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Loans
9 Months Ended
Sep. 30, 2015
Loans [Abstract]  
Loans
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 September 30, 2015 and December 31, 2014, a substantial portion of its debtors’ ability to honor their contracts is dependent on the economic conditions within these regions. The following table summarizes the primary segments of the loan portfolio and how those segments are analyzed within the allowance for loan losses as of September 30, 2015 and December 31, 2014 (in thousands):

September 30, 2015
 
Total Loans
Individually
 evaluated for
impairment
Collectively
evaluated for
impairment
Real estate loans:
       
     Residential
 
 $                 178,280
 $                        330
 $                 177,950
     Commercial and agricultural
 
                    233,931
                        5,583
                    228,348
     Construction
 
                      10,159
                                -
                      10,159
Consumer
 
                        8,473
                                -
                        8,473
Other commercial and agricultural loans
                      64,712
                        2,237
                      62,475
State and political subdivision loans
 
                      87,454
                                -
                      87,454
Total
 
                    583,009
 $                     8,150
 $                 574,859
Allowance for loan losses
 
                        7,045
   
Net loans
 
 $                 575,964
   

December 31, 2014
       
Real estate loans:
       
     Residential
 
 $                 185,438
 $                        316
 $                 185,122
     Commercial and agricultural
 
                    215,584
                        6,112
                    209,472
     Construction
 
                        6,353
                                -
                        6,353
Consumer
 
                        8,497
                                -
                        8,497
Other commercial and agricultural loans
 
                      58,516
                        2,394
                      56,122
State and political subdivision loans
 
                      79,717
                                -
                      79,717
Total
 
                    554,105
 $                     8,822
 $                 545,283
Allowance for loan losses
 
                        6,815
   
Net loans
 
 $                 547,290
   
 
 
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 or commercial real estate used during the construction phase of residential and commercial 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 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
September 30, 2015
Balance
Allowance
Allowance
Investment
Allowance
Real estate loans:
         
     Mortgages
 $       304
 $          119
 $          149
 $          268
 $          27
     Home Equity
            62
                  -
               62
               62
             12
     Commercial
       7,965
          5,314
               99
          5,413
             34
     Agricultural
170
             170
                  -
             170
                -
     Construction
               -
                  -
                  -
                  -
                -
Consumer
               -
                  -
                  -
                  -
                -
Other commercial loans
       2,238
          1,125
             999
          2,124
           123
Other agricultural loans
113
             113
                  -
             113
                -
State and political subdivision loans
               -
                  -
                  -
                  -
                -
Total
 $  10,852
 $       6,841
 $       1,309
 $       8,150
 $        196
           
December 31, 2014
         
Real estate loans:
         
     Mortgages
 $       222
 $          125
 $            66
 $          191
 $          13
     Home Equity
          130
               60
               65
             125
             12
     Commercial
       8,433
          5,708
             404
          6,112
             72
     Agricultural
               -
                  -
                  -
                  -
                -
     Construction
               -
                  -
                  -
                  -
                -
Consumer
               -
                  -
                  -
                  -
                -
Other commercial loans
       2,480
          2,346
               48
          2,394
               1
Other agricultural loans
               -
                  -
                  -
                  -
                -
State and political subdivision loans
               -
                  -
                  -
                  -
                -
Total
 $  11,265
 $       8,239
 $          583
 $       8,822
 $          98
 
 
The following tables includes the average balance of impaired financing receivables by class and the income recognized on impaired loans for the three and nine month periods ended September 30, 2015 and 2014(in thousands):

 
 For the Nine Months ended
 
September 30, 2015
September 30, 2014
     
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
 $       239
 $              8
 $              5
 $          201
 $            7
 $               -
     Home Equity
            97
                 3
                  -
             131
               3
                  -
     Commercial
       5,728
               46
                  -
          7,616
             66
                  -
     Agricultural
               19
                 1
                  -
                  -
                -
                  -
     Construction
               -
                  -
                  -
                  -
                -
                  -
Consumer
               -
                  -
                  -
               13
                -
                  -
Other commercial loans
       2,488
               64
                 4
          1,982
             61
                  -
Other agricultural loans
               13
                 1
                  -
                  -
                -
                  -
State and political subdivision loans
               -
                  -
                  -
                  -
                -
                  -
Total
 $    8,584
 $          123
 $              9
 $       9,943
 $        137
 $               -
             
 
 For the Three Months Ended
 
September 30, 2015
September 30, 2014
     
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
 $       269
 $              4
 $               -
 $          197
 $            3
 $               -
     Home Equity
            62
                 1
                  -
             130
               1
                  -
     Commercial
       5,462
               14
                  -
          6,770
             22
                  -
     Agricultural
            57
                 1
                  -
                  -
                -
                  -
     Construction
               -
                  -
                  -
                  -
                -
                  -
Consumer
               -
                  -
                  -
               10
                -
                  -
Other commercial loans
       2,107
               15
                 1
          1,943
             15
                  -
Other agricultural loans
               38
                 1
                  -
                  -
                -
                  -
State and political subdivision loans
               -
                  -
                  -
                  -
                -
                  -
Total
 $    7,995
 $            36
 $              1
 $       9,050
 $          41
 $               -

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, classified Special Mention, Substandard, Doubtful, or Loss, and 5) such other loans which management or the consultant deems appropriate.
 
The following tables represent credit exposures by internally assigned grades as of September 30, 2015 and December 31, 2014 (in thousands):

September 30, 2015
Pass
Special Mention
Substandard
Doubtful
Loss
Ending Balance
Real estate loans:
           
     Commercial
 $          181,306
 $           3,860
 $                  12,575
 $                34
 $              -
 $          197,775
     Agricultural
               32,326
              3,302
                          528
                      -
                 -
               36,156
     Construction
               10,123
                   36
                              -
                      -
                 -
               10,159
Other commercial loans
               46,435
                 480
                       5,140
                 140
                 -
               52,195
Other agricultural loans
               11,756
                 648
                          113
                      -
                 -
               12,517
State and political
           
   subdivision loans
               87,454
                      -
                              -
                      -
                 -
               87,454
Total
 $          369,400
 $           8,326
 $                  18,356
 $              174
 $              -
 $          396,256
             
December 31, 2014
           
Real estate loans:
           
     Commercial
 $          169,383
 $           8,948
 $                  12,614
 $                   -
 $              -
 $          190,945
     Agricultural
               19,575
              3,394
                       1,670
                      -
                 -
               24,639
     Construction
                 6,353
                      -
                              -
                      -
                 -
                 6,353
Other commercial loans
               40,683
              4,413
                       2,355
                      -
                 -
               47,451
Other agricultural loans
                 9,221
                 727
                       1,117
                      -
                 -
               11,065
State and political
           
   subdivision loans
               79,717
                      -
                              -
                      -
                 -
               79,717
Total
 $          324,932
 $         17,482
 $                  17,756
 $                   -
 $              -
 $          360,170
 
For residential real estate mortgages, home equity and consumer loans, credit quality is monitored based on whether the loan is performing or non-performing, which is typically based on the aging status of the loan and payment activity, unless a specific action, such as bankruptcy, repossession, death or significant delay in payment occurs to raise awareness of a possible credit event. Non-performing loans include those loans that are considered nonaccrual, described in more detail below, and all loans past due 90 or more days and still accruing. The following table presents the recorded investment in those loan classes based on payment activity as of September 30, 2015 and December 31, 2014 (in thousands):
 
September 30, 2015
Performing
Non-performing
Total
Real estate loans:
     
     Mortgages
 $          117,363
 $           1,032
 $                118,395
     Home Equity
               59,714
                 171
                     59,885
Consumer
                 8,421
                   52
                       8,473
Total
 $          185,498
 $           1,255
 $                186,753
       
December 31, 2014
Performing
Non-performing
Total
Real estate loans:
     
     Mortgages
 $          121,968
 $              890
 $                122,858
     Home Equity
               62,296
                 284
                     62,580
Consumer
                 8,444
                   53
                       8,497
Total
 $          192,708
 $           1,227
 $                193,935

Aging Analysis of Past Due Financing Receivables
 
Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table includes an aging analysis of the recorded investment of past due financing receivables as of September 30, 2015 and December 31, 2014 (in thousands):

               
90 Days or
   
30-59 Days
60-89 Days
90 Days
Total Past
 
Total Financing
Greater and
September 30, 2015
Past Due
Past Due
Or Greater
Due
Current
Receivables
Accruing
Real estate loans:
             
     Mortgages
 $        388
 $        133
 $        663
 $     1,184
 $   117,211
 $           118,395
 $            303
     Home Equity
           521
             21
           158
           700
        59,185
                59,885
               106
     Commercial
           302
           130
        4,138
        4,570
      193,205
              197,775
                 60
     Agricultural
             38
           170
                -
           208
        35,948
                36,156
                   -
     Construction
                -
                -
                -
                -
        10,159
                10,159
                   -
Consumer
             41
             29
             24
             94
          8,379
                  8,473
                   -
Other commercial loans
           528
             30
           756
        1,314
        50,881
                52,195
               199
Other agricultural loans
             30
           168
                -
           198
        12,319
                12,517
                   -
State and political subdivision loans
                -
                -
                -
                -
        87,454
                87,454
                   -
 
Total
 $     1,848
 $        681
 $     5,739
 $     8,268
 $   574,741
 $           583,009
 $            668
Loans considered non-accrual
 $        319
 $        204
 $     5,071
 $     5,594
 $          725
 $               6,319
 
Loans still accruing
        1,529
           477
           668
        2,674
      574,016
              576,690
 
 
Total
 $     1,848
 $        681
 $     5,739
 $     8,268
 $   574,741
 $           583,009
 

December 31, 2014
             
Real estate loans:
             
     Mortgages
 $        318
 $        230
 $        675
 $     1,223
 $   121,635
 $           122,858
 $            214
     Home Equity
           442
             99
           260
           801
        61,779
                62,580
               132
     Commercial
             97
           231
        1,432
        1,760
      189,185
              190,945
               310
     Agricultural
                -
                -
                -
                -
        24,639
                24,639
                   -
     Construction
                -
                -
                -
                -
          6,353
                  6,353
                   -
Consumer
           119
               4
               7
           130
          8,367
                  8,497
                   6
Other commercial loans
           503
           258
           476
        1,237
        46,214
                47,451
               174
Other agricultural loans
                -
                -
                -
                -
        11,065
                11,065
                   -
State and political subdivision loans
                -
                -
                -
                -
        79,717
                79,717
                   -
 
Total
 $     1,479
 $        822
 $     2,850
 $     5,151
 $   548,954
 $           554,105
 $            836
Loans considered non-accrual
 $          48
 $        181
 $     2,014
 $     2,243
 $       4,356
 $               6,599
 
Loans still accruing
        1,431
           641
           836
        2,908
      544,598
              547,506
 
 
Total
 $     1,479
 $        822
 $     2,850
 $     5,151
 $   548,954
 $           554,105
 
 
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 September 30, 2015 and December 31, 2014, respectively. The balances are presented by class of financing receivable (in thousands):

   
September 30, 2015
 
December 31, 2014
Real estate loans:
     
     Mortgages
 $                         729
 
 $                   676
     Home Equity
                              65
 
                      152
     Commercial
                         4,441
 
                   5,010
     Agricultural
                              -
 
                        -
     Construction
                              -
 
                        -
Consumer
                              52
 
                        47
Other commercial loans
                         1,032
 
                      714
Other agricultural loans
                              -
 
                        -
State and political subdivision loans
                              -
 
                        -
   
 $                      6,319
 
 $                6,599

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 interest or principal, or both, management measures any impairment on the restructuring by calculating the present value of the revised loan terms and comparing this balance to the Company’s investment in the loan prior to the restructuring. As these loans are individually evaluated, they are excluded from pooled portfolios when calculating the allowance for loan and lease losses and a separate allocation within the allowance for loan and lease losses is provided. Management continually evaluates loans that are considered TDRs, including payment history under the modified loan terms, the borrower’s ability to continue to repay the loan based on continued evaluation of their operating results and cash flows from operations.  Based on this evaluation management would no longer consider a loan to be a TDR when the relevant facts support such a conclusion. As of September 30, 2015 and December 31, 2014, included within the allowance for loan losses are reserves of $39,000 and $26,000 respectively, that are associated with loans modified as TDRs.
 
There were no loan modifications that were considered TDRs during the three months ended September 30, 2015 or 2014. Loan modifications that are considered TDRs completed during the nine months ended September 30, 2015 and 2014 were as follows (dollars in thousands):
 
 
For the Nine Months Ended September 30, 2015
 
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
                          1
 $                 71
 $                  19
 $               71
  $               19
Total
                    1
                          1
 $                 71
 $                  19
 $               71
 $               19


 
For the Nine Months Ended September 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
 
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, 2015 and 2014 (nine month periods) and July 1, 2015 and 2014 (3 month periods), respectively, and that subsequently defaulted during these reporting periods (dollars in thousands):

 
For the Three Months Ended
For the Nine Months Ended
 
September 30, 2015
September 30, 2014
September 30, 2015
September 30, 2014
 
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
 $              483
Total recidivism
                   -
 $              -
                   -
 $              -
                   -
 $              -
             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 September 30, 2015 and December 31, 2014, respectively (in thousands):
 
 
September 30, 2015
 
 December 31, 2014
 
Individually
evaluated for
impairment
Collectively
evaluated for
impairment
Total
 
Individually
evaluated for
impairment
Collectively
evaluated for
impairment
Total
Real estate loans:
             
     Residential
 $           39
 $         874
 $         913
 
 $           25
 $           853
 $             878
     Commercial and agricultural
              34
         3,769
3,803
 
              72
           3,798
             3,870
     Construction
                 -
              17
17
 
                 -
                26
                  26
Consumer
                 -
              91
91
 
                 -
                84
                  84
Other commercial and agricultural loans
            123
         1,322
1,445
 
                1
           1,223
             1,224
State and political subdivision loans
                 -
            586
586
 
                 -
              545
                545
Unallocated
                 -
            190
190
 
                 -
              188
                188
Total
 $         196
 $      6,849
 $      7,045
 
 $           98
 $        6,717
 $          6,815
 
The following tables roll forward the balance of the ALLL by portfolio segment for the three and nine month periods ended September 30, 2015 and 2014, respectively (in thousands):
 
 
Balance at
June 30, 2015
Charge-offs
Recoveries
Provision
Balance at
 September 30, 2015
Real estate loans:
         
     Residential
 $         931
 $              -
 $              -
 $       (18)
 $         913
     Commercial and agricultural
         3,679
                 -
                4
          120
         3,803
     Construction
              14
                 -
                 -
              3
              17
Consumer
              89
             (11)
              13
               -
              91
Other commercial and agricultural loans
         1,502
             (40)
                 -
          (17)
         1,445
 State and political subdivision loans
            568
                 -
                 -
            18
            586
Unallocated
            176
                 -
                 -
            14
            190
Total
 $      6,959
 $          (51)
 $           17
 $       120
 $      7,045
           
 
Balance at
December 31, 2014
Charge-offs
Recoveries
Provision
Balance at
September 30, 2015
Real estate loans:
         
     Residential
 $         878
 $          (34)
 $              -
 $         69
 $         913
     Commercial and agricultural
         3,870
             (56)
              11
          (22)
         3,803
     Construction
              26
                 -
                 -
            (9)
              17
Consumer
              84
             (35)
              25
            17
              91
Other commercial and agricultural loans
         1,224
             (41)
                 -
          262
         1,445
State and political subdivision loans
            545
                 -
                 -
            41
            586
Unallocated
            188
                 -
                 -
              2
            190
Total
 $      6,815
 $        (166)
 $           36
 $       360
 $      7,045
           
 
Balance at
June 30, 2014
Charge-offs
Recoveries
Provision
Balance at
September 30, 2014
Real estate loans:
         
     Residential
 $         879
 $              -
 $              -
 $           7
 $         886
     Commercial and agricultural
         3,809
             (11)
                4
          (99)
         3,703
     Construction
              13
                 -
                 -
            10
              23
Consumer
              86
             (26)
                6
            20
              86
Commercial and other loans
         1,151
             (58)
                 -
            70
         1,163
State and political subdivision loans
            455
                 -
                 -
            (5)
            450
Unallocated
            358
                 -
                 -
          147
            505
Total
 $      6,751
 $          (95)
 $           10
 $       150
 $      6,816
 
 
Balance at December 31, 2013
Charge-offs
Recoveries
Provision
Balance at
September 30, 2014
Real estate loans:
         
     Residential
 $         946
 $          (45)
 $              -
 $       (15)
 $         886
     Commercial and agricultural
         4,558
           (486)
                9
        (378)
         3,703
     Construction
              50
                 -
                 -
          (27)
              23
Consumer
            105
             (40)
              21
               -
              86
Commercial and other loans
            942
           (221)
                 -
          442
         1,163
State and political subdivision loans
            330
                 -
                 -
          120
            450
Unallocated
            167
                 -
                 -
          338
            505
Total
 $      7,098
 $        (792)
 $           30
 $       480
 $      6,816
 
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; and
·  
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 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 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.

We continually review the model utilized in calculating the required ALLL. The following qualitative factors experienced changes during the first nine months of 2015:
 
·  
The qualitative factor for national, state, regional and local economic trends and business conditions was increased for all loan categories due to an increase in the unemployment rates in the local economy during the first nine months of 2015.
·  
The qualitative factors for changes in levels of and trends in delinquencies and impaired/classified loans were decreased for commercial and agricultural real estate due to the decrease in the amount of loans classified as substandard. While there has been an increase in delinquencies of commercial and agricultural real estate loans, the qualitative factor was not increased. The increase in delinquencies is attributable to one relationship, which is classified as impaired and management does not believe that this delinquency is a reflection of a further decrease in the credit quality of the commercial and agricultural real estate loan portfolio.
·  
The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans were increased for other commercial and agricultural 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 and agricultural real estate and other commercial and agricultural 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 commercial real estate, agricultural real estate, other commercial and 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 commercial and agricultural related 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.
·  
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 following qualitative factors experienced changes during the three months ended September 30, 2015:
·  
The qualitative factors for changes in levels of and trends in delinquencies and impaired/classified loans were increased for other agricultural loans due to an increase in the amount of classified loans.
·  
The qualitative factor for levels of and trends in charge-offs and recoveries was increased for other commercial loans due to the increase in charge-offs during the quarter.
 
The primary factor that resulted in negative provision for commercial and agricultural loans for the nine month period ended September 30, 2015 was the reduction in the amount of special mention and substandard loans since December 31, 2014.
 
The following qualitative factors experienced changes during the first nine 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 and state economy.
·  
The qualitative factors for changes in levels of and trends in delinquencies and 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 and a decrease in the amount of loans past due.
·  
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 2014.
·  
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 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 decreased for agricultural related loans due to the improvement in the agricultural economy during 2014.

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

·  
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 factors for changes in levels of and trends in delinquencies, impaired/classified loans were decreased for other commercial loans real estate due to the decrease in the amount of loans past due as of September 30, 2014.
·  
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 decreased for agricultural related loans due to the improvement in the agricultural economy during 2014.
 
The primary factor that resulted in negative provisions for certain portfolio segments for the three and nine month periods in 2014 was 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.

Foreclosed Assets Held For Sale
 
Foreclosed assets acquired in settlement of loans are carried at fair value, less estimated costs to sell, and are included in other assets on the Consolidated Balance Sheet. As of September 30, 2015 and December 31, 2014 included with other assets are $1,429,000 and $1,792,000, respectively, of foreclosed assets. As of September 30, 2015, included within the foreclosed assets is $305,000 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of September 30, 2015, the Company has initiated formal foreclosure proceedings on $1,256,000 of consumer residential mortgages, which have not yet been transferred into foreclosed assets.