans:
Residential	$	1,114	$	-		$	-	$	92		$	1,206
Commercial		4,549		(1	)		34		362			4,944
Agricultural		5,022		-			-		39			5,061
Construction		43		-			-		38			81
Consumer		112		(18	)		12		256			362
Other commercial loans		1,255		-			5		(59	)		1,201
Other agricultural loans		961		-			-		(140	)		821
State and political subdivision loans		536		-			-		11			547
Unallocated		253		-			-		351			604
Total	$	13,845	$	(19	)	$	51	$	950		$	14,827

	For the six months ended June 30, 2019
	Balance at December 31, 2018		Charge-offs			Recoveries		Provision			Balance at June 30, 2019
Real estate loans:
Residential	$	1,105	$	-		$	-	$	(39	)	$	1,066
Commercial		4,115		(293	)		-		578			4,400
Agricultural		4,264		-			-		268			4,532
Construction		58		-			-		(22	)		36
Consumer		120		(22	)		18		2			118
Other commercial loans		1,354		(38	)		5		7			1,328
Other agricultural loans		752		-			-		(11	)		741
State and political subdivision loans		762		-			-		(223	)		539
Unallocated		354		-			-		190			544
Total	$	12,884	$	(353	)	$	23	$	750		$	13,304