| 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, 2019 and December 31, 2018, 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, 2019 and December 31, 2018 (in thousands): September 30, 2019 Total Loans Individually evaluated for impairment Loans acquired with deteriorated credit quality Collectively evaluated for impairment Real estate loans: Residential $ 215,717 $ 1,195 $ 24 $ 214,498 Commercial 349,269 11,921 1,213 336,135 Agricultural 305,948 4,781 - 301,167 Construction 11,448 - - 11,448 Consumer 9,709 6 - 9,703 Other commercial loans 76,785 2,042 91 74,652 Other agricultural loans 50,334 1,407 - 48,927 State and political subdivision loans 95,824 - - 95,824 Total 1,115,034 21,352 1,328 1,092,354 Allowance for loan losses 13,679 810 - 12,869 Net loans $ 1,101,355 $ 20,542 $ 1,328 $ 1,079,485 December 31, 2018 Total Loans Individually evaluated for impairment Loans acquired with deteriorated credit quality Collectively evaluated for impairment Real estate loans: Residential $ 215,305 $ 890 $ 28 $ 214,387 Commercial 319,265 13,327 1,321 304,617 Agricultural 284,520 5,592 - 278,928 Construction 33,913 - - 33,913 Consumer 9,858 - - 9,858 Other commercial loans 74,118 2,206 510 71,402 Other agricultural loans 42,186 1,435 - 40,751 State and political subdivision loans 102,718 - - 102,718 Total 1,081,883 23,450 1,859 1,056,574 Allowance for loan losses 12,884 676 - 12,208 Net loans $ 1,068,999 $ 22,774 $ 1,859 $ 1,044,366 Purchased loans are recorded at fair value on their purchase date without a carryover of the related allowance for loan losses. Upon acquisition, the Company evaluates 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 decreases in the expected cash flows of these loans between the acquisition date and September 30, 2019. 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 $1,328,000 and $1,859,000 at September 30, 2019 and December 31, 2018, respectively. The carrying value of the PCI loans was determined by projected discounted contractual cash flows and collateral valuations. Changes in the accretable yield for PCI loans were as follows for the three and nine months ended September 30, 2019 and 2018, respectively (in thousands): Three months ended Nine months ended September 30, September 30, 2019 2018 2019 2018 Balance at beginning of period $ 100 $ 59 $ 104 $ 106 Accretion (10 ) (24 ) (14 ) (71 ) Reclassification of non-accretable discount - 93 - 93 Balance at end of period $ 90 $ 128 $ 90 $ 128 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, 2019 December 31, 2018 Outstanding balance $ 4,076 $ 4,529 Carrying amount 1,328 1,859 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, 2019 Balance Allowance Allowance Investment Allowance Real estate loans: Mortgages $ 1,220 $ 814 $ 227 $ 1,041 $ 10 Home Equity 174 85 69 154 12 Commercial 12,466 10,469 1,452 11,921 342 Agricultural 4,811 1,617 3,164 4,781 145 Consumer 6 6 - 6 - Other commercial loans 2,621 1,715 327 2,042 144 Other agricultural loans 1,464 98 1,309 1,407 157 Total $ 22,762 $ 14,804 $ 6,548 $ 21,352 $ 810 Recorded Recorded Unpaid Investment Investment Total Principal With No With Recorded Related December 31, 2018 Balance Allowance Allowance Investment Allowance Real estate loans: Mortgages $ 932 $ 515 $ 288 $ 803 $ 10 Home Equity 106 12 75 87 14 Commercial 16,326 11,933 1,394 13,327 216 Agricultural 5,598 2,386 3,206 5,592 84 Consumer - - - - - Other commercial loans 2,711 1,836 370 2,206 193 Other agricultural loans 1,487 120 1,315 1,435 159 Total $ 27,160 $ 16,802 $ 6,648 $ 23,450 $ 676 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, 2019 and 2018(in thousands): For the Nine Months Ended September 30, 2019 September 30, 2018 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 $ 1,075 $ 12 $ - $ 988 $ 10 $ - Home Equity 108 4 - 98 4 - Commercial 11,768 342 11 13,915 372 14 Agricultural 5,068 61 - 4,472 124 - Consumer 2 - - 2 - - Other commercial loans 2,088 1 - 3,906 73 - Other agricultural loans 1,419 4 - 1,388 21 - Total $ 21,528 $ 424 $ 11 $ 24,769 $ 604 $ 14 For the Three Months Ended September 30, 2019 September 30, 2018 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 $ 1,048 $ 3 $ - $ 896 $ 3 $ - Home Equity 143 2 - 92 2 - Commercial 11,906 112 - 14,116 130 6 Agricultural 4,795 5 - 5,146 24 - Consumer 4 - - - - - Other commercial loans 2,073 - - 3,495 21 - Other agricultural loans 1,408 - - 1,453 2 - Total $ 21,377 $ 122 $ - $ 25,198 $ 182 $ 6 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 loan portfolio 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, 2019 and December 31, 2018 (in thousands) September 30, 2019 Pass Special Mention Substandard Doubtful Loss Ending Balance Real estate loans: Commercial $ 331,075 $ 9,945 $ 8,210 $ 39 $ - $ 349,269 Agricultural 283,074 14,987 7,887 - - 305,948 Construction 11,448 - - - - 11,448 Other commercial loans 73,502 964 2,253 66 - 76,785 Other agricultural loans 47,026 1,710 1,598 - - 50,334 State and political subdivision loans 95,349 - 475 - - 95,824 Total $ 841,474 $ 27,606 $ 20,423 $ 105 $ - $ 889,608 December 31, 2018 Pass Special Mention Substandard Doubtful Loss Ending Balance Real estate loans: Commercial $ 297,690 $ 10,792 $ 10,743 $ 40 $ - $ 319,265 Agricultural 264,732 10,017 9,771 - - 284,520 Construction 33,913 - - - - 33,913 Other commercial loans 70,425 777 2,800 116 - 74,118 Other agricultural loans 38,628 1,724 1,834 - - 42,186 State and political subdivision loans 92,666 9,481 571 - - 102,718 Total $ 798,054 $ 32,791 $ 25,719 $ 156 $ - $ 856,720 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, 2019 and December 31, 2018 ( in thousands) September 30, 2019 Performing Non-performing PCI Total Real estate loans: Mortgages $ 154,924 $ 935 $ 24 $ 155,883 Home Equity 59,742 92 - 59,834 Consumer 9,687 22 - 9,709 Total $ 224,353 $ 1,049 $ 24 $ 225,426 December 31, 2018 Performing Non-performing PCI Total Real estate loans: Mortgages $ 155,360 $ 1,099 $ 28 $ 156,487 Home Equity 58,736 82 - $ 58,818 Consumer 9,832 26 - $ 9,858 Total $ 223,928 $ 1,207 $ 28 $ 225,163 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, 2019 and December 31, 2018 (in thousands): Total 90 Days or 30-59 Days 60-89 Days 90 Days Total Past Financing Greater and September 30, 2019 Past Due Past Due Or Greater Due Current PCI Receivables Accruing Real estate loans: Mortgages $ 155 $ 205 $ 334 $ 694 $ 155,165 $ 24 $ 155,883 $ 19 Home Equity 224 86 88 398 59,436 - 59,834 - Commercial 957 263 3,394 4,614 343,442 1,213 349,269 21 Agricultural 1,113 - 3,164 4,277 301,671 - 305,948 - Construction - - - - 11,448 - 11,448 - Consumer 64 14 22 100 9,609 - 9,709 22 Other commercial loans 15 4 1,941 1,960 74,734 91 76,785 41 Other agricultural loans 60 - 1,196 1,256 49,078 - 50,334 - State and political subdivision loans - - - - 95,824 - 95,824 - Total $ 2,588 $ 572 $ 10,139 $ 13,299 $ 1,100,407 $ 1,328 $ 1,115,034 $ 103 Loans considered non-accrual $ 258 $ 230 $ 10,036 $ 10,524 $ 2,699 $ - $ 13,223 Loans still accruing 2,330 342 103 2,775 1,097,708 1,328 1,101,811 Total $ 2,588 $ 572 $ 10,139 $ 13,299 $ 1,100,407 $ 1,328 $ 1,115,034 Total 90 Days or 30-59 Days 60-89 Days 90 Days Total Past Financing Greater and December 31, 2018 Past Due Past Due Or Greater Due Current PCI Receivables Accruing Real estate loans: Mortgages $ 483 $ 789 $ 686 $ 1,958 $ 154,501 $ 28 $ 156,487 $ 20 Home Equity 257 108 63 428 58,390 - 58,818 - Commercial 999 631 4,706 6,336 311,608 1,321 319,265 36 Agricultural 121 - 3,184 3,305 281,215 - 284,520 - Construction - - - - 33,913 - 33,913 - Consumer 37 14 12 63 9,795 - 9,858 12 Other commercial loans 141 53 2,061 2,255 71,353 510 74,118 - Other agricultural loans - - 1,201 1,201 40,985 - 42,186 - State and political subdivision loans - - - - 102,718 - 102,718 - Total $ 2,038 $ 1,595 $ 11,913 $ 15,546 $ 1,064,478 $ 1,859 $ 1,081,883 $ 68 Loans considered non-accrual $ 72 $ 253 $ 11,845 $ 12,170 $ 1,554 $ - $ 13,724 Loans still accruing 1,966 1,342 68 3,376 1,062,924 1,859 1,068,159 Total $ 2,038 $ 1,595 $ 11,913 $ 15,546 $ 1,064,478 $ 1,859 $ 1,081,883 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, 2019 and December 31, 2018, respectively. The balances are presented by class of financing receivable (in thousands): September 30, 2019 December 31, 2018 Real estate loans: Mortgages $ 916 $ 1,079 Home Equity 92 82 Commercial 5,413 5,957 Agricultural 3,549 3,206 Consumer - 14 Other commercial loans 2,009 2,185 Other agricultural loans 1,244 1,201 $ 13,223 $ 13,724 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, 2019 and December 31, 2018, included within the allowance for loan losses are reserves of $351,000 and $255,000 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, 2019 and 2018 were as follows (dollars in thousands): For the Three Months Ended September 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: Commercial - 1 $ - $ 118 $ - $ 118 Consumer - 1 - 3 - 3 Total - 2 $ - $ 121 $ - $ 121 For the Nine Months Ended September 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 - 918 - 918 Consumer - 1 - 3 - 3 Total - 8 $ - $ 965 $ - $ 965 For the Three Months Ended September 30, 2018 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 $ - $ 106 $ - $ 106 Agricultural - 2 - 1,302 - 1,302 Total - 3 $ - $ 1,408 $ - $ 1,408 For the Nine Months Ended September 30, 2018 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 $ - $ 7 $ - $ 7 Home Equity - 1 - 1 - 1 Commercial - 2 - 683 - 683 Agricultural - 3 - 2,825 - 2,825 Other agricultural loans - 4 - 176 - 176 Total - 11 $ - $ 3,692 $ - $ 3,692 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, 2019 and 2018 (9 month periods) and July 1, 2019 and 2018 (3 month periods), respectively, and that subsequently defaulted during these reporting periods (dollars in thousands): For the Three Months Ended For the Nine Months Ended September 30, 2019 September 30, 2018 September 30, 2019 September 30, 2018 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 - $ - Agricultural - - 2 1,302 1 1,439 2 1,302 Other agricultural loans - - 1 124 4 261 1 124 Total recidivism - $ - 3 $ 1,426 6 $ 2,242 3 $ 1,426 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, 2019 and December 31, 2018, respectively (in thousands): September 30, 2019 December 31, 2018 Individually evaluated for impairment Collectively evaluated for impairment Total Individually evaluated for impairment Collectively evaluated for impairment Total Real estate loans: Residential $ 22 $ 1,069 $ 1,091 $ 24 $ 1,081 $ 1,105 Commercial 342 4,299 4,641 216 3,899 4,115 Agricultural 145 4,567 4,712 84 4,180 4,264 Construction - 19 19 - 58 58 Consumer - 119 119 - 120 120 Other commercial loans 144 1,205 1,349 193 1,161 1,354 Other agricultural loans 157 712 869 159 593 752 State and political subdivision loans - 536 536 - 762 762 Unallocated - 343 343 - 354 354 Total $ 810 $ 12,869 $ 13,679 $ 676 $ 12,208 $ 12,884 The following tables roll forward the balance of the ALLL by portfolio segment for the three and nine months ended September 30, 2019 and 2018, respectively (in thousands): For the three months ended September 30, 2019 Balance at June 30, 2019 Charge-offs Recoveries Provision (Credit) Balance at September 30, 2019 Real estate loans: Residential $ 1,066 $ (24 ) $ - $ 49 $ 1,091 Commercial 4,400 - - 241 4,641 Agricultural 4,532 - - 180 4,712 Construction 36 - - (17 ) 19 Consumer 118 (10 ) 6 5 119 Other commercial loans 1,328 - 3 18 1,349 Other agricultural loans 741 - - 128 869 State and political - - subdivision loans 539 - - (3 ) 536 Unallocated 544 - - (201 ) 343 Total $ 13,304 $ (34 ) $ 9 $ 400 $ 13,679 For the nine months ended September 30, 2019 Balance at December 31, 2018 Charge-offs Recoveries Provision (Credit) Balance at September 30, 2019 Real estate loans: Residential $ 1,105 $ (24 ) $ - $ 10 $ 1,091 Commercial 4,115 (293 ) - 819 4,641 Agricultural 4,264 - - 448 4,712 Construction 58 - - (39 ) 19 Consumer 120 (32 ) 24 7 119 Other commercial loans 1,354 (38 ) 8 25 1,349 Other agricultural loans 752 - - 117 869 State and political subdivision loans 762 - - (226 ) 536 Unallocated 354 - - (11 ) 343 Total $ 12,884 $ (387 ) $ 32 $ 1,150 $ 13,679 For the three months ended September 30, 2018 Balance at June 30, 2018 Charge-offs Recoveries Provision (Credit) Balance at September 30, 2018 Real estate loans: Residential $ 1,045 $ (10 ) $ 1 $ 16 $ 1,052 Commercial 3,794 (25 ) - 156 3,925 Agricultural 3,673 256 3,929 Construction 44 - - 5 49 Consumer 115 (13 ) 9 12 123 Other commercial loans 1,266 - 5 (52 ) 1,219 Other agricultural loans 589 - - 110 699 State and political subdivision loans 767 - - (16 ) 751 Unallocated 648 - - (12 ) 636 Total $ 11,941 $ (48 ) $ 15 $ 475 $ 12,383 For the nine months ended September 30, 2018 Balance at December 31, 2017 Charge-offs Recoveries Provision (Credit) Balance at September 30, 2018 Real estate loans: Residential $ 1,049 $ (27 ) $ 70 $ (40 ) $ 1,052 Commercial 3,867 (25 ) 3 80 3,925 Agricultural 3,143 - 786 3,929 Construction 23 - - 26 49 Consumer 124 (32 ) 26 5 123 Other commercial loans 1,272 (91 ) 19 19 1,219 Other agricultural loans 492 (50 ) - 257 699 State and political subdivision loans 816 - - (65 ) 751 Unallocated 404 - - 232 636 Total $ 11,190 $ (225 ) $ 118 $ 1,300 $ 12,383 The Company allocates the ALLL based on the factors described below, which conform to the Company’s loan classification policy and credit quality measurements. In reviewing risk within the Company’s loan portfolio, management has determined there to be several different risk categories within the loan portfolio. The ALLL consists of amounts applicable to: (i) residential real estate loans; (ii) residential real estate home equity loans; (iii) commercial real estate loans; (iv) agricultural real estate loans; (v) real estate construction loans; (vi) other commercial and agricultural loans; (vii) consumer loans; (viii) other agricultural loans and (ix) state and political subdivision loans. Factors considered in this process include general loan terms, collateral, and availability of historical data to support the analysis. Historical loss percentages are calculated and used as the basis for calculating allowance allocations. Certain qualitative factors are evaluated to determine additional inherent risks in the loan portfolio, which are not necessarily reflected in the historical loss percentages. These factors are then added to the historical allocation percentage to get the adjusted factor to be applied to non-classified loans. The following qualitative factors are analyzed: • Level of and trends in delinquencies and impaired/classified loans ◾ Change in volume and severity of past due loans ◾ Volume of non-accrual loans ◾ Volume and severity of classified, adversely or graded loans; • Level of and trends in charge-offs and recoveries; • Trends in volume, terms and nature of the loan portfolio; • Effects of any changes in risk selection and underwriting standards and any other changes in lending and recovery policies, procedures and practices; • Changes in the quality of the Company’s loan review system; • Experience, ability and depth of lending management and other relevant staff; • National, state, regional and local economic trends and business conditions ◾ General economic conditions ◾ Unemployment rates ◾ Inflation rate/ Consumer Price Index ◾ Changes in values of underlying collateral for collateral-dependent loans; • Industry conditions including the effects of external factors such as competition, legal, and regulatory requirements on the level of estimated credit losses; • Existence and effect of any credit concentrations, and changes in the level of such concentrations; and • Any change in the level of board oversight. The Company analyzes its loan portfolio at least each quarter to determine the adequacy of its ALLL. Loans determined to be TDRs are impaired and for purposes of estimating the ALLL must be individually evaluated for impairment. In calculating the impairment, the Company calculates the present value utilizing an analysis of discounted cash flows. If the present value calculated is below the recorded investment of the loan, impairment is recognized by a charge to the provision for loan and lease losses and a credit to the ALLL. For the three months ended September 30, 2019, the allowance for commercial real estate was increased in general reserves due to an increase in the size of the portfolio and an increase in the historical loss percentage of the portfolio. This was represented as an increase in the provision. The allowance for agricultural real estate loans was increased in general reserves as a result of overall growth in the portfolio. The result of this was represented as an increase in the provision. The allowance for other agricultural loans was increased as a result of a general increase in the size of the portfolio. The result of these changes was represented as an increase in the provision. For the nine months ended September 30, 2019, the allowance for commercial real estate was increased in general reserves due to general increase in the size of the portfolio and an increase in the historical loss percentage of the portfolio. There also was an increase in specific reserves for commercial real estate, which was partially offset by the decrease in substandard loans. The total change 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. Additionally, there was an increase in specific reserves. The allowance for other agricultural loans was increased as a result of a general increase in the size of the portfolio. The result of these changes was represented as an increase in the provision. These resulted in an increase in the provision. The allowance for state and political subdivision was decreased as a result a decrease in the volume of classified loans. The result of this change was represented as a decrease in the provision. For the three months ended September 30, 2018, the allowance for commercial real estate was increased in general reserves due to an increase in the size of the portfolio as well as an increase in specific reserves. This 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, an increase in the amount of loans classified as non-accrual and an increase in specific reserves. The result of this was represented as an increase in the provision. The allowance for other agricultural loans was increased as a result of an increase in specific reserves, which offset the decrease due to the decrease in the portfolio size. The result of these changes was represented as an increase in the provision. For the nine months ended September 30, 2018, the allowance for commercial real estate was decreased in general reserves due to a decrease in the qualitative factor associated with unemployment rates and an improvement in the number of loans classified as special mention. There was an increase in specific reserves for commercial real estate. The total change 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 and an increase in the amount of loans classified as special mention and nonaccrual. Additionally, there was an increase in specific reserves. These resulted in an increase in the provision. The allowance for other agricultural loans was increased in general reserves as a result of higher loan balances, loans past due and an increase in non-accrual loans. Additionally, specific reserves also increased. The result of these changes was represented as an increase in the provision. 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, 2019 and December 31, 2018, included within other assets are $3,497,000 and $601,000, respectively, of foreclosed assets. As of September 30, 2019, included within the foreclosed assets are $337,000 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, 2019, the Company had initiated formal foreclosure proceedings on $1,885,000 of consumer residential mortgages, which had not yet been transferred into foreclosed assets. |
