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 June 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 June 30, 2017 and December 31, 2016 (in thousands):

June 30, 2017	Total Loans		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Collectively evaluated for impairment
Real estate loans:
Residential	$	205,725	$	1,254	$	35	$	204,436
Commercial		271,342		13,680		1,989		255,673
Agricultural		188,547		3,728		734		184,085
Construction		25,569		-		-		25,569
Consumer		10,603		4		-		10,599
Other commercial loans		56,952		4,902		868		51,182
Other agricultural loans		32,974		1,466		-		31,508
State and political subdivision loans		96,337		-		-		96,337
Total		888,049		25,024		3,626		859,389
Allowance for loan losses		9,979		457		-		9,522
Net loans	$	878,070	$	24,577	$	3,626	$	849,867

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 June 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 $3,626,000 and $3,367,000 at June 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 six months ended June 30, 2017 and 2016, respectively (in thousands):

	Three months ended						Six months ended
	June 30,						June 30,
	2017			2016			2017			2016
Balance at beginning of period	$	275		$	551		$	389		$	637
Accretion		(108	)		(87	)		(222	)		(173	)
Balance at end of period	$	167		$	464		$	167		$	464

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, 2017		December 31, 2016
Outstanding balance	$	6,660	$	6,487
Carrying amount		3,626		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, certain residential mortgages, home equity and consumer loans that are cross collateralized with commercial relationships that are determined to be impaired may also be classified as impaired. Impaired loans are analyzed to determine if it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allocation of the allowance for loan losses or a charge-off to the allowance for loan losses.

The following table includes the recorded investment and unpaid principal balances for impaired 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
June 30, 2017	Balance		Allowance		Allowance		Investment		Allowance
Real estate loans:
Mortgages	$	1,246	$	281	$	903	$	1,184	$	67
Home Equity		70		16		54		70		10
Commercial		16,037		13,093		587		13,680		58
Agricultural		3,744		2,405		1,323		3,728		95
Construction		-		-		-		-		-
Consumer		4		2		2		4		2
Other commercial loans		5,423		4,431		471		4,902		207
Other agricultural loans		1,466		1,448		18		1,466		18
State and political
subdivision loans		-		-		-		-		-
Total	$	27,990	$	21,676	$	3,358	$	25,034	$	457

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 six month periods ended June 30, 2017 and 2016(in thousands):

	For the Three Months Ended
	June 30, 2017						June 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	$	986	$	3	$	-	$	460	$	5	$	-
Home Equity		60		1		-		59		1		-
Commercial		12,980		134		-		6,158		26		-
Agricultural		3,641		32		-		165		3		-
Construction		-		-		-		-		-		-
Consumer		3		-		-		-		-		-
Other commercial loans		5,029		37		17		5,933		68		2
Other agricultural loans		1,515		22		-		104		2		-
State and political
subdivision loans		-		-		-		-		-		-
Total	$	24,214	$	229	$	17	$	12,879	$	105	$	2

	For the Six Months ended
	June 30, 2017						June 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	$	940	$	6	$	-	$	425	$	9	$	-
Home Equity		58		2		-		60		2		-
Commercial		9,387		158		3		6,142		52		-
Agricultural		3,513		63		-		165		5		-
Construction		-		-		-		-		-		-
Consumer		2		-		-		-		-		-
Other commercial loans		5,313		77		27		5,942		134		3
Other agricultural loans		1,571		45		-		104		3		-
State and political
subdivision loans		-		-		-		-		-		-
Total	$	20,784	$	351	$	30	$	12,838	$	205	$	3

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 55% of the dollar volume of the commercial loan portfolio on an annual basis, 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 June 30, 2017 and December 31, 2016 (in thousands):

June 30, 2017	Pass		Special Mention		Substandard		Doubtful		Loss		Ending Balance
Real estate loans:
Commercial	$	244,957	$	13,913	$	12,472	$	-	$	-	$	271,342
Agricultural		176,551		5,457		6,539		-		-		188,547
Construction		25,569		-		-		-		-		25,569
Other commercial loans		51,577		608		4,684		83		-		56,952
Other agricultural loans		30,641		195		2,138		-		-		32,974
State and political
subdivision loans		82,665		2,926		10,746		-		-		96,337
Total	$	611,960	$	23,099	$	36,579	$	83	$	-	$	671,721

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 June 30, 2017 and December 31, 2016 (in thousands):

June 30, 2017	Performing		Non-performing		PCI		Total
Real estate loans:
Mortgages	$	146,736	$	1,509	$	35	$	148,280
Home Equity		57,256		189		-		57,445
Consumer		10,459		144		-		10,603
Total	$	214,451	$	1,842	$	35	$	216,328

December 31, 2016
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 June 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
June 30, 2017	Past Due		Past Due		Or Greater		Due		Current		PCI		Receivables		Accruing
Real estate loans:
Mortgages	$	223	$	165	$	879	$	1,267	$	146,978	$	35	$	148,280	$	-
Home Equity		280		8		96		384		57,061		-		57,445		43
Commercial		1,219		302		4,389		5,910		263,443		1,989		271,342		553
Agricultural		454		100		1,163		1,717		186,096		734		188,547		159
Construction		-		-		-		-		25,569		-		25,569		-
Consumer		91		-		144		235		10,368		-		10,603		57
Other commercial loans		45		-		2,620		2,665		53,419		868		56,952		-
Other agricultural loans		283		-		739		1,022		31,952		-		32,974		-
State and political
subdivision loans		-		-		-		-		96,337		-		96,337		-
Total	$	2,595	$	575	$	10,030	$	13,200	$	871,223	$	3,626	$	888,049	$	812

Loans considered non-accrual	$	144	$	99	$	9,218	$	9,461	$	2,050	$	-	$	11,511
Loans still accruing		2,451		476		812		3,739		869,173		3,626		876,538
Total	$	2,595	$	575	$	10,030	$	13,200	$	871,223	$	3,626	$	888,049

December 31, 2016
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 June 30, 2017 and December 31, 2016, respectively. The balances are presented by class of financing receivable (in thousands):

	June 30, 2017		December 31, 2016
Real estate loans:
Mortgages	$	1,509	$	1,475
Home Equity		146		95
Commercial		4,588		4,445
Agricultural		1,314		1,340
Construction		-		-
Consumer		87		42
Other commercial loans		3,128		4,057
Other agricultural loans		739		-
State and political subdivision		-		-
	$	11,511	$	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 June 30, 2017 and December 31, 2016, included within the allowance for loan losses are reserves of $26,000 and $29,000 respectively, that are associated with loans modified as TDRs.

Loan modifications that are considered TDRs completed during the three and six months ended June 30, 2017 and 2016 were as follows (dollars in thousands):

	For the Three Months Ended June 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		-		5	$	-	$	6,093	$	-	$	6,093
Total		-		5	$	-	$	6,093	$	-	$	6,093

	For the Six Months Ended June 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
Total		-		7	$	-	$	6,797	$	-	$	6,797

	For the Three Months Ended June 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		-		3	$	-	$	438	$	-	$	438
Total		-		3	$	-	$	438	$	-	$	438

	For the Six Months Ended June 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		-		3	$	-		438	$	-		438
Total		-		3	$	-	$	438	$	-	$	438

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 (six month periods) and April 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 June 30, 2017 and December 31, 2016, respectively (in thousands):

	June 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	$	77	$	1,027	$	1,104	$	32	$	1,032	$	1,064
Commercial		58		3,483		3,541		45		3,544		3,589
Agricultural		95		2,357		2,452		54		1,440		1,494
Construction		-		45		45		-		47		47
Consumer		2		123		125		-		122		122
Other commercial loans		207		924		1,131		326		1,001		1,327
Other agricultural loans		18		413		431		30		282		312
State and political
subdivision loans		-		838		838		-		833		833
Unallocated		-		312		312		-		98		98
Total	$	457	$	9,522	$	9,979	$	487	$	8,399	$	8,886

The following tables roll forward the balance of the ALLL by portfolio segment for the three and six month periods ended June 30, 2017 and 2016, respectively (in thousands):

	Balance at March 31, 2017		Charge-offs			Recoveries		Provision			Balance at June 30, 2017
Real estate loans:
Residential	$	1,042	$	(48	)	$	-	$	110		$	1,104
Commercial		3,665		-			2		(126	)		3,541
Agricultural		1,952		-			-		500			2,452
Construction		46		-			-		(1	)		45
Consumer		123		(17	)		12		7			125
Other commercial loans		1,215		-			-		(84	)		1,131
Other agricultural loans		306		-			-		125			431
State and political subdivision loans		824		-			-		14			838
Unallocated		232		-			-		80			312
Total	$	9,405	$	(65	)	$	14	$	625		$	9,979

	Balance at December 31, 2016		Charge-offs			Recoveries		Provision			Balance at June 30, 2017
Real estate loans:
Residential	$	1,064	$	(93	)	$	-	$	133		$	1,104
Commercial		3,589		(41	)		6		(13	)		3,541
Agricultural		1,494		-			-		958			2,452
Construction		47		-			-		(2	)		45
Consumer		122		(45	)		22		26			125
Other commercial loans		1,327		-			9		(205	)		1,131
Other agricultural loans		312		(5	)				124			431
State and political subdivision loans		833		-			-		5			838
Unallocated		98		-			-		214			312
Total	$	8,886	$	(184	)	$	37	$	1,240		$	9,979

	Balance at March 31, 2016		Charge-offs			Recoveries		Provision			Balance at June 30, 2016
Real estate loans:
Residential	$	966	$	(43	)	$	-	$	67		$	990
Commercial		3,533		-			4		(199	)		3,338
Agricultural		405							176			581
Construction		14		-			-		4			18
Consumer		96		(23	)		29		2			104
Other commercial loans		1,222		(18	)		-		112			1,316
Other agricultural loans		125							123			248
State and political subdivision loans		666		-			-		98			764
Unallocated		248		-			-		(248	)		-
Total	$	7,275	$	(84	)	$	33	$	135		$	7,359

	Balance at December 31, 2016		Charge-offs			Recoveries		Provision			Balance at June 30, 2016
Real estate loans:
Residential	$	905	$	(43	)	$	-	$	128		$	990
Commercial		3,376		-			8		(46	)		3,338
Agricultural		409		-					172			581
Construction		24		-			-		(6	)		18
Consumer		102		(38	)		68		(28	)		104
Other commercial loans		1,183		(18	)		6		145			1,316
Other agricultural loans		122							126			248
State and political subdivision loans		593		-			-		171			764
Unallocated		392		-			-		(392	)		-
Total	$	7,106	$	(99	)	$	82	$	270		$	7,359

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 June 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, and an increase in the specific reserve for individually evaluated loans. This was represented as an increase to the provision.  The allowance for commercial real estate was decreased in general reserves due to the improvement in classified loans, which was represented as 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 reduced as a result of lower loan balances, an improvement in the amount of classified loans and a reduction in the 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 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 six months ended June 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 six month period and an increase in the specific reserve. 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 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 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 June 30, 2016, the allowance for commercial real estate was decreased in general reserves due to the improvement in classified loans, which was represented as 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, an 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. The result of these changes was represented as an increase in the provision.

For the six months ended June 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. The result of these changes was represented as an increase in the provision. The allowance for other commercial loans was increased as a result an 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. 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.

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 June 30, 2017 and December 31, 2016, included with other assets are $1,194,000 and $1,036,000, respectively, of foreclosed assets. As of June 30, 2017, included within the foreclosed assets are $268,000 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of June 30, 2017, the Company has initiated formal foreclosure proceedings on $936,000 of consumer residential mortgages, which have not yet been transferred into foreclosed assets.