Note 5 – Loans

The Company grants loans primarily to customers throughout North Central Pennsylvania and Southern New York. Although the Company had a diversified loan portfolio at June 30, 2014 and December 31, 2013, 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, 2014 and December 31, 2013 (in thousands):

June 30, 2014	Total Loans		Individually evaluated for impairment		Collectively evaluated for impairment
Real estate loans:
Residential	$	187,183	$	330	$	186,853
Commercial and agricultural		210,786		7,069		203,717
Construction		3,474		-		3,474
Consumer		8,692		15		8,677
Other commercial and agricultural loans		58,090		2,323		55,767
State and political subdivision loans		71,652		-		71,652
Total		539,877	$	9,737	$	530,140
Allowance for loan losses		6,751
Net loans	$	533,126

December 31, 2013	Total Loans		Individually evaluated for impairment		Collectively evaluated for impairment
Real estate loans:
Residential	$	187,101	$	342	$	186,759
Commercial and agricultural		215,088		8,310		206,778
Construction		8,937		-		8,937
Consumer		9,563		15		9,548
Other commercial and agricultural loans		54,029		1,733		52,296
State and political subdivision loans		65,894		-		65,894
Total		540,612	$	10,400	$	530,212
Allowance for loan losses		7,098
Net loans	$	533,514

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 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 secured by a mortgage which is often a second lien on residential real estate with terms of 15 years or less. 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 or commercial real estate used during the construction phase of residential and commercial projects. Consumer loans are typically unsecured or primarily secured by something 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 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, with the associated allowance amount, if applicable (in thousands):

			Recorded		Recorded
	Unpaid		Investment		Investment		Total
	Principal		With No		With		Recorded		Related
June 30, 2014	Balance		Allowance		Allowance		Investment		Allowance
Real estate loans:
Mortgages	$	226	$	131	$	68	$	199	$	14
Home Equity		132		64		67		131		13
Commercial		9,283		6,161		908		7,069		101
Agricultural		-		-		-		-		-
Construction		-		-		-		-		-
Consumer		15		15		-		15		-
Other commercial loans		2,535		1,434		889		2,323		30
Other agricultural loans		-		-		-		-		-
State and political subdivision loans		-		-		-		-		-
Total	$	12,191	$	7,805	$	1,932	$	9,737	$	158

December 31, 2013
Real estate loans:
Mortgages	$	232	$	138	$	70	$	208	$	14
Home Equity		134		65		69		134		13
Commercial		9,901		6,335		1,975		8,310		305
Agricultural		-		-		-		-		-
Construction		-		-		-		-		-
Consumer		15		15		-		15		-
Other commercial loans		1,794		1,679		54		1,733		1
Other agricultural loans		-		-		-		-		-
State and political subdivision loans		-		-		-		-		-
Total	$	12,076	$	8,232	$	2,168	$	10,400	$	333

The following tables includes the average balance of impaired financing receivables by class and the income recognized on impaired loans for the three and six month periods ended June 30, 2014 and 2013(in thousands):

	For the Six Months ended
	June 30, 2014						June 30, 2013
					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	$	202	$	4	$	-	$	330	$	4	$	-
Home Equity		132		2		-		137		2		-
Commercial		8,039		44		-		8,595		84		35
Agricultural		-		-		-		-		-		-
Construction		-		-		-		-		-		-
Consumer		15		-		-		-		-		-
Other commercial loans		2,000		46		-		1,786		41		-
Other agricultural loans		-		-		-		-		-		-
State and political subdivision loans		-		-		-		-		-		-
Total	$	10,388	$	96	$	-	$	10,848	$	131	$	35

	For the Three Months Ended
	June 30, 2014						June 30, 2013
					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	$	200	$	2	$	-	$	352	$	2	$	-
Home Equity		131		1		-		136		1		-
Commercial		7,544		18		-		8,406		39		21
Agricultural		-		-		-		-		-		-
Construction		-		-		-		-		-		-
Consumer		15		-		-		-		-		-
Other commercial loans		2,108		13		-		1,916		22		-
Other agricultural loans		-		-		-		-		-		-
State and political subdivision loans		-		-		-		-		-		-
Total	$	9,998	$	34	$	-	$	10,810	$	64	$	21

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 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 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 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, agricultural and municipal 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 55% of the dollar volume of the commercial loan portfolio on an annual basis, 2) review new loans originated in the last year, 3) review all relationships in aggregate over $500,000, 4) review all aggregate loan relationships over $100,000 which are over 90 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, 2014 and December 31, 2013 (in thousands):

June 30, 2014	Pass		Special Mention		Substandard		Doubtful		Loss		Ending Balance
Real estate loans:
Commercial	$	162,474	$	9,735	$	14,768	$	-	$	-	$	186,977
Agricultural		18,657		2,991		2,161		-		-		23,809
Construction		3,474		-		-		-		-		3,474
Other commercial loans		39,143		5,233		3,574		58		-		48,008
Other agricultural loans		7,667		468		1,947		-		-		10,082
State and political subdivision loans		71,652		-		-		-		-		71,652
Total	$	303,067	$	18,427	$	22,450	$	58	$	-	$	344,002

December 31, 2013
Real estate loans:
Commercial	$	166,956	$	4,645	$	21,284	$	202	$	-	$	193,087
Agricultural		15,923		1,910		4,168		-		-		22,001
Construction		8,937		-		-		-		-		8,937
Other commercial loans		40,798		1,747		1,938		5		-		44,488
Other agricultural loans		7,431		153		1,957		-		-		9,541
State and political subdivision loans		65,894		-		-		-		-		65,894
Total	$	305,939	$	8,455	$	29,347	$	207	$	-	$	343,948

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. The following table presents the recorded investment in those loan classes based on payment activity as of June 30, 2014 and December 31, 2013 (in thousands):

June 30, 2014	Performing		Non-performing		Total
Real estate loans:
Mortgages	$	121,682	$	793	$	122,475
Home Equity		64,557		151		64,708
Consumer		8,658		34		8,692
Total	$	194,897	$	978	$	195,875

December 31, 2013
Real estate loans:
Mortgages	$	119,075	$	809	$	119,884
Home Equity		66,989		228		67,217
Consumer		9,547		16		9,563
Total	$	195,611	$	1,053	$	196,664

Age 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, 2014 and December 31, 2013 (in thousands):

	30-59 Days		60-89 Days		90 Days		Total Past				Total Financing		90 Days and
June 30, 2014	Past Due		Past Due		Or Greater		Due		Current		Receivables		Accruing
Real estate loans:
Mortgages	$	575	$	168	$	535	$	1,278	$	121,197	$	122,475	$	-
Home Equity		605		247		119		971		63,737		64,708		46
Commercial		88		12		2,021		2,121		184,856		186,977		301
Agricultural		-		-		-		-		23,809		23,809		-
Construction		-		-		-		-		3,474		3,474		-
Consumer		33		90		15		138		8,554		8,692		-
Other commercial loans		55		408		485		948		47,060		48,008		-
Other agricultural loans		437		-		-		437		9,645		10,082		-
State and political subdivision loans		-		-		-		-		71,652		71,652		-
Total	$	1,793	$	925	$	3,175	$	5,893	$	533,984	$	539,877	$	347

Loans considered non-accrual	$	112	$	407	$	2,828	$	3,347	$	4,214	$	7,561
Loans still accruing		1,681		518		347		2,546		529,770		532,316
Total	$	1,793	$	925	$	3,175	$	5,893	$	533,984	$	539,877

December 31, 2013
Real estate loans:
Mortgages	$	362	$	40	$	739	$	1,141	$	118,743	$	119,884	$	301
Home Equity		632		2		229		863		66,354		67,217		51
Commercial		88		319		3,091		3,498		189,589		193,087		344
Agricultural		-		-		-		-		22,001		22,001		-
Construction		-		-		-		-		8,937		8,937		-
Consumer		96		36		16		148		9,415		9,563		1
Other commercial loans		29		28		49		106		44,382		44,488		-
Other agricultural loans		-		-		-		-		9,541		9,541		-
State and political subdivision loans		-		-		-		-		65,894		65,894		-
Total	$	1,207	$	425	$	4,124	$	5,756	$	534,856	$	540,612	$	697

Loans considered non-accrual	$	98	$	164	$	3,427	$	3,689	$	4,408	$	8,097
Loans still accruing		1,109		261		697		2,067		530,448		532,515
Total	$	1,207	$	425	$	4,124	$	5,756	$	534,856	$	540,612

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 on non-accrual status as of June 30, 2014 and December 31, 2013, respectively. The balances are presented by class of financing receivable (in thousands):

	June 30 2014		December 31, 2013
Real estate loans:
Mortgages	$	793	$	508
Home Equity		105		177
Commercial		5,703		7,247
Agricultural		-		-
Construction		-		-
Consumer		34		15
Other commercial loans		926		150
Other agricultural loans		-		-
State and political subdivision		-		-
	$	7,561	$	8,097

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 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 June 30, 2014 and December 31, 2013, included within the allowance for loan losses are reserves of $30,000 and $28,000 respectively, that are associated with loans modified as TDRs.

There were no loan modifications that were considered TDRs during the three months ended June 30, 2013. Loan modifications that are considered TDRs completed during the six months ended June 30, 2014 and 2013 and the three months ended June 30, 2014, were as follows (dollars in thousands):

	For the Three Months Ended June 30, 2014
	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	$	-	$	28	$	-	$	28
Total		-		1	$	-	$	28	$	-	$	28

	For the Six Months Ended June 30, 2014
	Number of contracts				Pre-modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
	Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification
Real estate loans:
Commercial		-		2	$	-	$	153	$	-	$	153
Total		-		2	$	-	$	153	$	-	$	153

	For the Six Months Ended June 30, 2013
	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		-	$	72	$	-	$	72	$	-
Commercial		-		2		-		1,365		-		1,365
Other commercial loans		-		2		-		1,530		-		1,530
Total		1		4	$	72	$	2,895	$	72	$	2,895

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, 2014 and 2013 (six month periods) and April 1, 2014 and 2013 (3 month periods), respectively, and that subsequently defaulted during these reporting periods (dollars in thousands):

	For the Three Months Ended								For the Six Months Ended
	June 30, 2014				June 30, 2013				June 30, 2014				June 30, 2013
	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	$	535		1	$	483		-	$	-
Total recidivism		-	$	-		1	$	535		1	$	483		-	$	-

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, 2014 and December 31, 2013, respectively (in thousands):

	June 30, 2014						December 31, 2013
	Individually evaluated for impairment		Collectively evaluated for impairment		Total		Individually evaluated for impairment		Collectively evaluated for impairment		Total
Real estate loans:
Residential	$	27	$	852	$	879	$	27	$	919	$	946
Commercial and agricultural		101		3,708		3,809		305		4,253		4,558
Construction		-		13		13		-		50		50
Consumer		-		86		86		-		105		105
Other commercial and agricultural loans		30		1,121		1,151		1		941		942
State and political subdivision loans		-		455		455		-		330		330
Unallocated		-		358		358		-		167		167
Total	$	158	$	6,593	$	6,751	$	333	$	6,765	$	7,098

The following tables roll forward the balance of the ALLL by portfolio segment for the three and six month periods ended June 30, 2014 and 2013, respectively (in thousands):

	Balance at March 31, 2014		Charge-offs			Recoveries		Provision			Balance at June 30, 2014
Real estate loans:
Residential	$	886	$	(7	)	$	-	$	-		$	879
Commercial and agricultural		4,530		(465	)		3		(259	)		3,809
Construction		8		-			-		5			13
Consumer		83		(6	)		6		3			86
Other commercial and agricultural loans		1,173		(163	)		-		141			1,151
State and political subdivision loans		396		-			-		59			455
Unallocated		157		-			-		201			358
Total	$	7,233	$	(641	)	$	9	$	150		$	6,751

	Balance at December 31, 2013		Charge-offs			Recoveries		Provision			Balance at June 30, 2014
Real estate loans:
Residential	$	946	$	(45	)	$	-	$	(22	)	$	879
Commercial and agricultural		4,558		(475	)		5		(279	)		3,809
Construction		50		-			-		(37	)		13
Consumer		105		(14	)		15		(20	)		86
Other commercial and agricultural loans		942		(163	)		-		372			1,151
State and political subdivision loans		330		-			-		125			455
Unallocated		167		-			-		191			358
Total	$	7,098	$	(697	)	$	20	$	330		$	6,751

	Balance at March 31, 2013		Charge-offs			Recoveries		Provision			Balance at June 30, 2013
Real estate loans:
Residential	$	913	$	(13	)	$	-	$	34		$	934
Commercial and agricultural		4,416		-			-		(176	)		4,240
Construction		78		-			-		13			91
Consumer		118		(10	)		9		(3	)		114
Other commercial and agricultural loans		700		-			-		257			957
State and political subdivision loans		303		-			-		7			310
Unallocated		400		-			-		(57	)		343
Total	$	6,928	$	(23	)	$	9	$	75		$	6,989

	Balance at December 31, 2012		Charge-offs			Recoveries		Provision			Balance at June 30, 2013
Real estate loans:
Residential	$	875	$	(13	)	$	2	$	70		$	934
Commercial and agricultural		4,437		-			-		(197	)		4,240
Construction		38		-			-		53			91
Consumer		119		(30	)		21		4			114
Other commercial and agricultural loans		728		-			-		229			957
State and political subdivision loans		271		-			-		39			310
Unallocated		316		-			-		27			343
Total	$	6,784	$	(43	)	$	23	$	225		$	6,989

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 Bank’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, 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 Bank’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 / 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; and

·	Existence and effect of any credit concentrations, and changes in the level of such concentrations.

·	Any change in the level of board oversight

The Company also maintains an unallocated allowance to account for any factors or conditions that may cause a potential loss but are not specifically addressed in the process described above. The Company analyzes its loan portfolio each quarter to determine the appropriateness of its allowance for loan losses.

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.

We continually review the model utilized in calculating the required allowance. The following qualitative factors experienced changes during the first six months of 2014:

·	The qualitative factor for national, state, regional and local economic trends and business conditions was decreased for all loan categories due to a decrease in the unemployment rates in the local economy.

·	The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans were decreased for commercial and agricultural real estate due to the decrease in the Company’s classified loans to its lowest level in three years.

·	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 classified loans during the quarter.

·	The qualitative factor for levels of and trends in charge-offs and recoveries was increased for commercial real estate and other commercial loans due to the increase in charge-offs compared to historical norms for the Bank.

·	The qualitative factor for experience, ability and depth of lending management and other relevant staff was decreased for all loan categories due to the length of time employees involved throughout the loan process have been in their positions.

The following qualitative factors experienced changes during the three months ended June 30, 2014:

·	The qualitative factor for national, state, regional and local economic trends and business conditions was decreased for all loan categories due to a decrease in the unemployment rates in the local economy.

·	The qualitative factor for levels of and trends in charge-offs and recoveries was increased for commercial real estate and other commercial loans due to the increase in charge-offs compared to historical norms for the Bank.

·	The qualitative factor for experience, ability and depth of lending management and other relevant staff was decreased for all loan categories due to the length of time employees involved throughout the loan process have been in their positions.

·	The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans were decreased for commercial real estate due to the decrease in the Company’s classified loans.

·	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 classified loans during the quarter.

The primary factor that resulted in negative provisions for certain portfolio segments for the three and six month periods ended is due to decreases in the outstanding balances for certain portfolio segments compared to December 31, 2013, a reduction in the amount of substandard loans and the decrease in the qualitative factor associated with the improvement in unemployment rates noted above.

The following qualitative factors experienced changes during the first six months of 2013:

·	The qualitative factor for national, state, regional and local economic trends and business conditions was increased for all loan categories due to rising unemployment rates in the local economy as a result of the slowdown in Marcellus shale natural gas exploration activities.

The qualitative factor for trends in volume, terms and nature of the loan portfolio was increased for commercial and agricultural real estate, other commercial and agricultural loans and state and political subdivision loan categories due to the increase of the number of loans that are participations that were purchased from other banks and therefore subject to different underwriting standards.

·	The qualitative factor for the existence and effect of any credit concentrations and changes in the level of such concentrations was increased for other commercial and agricultural loans and was lowered for commercial and agricultural real estate as the loan growth has slowed in 2013.

The following qualitative factors experienced changes during the three months ended June 30, 2013:

·	The qualitative factor for the existence and effect of any credit concentrations and changes in the level of such concentrations was increased for other commercial and agricultural loans and was lowered for commercial and agricultural real estate as the loan growth has slowed in 2013.