| Loans | 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. Although the Company had a diversified loan portfolio at September 30, 2017 and December 31, 2016, 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, 2017 and December 31, 2016 (in thousands): September 30, 2017 Total Loans Individually evaluated for impairment Loans acquired with deteriorated credit quality Collectively evaluated for impairment Real estate loans: Residential $ 206,389 $ 864 $ 34 $ 205,491 Commercial 273,624 13,759 2,016 257,849 Agricultural 207,052 3,964 733 202,355 Construction 17,074 - - 17,074 Consumer 10,784 4 - 10,780 Other commercial loans 56,222 4,228 538 51,456 Other agricultural loans 34,066 1,418 - 32,648 State and political subdivision loans 101,951 - - 101,951 Total 907,162 24,237 3,321 879,604 Allowance for loan losses 10,447 442 - 10,005 Net loans $ 896,715 $ 23,795 $ 3,321 $ 869,599 December 31, 2016 Real estate loans: Residential $ 207,423 $ 957 $ 35 $ 206,431 Commercial 252,577 5,742 1,969 244,866 Agricultural 123,624 3,346 738 119,540 Construction 25,441 - - 25,441 Consumer 11,005 - 4 11,001 Other commercial loans 58,639 5,994 621 52,024 Other agricultural loans 23,388 1,654 - 21,734 State and political subdivision loans 97,514 - - 97,514 Total 799,611 17,693 3,367 778,551 Allowance for loan losses 8,886 487 - 8,399 Net loans $ 790,725 $ 17,206 $ 3,367 $ 770,152 Purchased loans acquired in The First National Bank of Fredericksburg (FNB) acquisition, completed in 2015, were recorded at fair value on their purchase 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. 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. Based upon management's review, there were no material increases or decreases in the expected cash flows of these loans between December 11, 2015 (the "acquisition date") and September 30, 2017. 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 $3,321,000 and $3,367,000 at September 30, 2017 and December 31, 2016, respectively. The carrying value of the PCI loans was determined by projected discounted contractual cash flows. Changes in the accretable yield for PCI loans were as follows for the three and nine months ended September 30, 2017 and 2016, respectively (in thousands): Three months ended Nine months ended September 30, September 30, 2017 2016 2017 2016 Balance at beginning of period $ 167 $ 464 $ 389 $ 637 Accretion (90 ) (88 ) (312 ) (261 ) Balance at end of period $ 77 $ 376 $ 77 $ 376 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, 2017 December 31, 2016 Outstanding balance $ 6,328 $ 6,487 Carrying amount 3,321 3,367 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, c ertain 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. The following table includes the recorded investment and unpaid principal balances for impaired financing receivables by class, excluding PCI loans, with the associated allowance amount, if applicable (in thousands) Recorded Recorded Unpaid Investment Investment Total Principal With No With Recorded Related September 30, 2017 Balance Allowance Allowance Investment Allowance Real estate loans: Mortgages $ 865 $ 280 $ 515 $ 795 $ 17 Home Equity 69 16 53 69 9 Commercial 16,240 13,329 430 13,759 67 Agricultural 3,983 1,933 2,031 3,964 99 Construction - - - - - Consumer 4 2 2 4 2 Other commercial loans 4,690 3,759 469 4,228 208 Other agricultural loans 1,442 1,309 109 1,418 40 State and political subdivision loans - - - - - Total $ 27,293 $ 20,628 $ 3,609 $ 24,237 $ 442 December 31, 2016 Real estate loans: $ - Mortgages $ 953 $ 570 $ 330 900 $ 22 Home Equity 57 - 57 57 10 Commercial 7,958 5,697 45 5,742 45 Agricultural 3,347 2,000 1,347 3,347 54 Construction - - - - - Consumer - - - - - Other commercial loans 6,159 5,135 859 5,994 326 Other agricultural loans 1,653 1,629 24 1,653 30 State and political subdivision loans - - - - - Total $ 20,127 $ 15,031 $ 2,662 $ 17,693 $ 487 The following tables includes the average balance of impaired financing receivables by class and the income recognized on these receivables for the three and nine month periods ended September 30, 2017 and 2016(in thousands): For the Three Months Ended September 30, 2017 September 30, 2016 Interest Interest Average Interest Income Average Interest Income Recorded Income Recognized Recorded Income Recognized Investment Recognized Cash Basis Investment Recognized Cash Basis Real estate loans: Mortgages $ 741 $ 3 $ - $ 607 $ 1 $ - Home Equity 70 1 - 58 1 - Commercial 13,663 122 2 5,980 35 - Agricultural 3,799 27 - - 2 - Construction - - - - - - Consumer 4 - - - - - Other commercial loans 4,337 54 25 5,298 53 2 Other agricultural loans 1,443 10 - - - - State and political subdivision loans - - - - - - Total $ 24,057 $ 217 $ 27 $ 11,943 $ 92 $ 2 For the Nine Months ended September 30, 2017 September 30, 2016 Interest Interest Average Interest Income Average Interest Income Recorded Income Recognized Recorded Income Recognized Investment Recognized Cash Basis Investment Recognized Cash Basis Real estate loans: Mortgages $ 874 $ 9 $ - $ 486 $ 10 $ - Home Equity 62 3 - 59 3 - Commercial 10,812 280 5 6,088 87 - Agricultural 3,609 90 - 110 7 - Construction - - - - - - Consumer 2 - - - - - Other commercial loans 4,988 131 52 5,743 187 5 Other agricultural loans 1,528 55 - 70 3 - State and political subdivision loans - - - - - - Total $ 21,875 $ 568 $ 57 $ 12,556 $ 297 $ 5 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 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 and agricultural loans are reviewed annually to ensure the appropriateness of the loan grade. In addition, the Company engages an external consultant on at least an annual basis to 1) review a minimum of 50% of the dollar volume of the commercial loan portfolio on an annual basis (60% for 2016), 2) review new loans originated for over $1.0 million in the last year, 3) review a majority of borrowers with commitments greater than or equal to $1.0 million, 4) review selected loan relationships over $750,000 which are over 30 days past due or classified Special Mention, Substandard, Doubtful, or Loss, and 5) such other loans which management or the consultant deems appropriate. The following tables represent credit exposures by internally assigned grades as of September 30, 2017 and December 31, 2016 (in thousands) September 30, 2017 Pass Special Mention Substandard Doubtful Loss Ending Balance Real estate loans: Commercial $ 246,405 $ 15,069 $ 12,150 $ - $ - $ 273,624 Agricultural 195,469 4,824 6,759 - - 207,052 Construction 17,074 - - - - 17,074 Other commercial loans 51,341 635 4,165 81 - 56,222 Other agricultural loans 31,791 198 2,077 - - 34,066 State and political subdivision loans 88,251 2,891 10,809 - - 101,951 Total $ 630,331 $ 23,617 $ 35,960 $ 81 $ - $ 689,989 December 31, 2016 Pass Special Mention Substandard Doubtful Loss Ending Balance Real estate loans: Commercial $ 225,185 $ 14,045 $ 13,347 $ - $ - $ 252,577 Agricultural 110,785 8,231 4,608 - - 123,624 Construction 25,441 - - - - 25,441 Other commercial loans 51,396 2,049 5,105 89 - 58,639 Other agricultural loans 20,178 1,733 1,477 - - 23,388 State and political subdivision loans 83,620 13,066 828 - - 97,514 Total $ 516,605 $ 39,124 $ 25,365 $ 89 $ - $ 581,183 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, 2017 and December 31, 2016 ( in thousands) September 30, 2017 Performing Non-performing PCI Total Real estate loans: Mortgages $ 147,785 $ 1,254 $ 34 $ 149,073 Home Equity 57,148 168 - 57,316 Consumer 10,683 101 - 10,784 Total $ 215,616 $ 1,523 $ 34 $ 217,173 December 31, 2016 Performing Non-performing PCI Total Real estate loans: Mortgages $ 147,047 $ 1,648 $ 35 $ 148,730 Home Equity 58,438 255 - $ 58,693 Consumer 10,892 109 4 $ 11,005 Total $ 216,377 $ 2,012 $ 39 $ 218,428 Aging Analysis of Past Due Financing 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 financing receivables as of September 30, 2017 and December 31, 2016 (in thousands): Total 90 Days or 30-59 Days 60-89 Days 90 Days Total Past Financing Greater and September 30, 2017 Past Due Past Due Or Greater Due Current PCI Receivables Accruing Real estate loans: Mortgages $ 1,087 $ 242 $ 612 $ 1,941 $ 147,098 $ 34 $ 149,073 $ 49 Home Equity 347 33 80 460 56,856 - 57,316 30 Commercial 1,184 211 3,814 5,209 266,399 2,016 273,624 80 Agricultural - 17 1,165 1,182 205,137 733 207,052 - Construction - - - - 17,074 - 17,074 - Consumer 115 48 100 263 10,521 - 10,784 14 Other commercial loans 230 43 2,634 2,907 52,777 538 56,222 - Other agricultural loans 187 - - 187 33,879 - 34,066 - State and political subdivision loans - - - - 101,951 - 101,951 - Total $ 3,150 $ 594 $ 8,405 $ 12,149 $ 891,692 $ 3,321 $ 907,162 $ 173 Loans considered non-accrual $ 317 $ 67 $ 8,232 $ 8,616 $ 3,205 $ - $ 11,821 Loans still accruing 2,833 527 173 3,533 888,487 3,321 895,341 Total $ 3,150 $ 594 $ 8,405 $ 12,149 $ 891,692 $ 3,321 $ 907,162 90 Days or 30-59 Days 60-89 Days 90 Days Total Past Total Financing Greater and December 31, 2016 Past Due Past Due Or Greater Due Current PCI Receivables Accruing Real estate loans: Mortgages $ 630 $ 36 $ 1,109 $ 1,775 $ 146,920 $ 35 $ 148,730 $ 173 Home Equity 384 49 209 642 58,051 - 58,693 160 Commercial 1,757 58 4,302 6,117 244,491 1,969 252,577 - Agricultural - - 1,145 1,145 121,741 738 123,624 - Construction - - - - 25,441 - 25,441 - Consumer 115 40 83 238 10,763 4 11,005 67 Other commercial loans 95 35 4,004 4,134 53,884 621 58,639 - Other agricultural loans 43 34 5 82 23,306 - 23,388 5 State and political subdivision loans - - - - 97,514 - 97,514 - Total $ 3,024 $ 252 $ 10,857 $ 14,133 $ 782,111 $ 3,367 $ 799,611 $ 405 Loans considered non-accrual $ 172 $ 105 $ 10,452 $ 10,729 $ 725 $ - $ 11,454 Loans still accruing 2,852 147 405 3,404 781,386 3,367 788,157 Total $ 3,024 $ 252 $ 10,857 $ 14,133 $ 782,111 $ 3,367 $ 799,611 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 financing receivables, excluding PCI loans, on non-accrual status as of September 30, 2017 and December 31, 2016, respectively. The balances are presented by class of financing receivable (in thousands): September 30, 2017 December 31, 2016 Real estate loans: Mortgages $ 1,205 $ 1,475 Home Equity 138 95 Commercial 5,262 4,445 Agricultural 1,464 1,340 Construction - - Consumer 88 42 Other commercial loans 3,008 4,057 Other agricultural loans 656 - State and political subdivision - - $ 11,821 $ 11,454 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. 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 September 30, 2017 and December 31, 2016, included within the allowance for loan losses are reserves of $85,000 and $29,000 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, 2017 and 2016 were as follows (dollars in thousands): For the Three Months Ended September 30, 2017 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 - 2 $ - $ 150 $ - $ 150 Other agricultural loans - 1 - 161 - 161 Total - 3 $ - $ 311 $ - $ 311 For the Nine Months Ended September 30, 2017 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 - 7 $ - $ 6,797 $ - $ 6,797 Agricultural - 2 - 150 - 150 Other agricultural loans - 1 - 161 - 161 Total - 10 $ - $ 7,108 $ - $ 7,108 For the Three Months Ended September 30, 2016 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 - 1 $ - $ 750 $ - $ 750 Other commercial loans - 3 - 3,076 - 3,076 Total - 4 $ - $ 3,826 $ - $ 3,826 For the Nine Months Ended September 30, 2016 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 - 4 $ - $ 1,188 $ - $ 1,188 Other commercial loans - 3 - 3,076 - 3,076 Total - 7 $ - $ 4,264 $ - $ 4,264 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. There were no loans that were modified as TDRs during each 12-month period prior to the current reporting periods, which began January 1, 2017 and 2016 (nine month periods) and June 1, 2017 and 2016 (3 month periods), respectively, that subsequently defaulted during these reporting periods. 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, 2017 and December 31, 2016, respectively (in thousands): September 30, 2017 December 31, 2016 Individually evaluated for impairment Collectively evaluated for impairment Total Individually evaluated for impairment Collectively evaluated for impairment Total Real estate loans: Residential $ 26 $ 1,054 $ 1,080 $ 32 $ 1,032 $ 1,064 Commercial 67 3,515 3,582 45 3,544 3,589 Agricultural 99 2,595 2,694 54 1,440 1,494 Construction - 31 31 - 47 47 Consumer 2 135 137 - 122 122 Other commercial loans 208 904 1,112 326 1,001 1,327 Other agricultural loans 40 422 462 30 282 312 State and political subdivision loans - 874 874 - 833 833 Unallocated - 475 475 - 98 98 Total $ 442 $ 10,005 $ 10,447 $ 487 $ 8,399 $ 8,886 The following tables roll forward the balance of the ALLL by portfolio segment for the three and nine month periods ended September 30, 2017 and 2016, respectively (in thousands): Balance at June 30, 2017 Charge-offs Recoveries Provision Balance at September 30, 2017 Real estate loans: Residential $ 1,104 $ (11 ) $ - $ (13 ) $ 1,080 Commercial 3,541 - 5 36 3,582 Agricultural 2,452 - - 242 2,694 Construction 45 - - (14 ) 31 Consumer 125 (45 ) 13 44 137 Other commercial loans 1,131 - 5 (24 ) 1,112 Other agricultural loans 431 - 1 30 462 State and political subdivision loans 838 - - 36 874 Unallocated 312 - - 163 475 Total $ 9,979 $ (56 ) $ 24 $ 500 $ 10,447 Balance at June 30, 2016 Charge-offs Recoveries Provision Balance at September 30, 2016 Real estate loans: Residential $ 990 $ (9 ) $ - $ 32 $ 1,013 Commercial 3,338 (100 ) 467 (90 ) 3,615 Agricultural 581 410 991 Construction 18 - - 16 34 Consumer 104 (27 ) 16 16 109 Other commercial loans 1,316 (37 ) 25 39 1,343 Other agricultural loans 248 51 299 State and political subdivision loans 764 - - 7 771 Unallocated - - - 19 19 Total $ 7,359 $ (173 ) $ 508 $ 500 $ 8,194 Balance at December 31, 2016 Charge-offs Recoveries Provision Balance at September 30, 2017 Real estate loans: Residential $ 1,064 $ (104 ) $ - $ 120 $ 1,080 Commercial 3,589 (41 ) 11 23 3,582 Agricultural 1,494 - - 1,200 2,694 Construction 47 - - (16 ) 31 Consumer 122 (90 ) 35 70 137 Other commercial loans 1,327 - 14 (229 ) 1,112 Other agricultural loans 312 (5 ) 1 154 462 State and political subdivision loans 833 - - 41 874 Unallocated 98 - - 377 475 Total $ 8,886 $ (240 ) $ 61 $ 1,740 $ 10,447 Balance at December 31, 2015 Charge-offs Recoveries Provision Balance at September 30, 2016 Real estate loans: Residential $ 905 $ (52 ) $ - $ 160 $ 1,013 Commercial 3,376 (100 ) 475 (136 ) 3,615 Agricultural 409 - 582 991 Construction 24 - - 10 34 Consumer 102 (65 ) 84 (12 ) 109 Other commercial loans 1,183 (55 ) 31 184 1,343 Other agricultural loans 122 177 299 State and political subdivision loans 593 - - 178 771 Unallocated 392 - - (373 ) 19 Total $ 7,106 $ (272 ) $ 590 $ 770 $ 8,194 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 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, 2017, the allowance for residential real estate increased in general reserves for pooled loans as a result of increased loss rates reflected in the charge-offs for the three month period, as well as higher loan balances. The increase was offset by a decrease in the specific reserve for individually evaluated residential loans. This was represented as a decrease to the provision. The allowance for commercial real estate was increased in general reserves due to growth in the commercial real estate loan portfolio, which was represented as an increase in the provision. The allowance for agricultural real estate loans was increased in general reserves as a result of higher loan balances. The result of this growth was represented as an increase in the provision. The allowance for other commercial loans was reduced as a result of a decrease in the historical loss factor in the portfolio segment and decrease in specific reserves. This was represented by a decrease to the provision. The allowance for other agricultural loans was increased in general reserves as a result of higher loan balances. It was also impacted by an increase in specific reserves during the quarter. The result of these changes was represented as an increase in the provision. For the nine months ended September 30, 2017, the allowance for residential real estate increased in general reserves as a result of increased loss rates reflected in the charge-offs for the nine month period. This was represented as an increase to the provision. The allowance for agricultural real estate loans was increased in general reserves as a result of higher loan balances as well as an increase in specific reserves. It was also impacted by the classified loan trend in the agricultural real estate portfolio. The result of these changes was represented as an increase in the provision. The allowance for other commercial loans was reduced as a result of lower loan balances, an improvement in the amount of classified loans and a reduction in the historical loss factor. This was represented by a decrease to the provision. The allowance for other agricultural loans was increased in general reserves as a result of higher loan balances. It was also impacted by the classified loan trend in the other agricultural loan portfolio. The result of these changes was represented as an increase in the provision. For the three months ended September 30, 2016, the allowance for commercial real estate was increased in general reserves due to the increase in the amount of classified loans. Offsetting this increase was the recovery of a previously charged-off amount during the quarter. This resulted in a decrease in the provision. The allowance for agricultural real estate loans was increased in general reserves as a result of higher loan balances. It was also impacted by the classified loan trend in the agricultural real estate portfolio. The result of these changes was represented as an increase in the provision. The allowance for other commercial loans was increased as a result of higher loan balances and an increase in the historical loss factor. This was represented by an increase to the provision. The allowance for other agricultural loans was increased in general reserves as a result of higher loan balances. It was also impacted by the classified loan trend in the other agricultural loan portfolio. The result of these changes was represented as an increase in the provision. For the nine months ended September 30, 2016, the allowance for agricultural real estate loans was increased in general reserves as a result of higher loan balances. It was also impacted by the classified loan trend in the agricultural real estate portfolio and the general industry conditions. The result of these changes was represented as an increase in the provision. The allowance for other commercial loans was increased as a result of the increase in the amount of classified loans and an increase in the specific reserves. This was represented by an increase to the provision. The allowance for other agricultural loans was increased in general reserves as a result of higher loan balances. It was also impacted by the classified loan trend in the other agricultural loan portfolio and in the general industry conditions. The result of these changes was represented as an increase in the provision. The allowance for state and political loans was increased for general reserves due to an increase in special mention loans during the period. This was represented as an increase in the provision. The allowance for commercial real estate was increased due to a recovery that occurred in the third quarter of 2016. As a result of the recovery, a negative provision was recorded. 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, 2017 and December 31, 2016, included with other assets are $1,570,000 and $1,036,000, respectively, of foreclosed assets. As of September 30, 2017, included within the foreclosed assets are $644,000 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, 2017, the Company has initiated formal foreclosure proceedings on $1,377,000 of consumer residential mortgages, which have n |
