4. LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES

The Company grants commercial, industrial, agricultural, residential, and consumer loans primarily to customers throughout north central and south central Pennsylvania and southern New York. Although the Company has a diversified loan portfolio at December 31, 2017 and 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, as well as how those segments are analyzed within the allowance for loan losses as of December 31, 2017 and 2016 (in thousands):

2017	Total Loans		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Collectively evaluated for impairment
Real estate loans:
Residential	$	214,479	$	1,065	$	33	$	213,381
Commercial		308,084		13,864		1,460		292,760
Agricultural		239,957		3,901		702		235,354
Construction		13,502		-		-		13,502
Consumer		9,944		8		-		9,936
Other commercial loans		72,013		4,197		443		67,373
Other agricultural loans		37,809		1,363		-		36,446
State and political subdivision loans		104,737		-		-		104,737
Total		1,000,525		24,398		2,638		973,489
Allowance for loan losses		11,190		410		-		10,780
Net loans	$	989,335	$	23,988	$	2,638	$	962,709

2016
Real estate loans:
Residential	$	207,423	$	957	$	35	$	206,431
Commercial		252,577		5,742		1,969		244,866
Agricultural		123,624		3,347		738		119,539
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		1,653		-		21,735
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

As of December 31, 2017 and 2016, net unamortized loan fees and costs of $794,000 and $732,000, respectively, were included in the carrying value of loans. Purchased loans acquired in connection with the FNB acquisition and the State College branch acquisition 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. 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 $2,638,000 and $3,367,000 at December 31, 2017 and December 31, 2016, respectively. The carrying value of the PCI loans was determined by projected discounted contractual cash flows.

On the acquisition date, the unpaid principal balance for all PCI loans was $6,969,000 and the estimated fair value of the loans was $3,809,000. Total contractually required payments on these loans, including interest, at the acquisition date was $9,913,000. However, the Company's preliminary estimate of expected cash flows was $4,474,000. At such date, the Company established a credit risk related non-accretable discount (a discount representing amounts which are not expected to be collected from the customer nor liquidation of collateral) of $5,439,000 relating to these PCI loans, reflected in the recorded net fair value. Such amount is reflected as a non-accretable fair value adjustment to loans. The Company further estimated the timing and amount of expected cash flows and established an accretable discount of $665,000 on the acquisition date relating to these PCI loans.

Changes in the amortizable yield for PCI loans were as follows for the years ended December 31, 2017 and 2016 (in thousands):

	December 31, 2017			December 31, 2016
Balance at beginning of period	$	389		$	637
Accretion		(632	)		(349	)
Reclassification of non-accretable discount		349			101
Balance at end of period	$	106		$	389

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

	December 31, 2017		December 31, 2016
Outstanding balance	$	5,295	$	6,487
Carrying amount		2,638		3,367

Real estate loans serviced for Freddie Mac, Fannie Mae and the FHLB, which are not included in the Consolidated Balance Sheet, totaled $142,972,000 and $135,404,000 at December 31, 2017 and 2016, respectively. Loans sold to Freddie Mac and Fannie Mae were sold without recourse and total $114,643,000 and $102,444,000 at December 31, 2017 and 2016, respectively. Additionally, the Bank acquired a portfolio of loans sold to the FHLB during the acquisition of FNB, which were sold under the Mortgage Partnership Finance Program ("MPF"). The Bank is no longer an active participant in the MPF program. The MPF portfolio balance was $28,329,000 and $32,960,000 at December 31, 2017 and 2016, respectively. The FHLB maintains a first-loss position for the MPF portfolio that totals $123,000. Should the FHLB exhaust its first-loss position, recourse to the Bank's credit enhancement would be up to the next $980,000 of losses. The Bank has not experienced any losses for the MPF portfolio.

The segments of the Bank's loan portfolio are disaggregated into classes to a level that allows management to monitor risk and performance. Residential real estate mortgages consists of 15 to 30 year first mortgages on residential real estate, while residential real estate home equities are consumer purpose installment loans or lines of credit secured by a mortgage which is often a second lien on residential real estate with terms of 15 years or less. Commercial real estate are business purpose loans secured by a mortgage on commercial real estate. Agricultural real estate are loans secured by a mortgage on real estate used in agriculture production. Construction real estate are loans secured by residential or commercial real estate used during the construction phase of residential and commercial projects. Consumer loans are typically unsecured or primarily secured by collateral other than real estate and overdraft lines of credit connected with customer deposit accounts. Other commercial loans are loans for commercial purposes primarily secured by non-real estate collateral. Other agricultural loans are loans for agricultural purposes primarily secured by non real estate collateral. State and political subdivisions are loans for state and local municipalities for capital and operating expenses or tax free loans used to finance commercial development.

Management considers other commercial loans, other agricultural loans, commercial and agricultural real estate loans and state and political subdivision loans which are 90 days or more past due to be impaired. Certain residential mortgages, home equity and consumer loans that are cross collateralized with commercial relationships determined to be impaired may be classified as impaired as well. These loans are analyzed to determine if it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance allocation or a charge-off to the allowance.

The following table includes the recorded investment and unpaid principal balances for impaired loans by class, with the associated allowance amount as of December 31, 2017 and 2016, if applicable (in thousands):

			Recorded		Recorded
	Unpaid		Investment		Investment		Total
	Principal		With No		With		Recorded		Related
2017	Balance		Allowance		Allowance		Investment		Allowance
Real estate loans:
Mortgages	$	1,055	$	273	$	700	$	973	$	47
Home Equity		92		40		52		92		9
Commercial		16,363		13,154		710		13,864		94
Agricultural		5,231		3,283		618		3,901		3
Consumer		10		2		6		8		-
Other commercial loans		4,739		3,766		431		4,197		231
Other agricultural loans		1,397		1,238		125		1,363		26
Total	$	28,887	$	21,756	$	2,642	$	24,398	$	410

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
Other commercial loans		6,159		5,135		859		5,994		326
Other agricultural loans		1,653		1,629		24		1,653		30
Total	$	20,127	$	15,031	$	2,662	$	17,693	$	487

The following table includes the average investment in impaired loans and the income recognized on impaired loans for 2017, 2016 and 2015 (in thousands):

					Interest
	Average		Interest		Income
	Recorded		Income		Recognized
2017	Investment		Recognized		Cash Basis
Real estate loans:
Mortgages	$	900	$	13	$	-
Home Equity		67		4		-
Commercial		11,567		385		7
Agricultural		3,574		131		-
Consumer		3		-		-
Other commercial loans		4,790		152		52
Other agricultural loans		1,491		65		-
Total	$	22,392	$	750	$	59

2016
Real estate loans:
Mortgages	$	590	$	13	$	-
Home Equity		59		4		-
Commercial		5,959		69		1
Agricultural		361		17		-
Consumer		-		-		-
Other commercial loans		5,715		87		6
Other agricultural loans		190		11		-
Total	$	12,874	$	201	$	7

					Interest
	Average		Interest		Income
	Recorded		Income		Recognized
2015	Investment		Recognized		Cash Basis
Real estate loans:
Mortgages	$	240	$	12	$	-
Home Equity		88		4		-
Commercial		5,683		63		5
Agricultural		56		2		-
Consumer		-		-		-
Other commercial loans		2,700		98		6
Other agricultural loans		37		1		-
Total	$	8,804	$	180	$	11

Credit Quality Information

For commercial real estate, agricultural real estate, construction, other commercial, other agricultural loans and state and political subdivision loans, management uses a nine point internal risk rating system to monitor the credit quality. The first five categories are considered not criticized and are aggregated as "Pass" rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The definitions of each rating are defined below:

·	Pass (Grades 1-5) – These loans are to customers with credit quality ranging from an acceptable to very high quality and are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral.

·	Special Mention (Grade 6) – This loan grade is in accordance with regulatory guidance and includes loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected.

·	Substandard (Grade 7) – This loan grade is in accordance with regulatory guidance and includes loans that have a well-defined weakness based on objective evidence and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

·	Doubtful (Grade 8) – This loan grade is in accordance with regulatory guidance and includes loans that have all the weaknesses inherent in a substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.

·	Loss (Grade 9) – This loan grade is in accordance with regulatory guidance and includes loans that are considered uncollectible, or of such value that continuance as an asset is not warranted.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay the loan as agreed, the Bank'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 Bank engages an external consultant on at least an annual basis. The external consultant is engaged to 1) review a minimum of 50% of the dollar volume of the commercial loan portfolio on an annual basis, 2) review new loans originated over $1.0 million in the last years, 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 December 31, 2017 and 2016 (in thousands):

2017	Pass		Special Mention		Substandard		Doubtful		Loss		Ending Balance
Real estate loans:
Commercial	$	281,742	$	15,029	$	11,271	$	42	$	-	$	308,084
Agricultural		222,198		11,538		6,221		-		-		239,957
Construction		13,364		-		138		-		-		13,502
Other commercial loans		67,706		615		3,567		125		-		72,013
Other agricultural loans		34,914		1,325		1,570		-		-		37,809
State and political subdivision loans		94,125		-		10,612		-		-		104,737
Total	$	714,049	$	28,507	$	33,379	$	167	$	-	$	776,102

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 equities and consumer loans, credit quality is monitored based on whether the loan is performing or non-performing, which is typically based on the aging status of the loan and payment activity, unless a specific action, such as bankruptcy, repossession, death or significant delay in payment occurs to raise awareness of a possible credit event. Non-performing loans include those loans that are considered nonaccrual, described in more detail below and all loans past due 90 or more days. The following table presents the recorded investment in those loan classes based on payment activity as of December 31, 2017 and 2016 (in thousands):

2017	Performing		Non-performing		PCI		Total
Real estate loans:
Mortgages	$	152,820	$	1,492	$	33	$	154,345
Home Equity		60,022		112		-		60,134
Consumer		9,895		49		-		9,944
Total	$	222,737	$	1,653	$	33	$	224,423

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 Loans by Class

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table includes an aging analysis of the recorded investment of past due loans as of December 31, 2017 and 2016 (in thousands):

	30-59 Days		60-89 Days		90 Days		Total Past							Total Financing	90 Days and
2017	Past Due		Past Due		Or Greater		Due		Current		PCI			Receivables	Accruing
Real estate loans:
Mortgages	$	996	$	362	$	810	$	2,168	$	152,144	$	33	$	154,345	$	218
Home Equity		277		86		78		441		59,693		-		60,134		-
Commercial		1,353		1,010		3,865		6,228		300,396		1,460		308,084		162
Agricultural		242		-		205		447		238,808		702		239,957		30
Construction		-		-		133		133		13,369		-		13,502		-
Consumer		53		33		49		135		9,809		-		9,944		7
Other commercial loans		132		-		2,372		2,504		69,066		443		72,013		32
Other agricultural loans		-		42		106		148		37,661		-		37,809		106
State and political
subdivision loans		-		-		-		-		104,737		-		104,737		-
Total	$	3,053	$	1,533	$	7,618	$	12,204	$	985,683	$	2,638	$	1,000,525	$	555

Loans considered non-accrual	$	816	$	281	$	7,063	$	8,160	$	2,011	$	-	$	10,171
Loans still accruing		2,237		1,252		555		4,044		983,672		2,638		990,354
Total	$	3,053	$	1,533	$	7,618	$	12,204	$	985,683	$	2,638	$	1,000,525

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 nonaccrual status upon reaching 90 days delinquency, unless the loan is well secured and in the process of collection, although the Company may be receiving partial payments of interest and partial repayments of principal on such loans or if full payment of principal and interest is not expected.

The following table reflects the loans on nonaccrual status as of December 31, 2017 and 2016, respectively. The balances are presented by class of loan (in thousands):

	2017		2016
Real estate loans:
Mortgages	$	1,274	$	1,475
Home Equity		112		95
Commercial		5,192		4,445
Agricultural		175		1,340
Construction		133		-
Consumer		42		42
Other commercial loans		2,637		4,057
Other agricultural loans		606		-
	$	10,171	$	11,454

Interest income on loans would have increased by approximately $709,000, $603,000 and $463,000 during 2017, 2016 and 2015, respectively, if these loans had performed in accordance with their terms.

Troubled Debt Restructurings (TDR)

In situations where, for economic or legal reasons related to a borrower's financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a TDR. Management strives to identify borrowers in financial difficulty early and work with them to modify more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal, management measures any impairment on the restructuring by calculating the present value of the revised loan terms and comparing this balance to the Company's investment in the loan prior to the restructuring. As these loans are individually evaluated, they are excluded from pooled portfolios when calculating the allowance for loan and lease losses and a separate allocation within the allowance for loan and lease losses is provided. Management continually evaluates loans that are considered TDRs, including payment history under the modified loan terms, the borrower's ability to continue to repay the loan based on continued evaluation of their operating results and cash flows from operations. Based on this evaluation management would no longer consider a loan to be a TDR when the relevant facts support such a conclusion. As of December 31, 2017, 2016 and 2015, included within the allowance for loan losses are reserves of $41,000, $29,000 and $37,000, respectively, that are associated with loans modified as TDRs.

Loan modifications that are considered TDRs completed during the years ended December 31, 2017, 2016 and 2015 were as follows (dollars in thousands):

	Number of contracts				Pre-modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
2017	Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification
Real estate loans:
Home Equity		-		1	$	-	$	25	$	-	$	25
Commercial		-		5		-		7,021		-		7,021
Agricultural		-		4		-		1,475		-		1,475
Other commercial loans		-		1		-		9		-		9
Other agricultural loans		-		1		-		161		-		161
Total		-		12	$	-	$	8,691	$	-	$	8,691

2016
Real estate loans:
Commercial		-		4	$	-	$	1,188	$	-	$	1,188
Agricultural		-		5		-		1,956		-		1,956
Other commercial loans		-		3		-		3,076		-		3,076
Other agricultural loans		-		7		-		1,558		-		1,558
Total		-		19	$	-	$	7,778	$	-	$	7,778

2015
Real estate loans:
Mortgages		1		1	$	71	$	19	$	71	$	19
Total		1		1	$	71	$	19	$	71	$	19

Recidivism, or the borrower defaulting on its obligation pursuant to a modified loan, results in the loan once again becoming a non-accrual loan. Recidivism occurs at a notably higher rate than do defaults on new origination loans, so modified loans present a higher risk of loss than do new origination loans. The following table presents the recorded investment in loans that were modified as TDRs during each 12-month period prior to the current reporting periods, which begin January 1, 2017, 2016 and 2015, respectively, and that subsequently defaulted during these reporting periods (dollars in thousands):

	December 31, 2017				December 31, 2016				December 31, 2015
	Number of contracts		Recorded investment		Number of contracts		Recorded investment		Number of contracts		Recorded investment

Other agricultural loans		2	$	632		-	$	-		-	$	-
Total recidivism		2	$	632		-	$	-		-	$	-

Foreclosed Assets Held For Sale

Foreclosed assets acquired in settlement of loans are carried at fair value, less estimated costs to sell, and are included in other assets on the Consolidated Balance Sheet. As of December 31, 2017 and 2016 included with other assets are $1,119,000, and $1,036,000, respectively, of foreclosed assets. As of December 31, 2017, included within the foreclosed assets is $254,000 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of December 31, 2017, the Company has initiated formal foreclosure proceedings on $1,600,000 of consumer residential mortgages, which have not yet been transferred into foreclosed assets.

Allowance for Loan Losses

The following tables roll forward the balance of the allowance for loan and lease losses for the years ended December 31, 2017, 2016 and 2015 and is segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of December 31, 2017, 2016 and 2015 (in thousands):

	Balance at December 31, 2016		Charge-offs			Recoveries		Provision (Benefit)			Balance at December 31, 2017		Individually evaluated for impairment		Collectively evaluated for impairment
Real estate loans:
Residential	$	1,064	$	(107	)	$	-	$	92		$	1,049	$	56	$	993
Commercial		3,589		(41	)		11		308			3,867		94		3,773
Agricultural		1,494		(30	)		-		1,679			3,143		3		3,140
Construction		47		-			-		(24	)		23		-		23
Consumer		122		(130	)		49		83			124		-		124
Other commercial loans		1,327		-			16		(71	)		1,272		231		1,041
Other agricultural loans		312		(5	)		1		184			492		26		466
State and political
subdivision loans		833		-			-		(17	)		816		-		816
Unallocated		98		-			-		306			404		-		404
Total	$	8,886	$	(313	)	$	77	$	2,540		$	11,190	$	410	$	10,780

	Balance at December 31, 2015		Charge-offs			Recoveries		Provision (Benefit)			Balance at December 31, 2016		Individually evaluated for impairment		Collectively evaluated for impairment
Real estate loans:
Residential	$	905	$	(85	)	$	-	$	244		$	1,064	$	32	$	1,032
Commercial		3,376		(100	)		479		(166	)		3,589		45		3,544
Agricultural		409		-			-		1,085			1,494		54		1,440
Construction		24		-			-		23			47		-		47
Consumer		102		(100	)		88		32			122		-		122
Other commercial loans		1,183		(55	)		33		166			1,327		326		1,001
Other agricultural loans		122		-			-		190			312		30		282
State and political
subdivision loans		593		-			-		240			833		-		833
Unallocated		392		-			-		(294	)		98		-		98
Total	$	7,106	$	(340	)	$	600	$	1,520		$	8,886	$	487	$	8,399

	Balance at December 31, 2014		Charge-offs			Recoveries		Provision (Benefit)			Balance at December 31, 2015		Individually evaluated for impairment		Collectively evaluated for impairment
Real estate loans:
Residential	$	878	$	(66	)	$	-	$	93		$	905	$	37	$	868
Commercial		3,419		(84	)		14		27			3,376		62		3,314
Agricultural		451		-			-		(42	)		409				409
Construction		26		-			-		(2	)		24		-		24
Consumer		84		(47	)		33		32			102		-		102
Other commercial loans		1,007		(41	)		2		215			1,183		256		927
Other agricultural loans		217		-			-		(95	)		122				122
State and political									-
subdivision loans		545		-			-		48			593		-		593
Unallocated		188		-			-		204			392		-		392
Total	$	6,815	$	(238	)	$	49	$	480		$	7,106	$	355	$	6,751

As discussed in Footnote 1, management evaluates various qualitative factors on a quarterly basis. The following are explanations for the changes in the allowance by portfolio segments:

2017

Residential - There was an increase in the historical loss factor for residential loans when comparing 2016 and 2017. The specific reserve for residential loans increased slightly between 2016 and 2017. The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans were increased for residential loans due to an increase in past due. The qualitative factor for national, state, regional and local economic trends and business conditions was decreased for residential loan categories due to an decrease in the unemployment rates in the local economy during 2017.

Commercial real estate– There was a decrease in the historical loss factor for commercial real estate loans when comparing 2016 and 2017. The specific reserve for commercial real estate loans increased slightly between 2016 and 2017. The qualitative factor for national, state, regional and local economic trends and business conditions was decreased for all commercial real estate loans due to an decrease in the unemployment rates in the local economy during 2017. The qualitative factors for changes in the levels of and trends in delinquencies, impaired and classified loans was decreased due to a lower amount of substandard loans.

Agricultural real estate – There was an increase in the historical loss factor for agricultural real estate loans from 2016 to 2017. The specific reserve for agricultural real estate loans decreased from 2016 to 2017. The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans was increased for agricultural real estate due to an increase in classified loans. The qualitative factor for national, state, regional and local economic trends and business conditions was decreased for agricultural real estate loans due to a decrease in the unemployment rates in the local economy during 2017. The qualitative factors for existence of credit concentrations and changes in the level of concentrations were increased for agricultural real estate loans due to growth in these loan categories.

Other commercial - There was a decrease in the historical loss factor for other commercial loans when comparing 2016 and 2017. The specific reserve for other commercial loans decreased from 2016 to 2017. The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans was decreased due to the decrease in non-accrual loans and past due loans. The qualitative factor for national, state, regional and local economic trends and business conditions was decreased for other commercial loans due to an decrease in the unemployment rates in the local economy during 2017. The qualitative factors for existence of credit concentrations and changes in the level of concentrations were decreased for other commercial loans due to limited organic growth in these loan categories.

Other agricultural - There was an increase in the historical loss factor for other agricultural loans from 2016 to 2017. The specific reserve for other agricultural loans decreased slightly from 2016 to 2017. The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans were increased for other agricultural loans due to an increase in past due, non-accrual and substandard loans. The qualitative factor for national, state, regional and local economic trends and business conditions was decreased for other agricultural loan categories due to a decrease in the unemployment rates in the local economy during 2017. The qualitative factors for existence of credit concentrations and changes in the level of concentrations were increased for other agricultural loans due to growth in these loan categories.

Municipal loans - There was no change in the historical loss factor or specific reserve for municipal loans from 2016 to 2017. The qualitative factor for national, state, regional and local economic trends and business conditions was decreased for municipal loans due to a decrease in the unemployment rates in the local economy during 2017.

2016

Residential - There was an increase in the historical loss factor for residential loans when comparing 2015 and 2016. The specific reserve for residential loans decreased slightly between 2015 and 2016. The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans were increased for residential loans due to an increase in past due, non-accrual and classified loans. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for residential loan categories due to an increase in the unemployment rates in the local economy during 2016.

Commercial real estate– There was a decrease in the historical loss factor for commercial real estate loans when comparing 2015 and 2016. The specific reserve for commercial real estate loans decreased slightly between 2015 and 2016. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for all commercial real estate loans due to an increase in the unemployment rates in the local economy during 2016. The qualitative factors for changes in quality of the institutions loan review system were increased for commercial real estate loans due to the addition of new staff and processes.

Agricultural real estate – There was no change in the historical loss factor for agricultural real estate loans from 2015 to 2016. The specific reserve for agricultural real estate loans increased from 2015 to 2016. The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans was increased for agricultural real estate due to an increase in past due, non-accrual and classified loans. The qualitative factor for industry conditions, including the effects of external factors such as competition, legal, and regulatory requirements on the level of estimated credit losses, was increased for agricultural real estate due to the decrease in the price received for product sold and the increase in feed costs that has occurred in 2016, which negatively affected customer earnings. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for agricultural real estate loans due to an increase in the unemployment rates in the local economy during 2016. The qualitative factors for changes in quality of the institutions loan review system were increased for agricultural real estate due to the addition of new staff and processes. The qualitative factors for trends in volume, terms and nature of the loan portfolio were increased for agricultural real estate loans due to growth in these loan categories.

Other commercial - There was an increase in the historical loss factor for other commercial loans when comparing 2015 and 2016. The specific reserve for other commercial loans increased from 2015 to 2016. The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans was not increased due to the increase being caused by one relationship instead of a larger trend. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for other commercial loans due to an increase in the unemployment rates in the local economy during 2016. The qualitative factors for changes in quality of the institutions loan review system were increased for other commercial due to the addition of new staff and processes.

Other agricultural - There was no change in the historical loss factor for other agricultural loans from 2015 to 2016. The specific reserve for other agricultural loans increased from 2015 to 2016. The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans were increased for other agricultural loans due to an increase in past due, non-accrual and classified loans The qualitative factor for industry conditions, including the effects of external factors such as competition, legal, and regulatory requirements on the level of estimated credit losses, was increased for other agricultural loans due to the decrease in the price received for product sold and the increase in feed costs that has occurred in 2016, which negatively affected customer earnings. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for other agricultural loan categories due to an increase in the unemployment rates in the local economy during 2016. The qualitative factors for changes in quality of the institutions loan review system were increased for other agricultural loans due to the addition of new staff and processes. The qualitative factors for trends in volume, terms and nature of the loan portfolio were increased for other agricultural loans due to growth in these loan categories.

Municipal loans - There was no change in the historical loss factor or the specific reserve for municipal loans from 2015 to 2016. The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans were increased for municipal loans due to an increase in classified loans. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for municipal loans due to an increase in the unemployment rates in the local economy during 2016. The qualitative factors for trends in volume, terms and nature of the loan portfolio were decreased for municipal loans due to this loan segment making up a smaller portion of the Bank's overall loan portfolio as we continue to grow commercial and agricultural loans. The qualitative factors for experience, ability, and depth of lending management was decreased for municipal loans due to employees gaining additional experience and the use of a third party in reviewing loan information.

2015

Residential - There was a decrease in the historical loss factor for residential loans when comparing 2014 and 2015. The specific reserve for residential loans increased slightly between 2014 and 2015. The qualitative factor for levels of and trends in charge-offs and recoveries was increased for residential real estate loans due to the increase in charge-offs compared to historical norms for the Company. The qualitative factors for changes in levels of and trends in delinquencies and impaired/classified loans was increased for residential mortgages due to increases in the amount of non-performing loans. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for residential loan categories due to an increase in the unemployment rates in the local economy during 2015 and the reduction in natural gas exploration and extraction activity.

Commercial real estate– There was an increase in the historical loss factor for commercial real estate loans when comparing 2014 and 2015. The specific reserve for commercial real estate loans decreased slightly between 2014 and 2015. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for all commercial real estate loans due to an increase in the unemployment rates in the local economy during 2015 and the reduction in natural gas exploration and extraction activity. The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans were increased for commercial real estate loans due to an increase in the amount of loans classified as substandard. The qualitative factor for levels of and trends in charge-offs and recoveries was decreased for commercial real estate due to the decrease in charge-offs compared to the prior year as charge-offs returned to historical norms for the Bank. The qualitative factor for experience, ability and depth of lending management and other relevant staff was decreased for commercial real estate, due to the length of time employees involved throughout the loan process have been in their positions.

Agricultural real estate – There were no changes in the historical loss factor and specifc reserve for agricultural real estate loans from 2014 to 2015. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for all agricultural real estate loans due to an increase in the unemployment rates in the local economy during 2015 and the reduction in natural gas exploration and extraction activity. The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans were decreased for agricultural real estate to the decrease in the amount of loans classified as substandard, excluding loans acquired as part of the FNB acquisition. The qualitative factor for experience, ability and depth of lending management and other relevant staff was decreased for agricultural real estate, due to the length of time employees involved throughout the loan process have been in their positions. The qualitative factor for industry conditions, including the effects of external factors such as competition, legal, and regulatory requirements on the level of estimated credit losses, was increased for agricultural real estate due to the decrease in the price received for product sold and the increase in feed costs that has occurred in 2015, which negatively affected customer earnings.

Other commercial - There was a decrease in the historical loss factor for other commercial loans when comparing 2014 and 2015. The specific reserve for other commercial loans increased from 2014 to 2015. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for other commercial loans due to an increase in the unemployment rates in the local economy during 2015 and the reduction in natural gas exploration and extraction activity. The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans were increased for other commercial loans due to an increase in the amount of loans classified as substandard. The qualitative factor for levels of and trends in charge-offs and recoveries was decreased for other commercial loans due to the decrease in charge-offs compared to the prior year as charge-offs returned to historical norms for the Bank. The qualitative factor for experience, ability and depth of lending management and other relevant staff was decreased for other commercial loans real estate, due to the length of time employees involved throughout the loan process have been in their positions.

Other agricultural - There were no changes in the historical loss factor or specific reserve for other agricultural loans from 2014 to 2015. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for other agricultural real estate loans due to an increase in the unemployment rates in the local economy during 2015 and the reduction in natural gas exploration and extraction activity. The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans were decreased for other agricultural loans to the decrease in the amount of loans classified as substandard, excluding loans acquired as part of the FNB acquisition. The qualitative factor for experience, ability and depth of lending management and other relevant staff was decreased for other agricultural loans, due to the length of time employees involved throughout the loan process have been in their positions. The qualitative factor for industry conditions, including the effects of external factors such as competition, legal, and regulatory requirements on the level of estimated credit losses, was increased for other agricultural loans due to the decrease in the price received for product sold and the increase in feed costs that has occurred in 2015, which negatively affected customer earnings.

Municipal loans - There were no changes in the historical loss factor or specific reserve for municipal loans from 2014 to 2015. The qualitative factor for national, state, regional and local economic trends and business conditions was increased for municipal loans due to an increase in the unemployment rates in the local economy during 2015 and the reduction in natural gas exploration and extraction activity.