Note 5 – Loans

The Company grants loans primarily to customers throughout north central, central and south central Pennsylvania and the southern tier of New York.  Although the Company had a diversified loan portfolio at September 30, 2018 and December 31, 2017, 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, 2018 and December 31, 2017 (in thousands):

September 30, 2018	Total Loans		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Collectively evaluated for impairment
Real estate loans:
Residential	$	213,255	$	915	$	30	$	212,310
Commercial		312,982		14,148		1,345		297,489
Agricultural		280,569		5,038		683		274,848
Construction		30,262		-		-		30,262
Consumer		9,702		-		-		9,702
Other commercial loans		72,219		3,368		518		68,333
Other agricultural loans		39,917		1,448		-		38,469
State and political subdivision loans		101,425		-		-		101,425
Total		1,060,331		24,917		2,576		1,032,838
Allowance for loan losses		12,383		654		-		11,729
Net loans	$	1,047,948	$	24,263	$	2,576	$	1,021,109

December 31, 2017	Total Loans		Individually evaluated for mpairment		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

Purchased loans are recorded at fair value on their purchase date without a carryover of the related allowance for loan losses. Upon acquisition, the Company evaluates whether an acquired loan was within the scope of ASC 310-30, Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality. Purchased credit-impaired ("PCI") loans are loans that have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. Based upon management's review, there were no material decreases in the expected cash flows of these loans between the acquisition date and September 30, 2018. 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 $2,576,000 and $2,638,000 at September 30, 2018 and December 31, 2017, respectively. The carrying value of the PCI loans was determined by projected discounted contractual cash flows and collateral valuations.

Changes in the accretable yield for PCI loans were as follows for the three and nine months ended September 30, 2018 and 2017, respectively (in thousands):

	Three months ended						Nine months ended
	September 30,						September 30,
	2018			2017			2018			2017
Balance at beginning of period	$	59		$	167		$	106		$	389
Accretion		(24	)		(90	)		(71	)		(312	)
Reclassification of non-accretable discount		93			-			93			-
Balance at end of period	$	128		$	77		$	128		$	77

The following table presents additional information regarding loans acquired with specific evidence of deterioration in credit quality under ASC 310-30 (in thousands):

	September 30, 2018		December 31, 2017
Outstanding balance	$	5,340	$	5,295
Carrying amount		2,576		2,638

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

Management considers other commercial loans, other agricultural loans, state and political subdivision loans, commercial real estate loans and agricultural real estate loans which are 90 days or more past due to be impaired. Management will also consider a loan impaired based on other factors it becomes aware of, including the customer's results of operations and cash flows or if the loan is modified in a troubled debt restructuring. In addition, certain residential mortgages, home equity and consumer loans that are cross collateralized with commercial relationships that are determined to be impaired may also be classified as impaired. Impaired loans are analyzed to determine if it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allocation of the allowance for loan losses or a charge-off to the allowance for loan losses.

The following table includes the recorded investment and unpaid principal balances for impaired financing receivables by class, excluding PCI loans, with the associated allowance amount, if applicable (in thousands):

			Recorded		Recorded
	Unpaid		Investment		Investment		Total
	Principal		With No		With		Recorded		Related
September 30, 2018	Balance		Allowance		Allowance		Investment		Allowance
Real estate loans:
Mortgages	$	939	$	360	$	466	$	826	$	12
Home Equity		108		12		77		89		15
Commercial		17,043		12,595		1,553		14,148		224
Agricultural		5,050		1,752		3,286		5,038		86
Construction		-		-		-		-		-
Consumer		-		-		-		-		-
Other commercial loans		3,956		2,990		378		3,368		152
Other agricultural loans		1,498		114		1,334		1,448		165
State and political subdivision loans		-		-		-		-		-
Total	$	28,594	$	17,823	$	7,094	$	24,917	$	654

			Recorded		Recorded
	Unpaid		Investment		Investment		Total
	Principal		With No		With		Recorded		Related
December 31, 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
Construction		-		-		-		-		-
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
State and political subdivision loans		-		-		-		-		-
Total	$	28,887	$	21,756	$	2,642	$	24,398	$	410

The following tables includes the average balance of impaired financing receivables by class and the income recognized on these receivables for the three and nine month periods ended September 30, 2018 and 2017(in thousands):

	For the Three Months Ended
	September 30, 2018						September 30, 2017
					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	$	896	$	3	$	-	$	741	$	3	$	-
Home Equity		92		2		-		70		1		-
Commercial		14,116		130		6		13,663		122		2
Agricultural		5,146		24		-		3,799		27		-
Construction		-		-		-		-		-		-
Consumer		-		-		-		4		-		-
Other commercial loans		3,495		21		-		4,337		54		25
Other agricultural loans		1,453		2		-		1,443		10		-
State and political subdivision loans		-		-		-		-		-		-
Total	$	25,198	$	182	$	6	$	24,057	$	217	$	27

	For the Nine Months ended
	September 30, 2018						September 30, 2017
					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	$	988	$	10	$	-	$	874	$	9	$	-
Home Equity		98		4		-		62		3		-
Commercial		13,915		372		14		10,812		280		5
Agricultural		4,472		124		-		3,609		90		-
Construction		-		-		-		-		-		-
Consumer		2		-		-		2		-		-
Other commercial loans		3,906		73		-		4,988		131		52
Other agricultural loans		1,388		21		-		1,528		55		-
State and political subdivision loans		-		-		-		-		-		-
Total	$	24,769	$	604	$	14	$	21,875	$	568	$	57

Credit Quality Information

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

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

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

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

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

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

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay the loan as agreed, the Company's loan rating process includes several layers of internal and external oversight. The Company's loan officers are responsible for the timely and accurate risk rating of the loans in each of their portfolios at origination and on an ongoing basis under the supervision of management.  All commercial, agricultural and state and political 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 50% of the dollar volume of the commercial loan portfolio on an annual basis, 2) review new loans originated for over $1.0 million in the last year, 3) review a majority of borrowers with commitments greater than or equal to $1.0 million,  4) review selected loan relationships over $750,000 which are over 30 days past due or classified Special Mention, Substandard, Doubtful, or Loss, and 5) such other loans which management or the consultant deems appropriate.

The following tables represent credit exposures by internally assigned grades as of September 30, 2018 and December 31, 2017 (in thousands):

September 30, 2018	Pass		Special Mention		Substandard		Doubtful		Loss		Ending Balance
Real estate loans:
Commercial	$	289,909	$	12,540	$	10,415	$	118	$	-	$	312,982
Agricultural		260,554		14,619		5,396		-		-		280,569
Construction		30,262		-		-		-		-		30,262
Other commercial loans		68,449		732		2,918		120		-		72,219
Other agricultural loans		36,320		2,288		1,309		-		-		39,917
State and political
subdivision loans		91,136		9,686		603		-		-		101,425
Total	$	776,630	$	39,865	$	20,641	$	238	$	-	$	837,374

December 31, 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

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, 2018 and December 31, 2017 (in thousands):

September 30, 2018	Performing		Non-performing		PCI		Total
Real estate loans:
Mortgages	$	153,328	$	1,264	$	30	$	154,621
Home Equity		58,547		86		-		58,634
Consumer		9,679		23		-		9,702
Total	$	221,554	$	1,373	$	30	$	222,957

December 31, 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

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, 2018 and December 31, 2017 (in thousands):

															90 Days or
	30-59 Days		60-89 Days		90 Days		Total Past						Total Financing		Greater and
September 30, 2018	Past Due		Past Due		Or Greater		Due		Current		PCI		Receivables		Accruing
Real estate loans:
Mortgages	$	661	$	191	$	685	$	1,537	$	153,054	$	30	$	154,621	$	1
Home Equity		125		-		67		192		58,442		-		58,634		-
Commercial		1,576		1,109		4,597		7,282		304,355		1,345		312,982		300
Agricultural		-		6		3,253		3,259		276,627		683		280,569		-
Construction		-		-		-		-		30,262		-		30,262		-
Consumer		69		7		1		77		9,625		-		9,702		1
Other commercial loans		662		141		2,179		2,982		68,719		518		72,219		-
Other agricultural loans		81		195		909		1,185		38,732		-		39,917		-
State and political
subdivision loans		-		-		-		-		101,425		-		101,425		-
Total	$	3,174	$	1,649	$	11,691	$	16,514	$	1,041,241	$	2,576	$	1,060,331	$	302

Loans considered non-accrual	$	326	$	1,370	$	11,389	$	13,085	$	1,445	$	-	$	14,530
Loans still accruing		2,848		279		302		3,429		1,039,796		2,576		1,045,801
Total	$	3,174	$	1,649	$	11,691	$	16,514	$	1,041,241	$	2,576	$	1,060,331

															90 Days or
	30-59 Days		60-89 Days		90 Days		Total Past						Total Financing		Greater and
December 31, 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

Nonaccrual Loans

Loans are considered for non-accrual status upon reaching 90 days delinquency, although the Company may be receiving partial payments of interest and partial repayments of principal on such loans or if full payment of principal and interest is not expected. Additionally, if management is made aware of other information including bankruptcy, repossession, death, or legal proceedings, the loan may be placed on non-accrual status. If a loan is 90 days or more past due and is well secured and in the process of collection, it may still be considered accruing.

The following table reflects the financing receivables, excluding PCI loans, on non-accrual status as of September 30, 2018 and December 31, 2017, respectively. The balances are presented by class of financing receivable (in thousands):

	September 30, 2018		December 31, 2017
Real estate loans:
Mortgages	$	1,263	$	1,274
Home Equity		86		112
Commercial		6,445		5,192
Agricultural		3,259		175
Construction		-		133
Consumer		22		42
Other commercial loans		2,269		2,637
Other agricultural loans		1,186		606
State and political subdivision		-		-
	$	14,530	$	10,171

Troubled Debt Restructurings

In situations where, for economic or legal reasons related to a borrower's financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a Troubled Debt Restructuring (TDR). Management strives to identify borrowers in financial difficulty early and work with them to structure more affordable terms before their loan reaches nonaccrual status. These restructured terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of interest or principal, or both, management measures any impairment on the restructuring by calculating the present value of the revised loan terms and comparing this balance to the Company's investment in the loan prior to the restructuring. As these loans are individually evaluated, they are excluded from pooled portfolios when calculating the allowance for loan and lease losses and a separate allocation within the allowance for loan and lease losses is provided. Management continually evaluates loans that are considered TDRs, including payment history under the modified loan terms, the borrower's ability to continue to repay the loan based on continued evaluation of their operating results and cash flows from operations.  Based on this evaluation management would no longer consider a loan to be a TDR when the relevant facts support such a conclusion. As of September 30, 2018 and December 31, 2017, included within the allowance for loan losses are reserves of $263,000 and $41,000 respectively, that are associated with loans modified as TDRs.

Loan modifications that are considered TDRs completed during the three and nine months ended September 30, 2018 and 2017 were as follows (dollars in thousands):

	For the Three Months Ended September 30, 2018
	Number of contracts				Pre-modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
	Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification
Real estate loans:
Commercial		-		1	$	-	$	106	$	-	$	106
Agricultural		-		2		-		1,302		-		1,302
Total		-		3	$	-	$	1,408	$	-	$	1,408

	For the Nine Months Ended September 30, 2018
	Number of contracts				Pre-modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
	Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification
Real estate loans:
Mortgages		-		1	$	-	$	7	$	-	$	7
Home Equity		-		1		-		1		-		1
Commercial		-		2		-		683		-		683
Agricultural		-		3		-		2,825		-		2,825
Other agricultural loans		-		4		-		176		-		176
Total		-		11	$	-	$	3,692	$	-	$	3,692

	For the Three Months Ended September 30, 2017
	Number of contracts				Pre-modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
	Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification
Real estate loans:
Agricultural		-		2	$	-	$	150	$	-	$	150
Other agricultural loans		-		1		-		161		-		161
Total		-		3	$	-	$	311	$	-	$	311

	For the Nine Months Ended September 30, 2017
	Number of contracts				Pre-modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
	Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification
Real estate loans:
Commercial		-		7	$	-	$	6,797	$	-	$	6,797
Agricultural		-		2		-		150		-		150
Other agricultural loans		-		1		-		161		-		161
Total		-		10	$	-	$	7,108	$	-	$	7,108

Recidivism, or the borrower defaulting on its obligation pursuant to a modified loan, results in the loan once again becoming a non-accrual loan. Recidivism on modified loans occurs at a notably higher rate than do defaults on new origination loans, so modified loans present a higher risk of loss than do new origination loans. The following table presents the recorded investment in loans that were modified as TDRs during each 12-month period prior to the current reporting periods, which began January 1, 2018 and 2017 (9 month periods) and June 1, 2018 and 2017 (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, 2018				September 30, 2017				September 30, 2018				September 30, 2017
	Number of contracts		Recorded investment		Number of contracts		Recorded investment		Number of contracts		Recorded investment		Number of contracts		Recorded investment
Real estate loans:
Agricultural		2	$	1,302		-	$	-		2	$	1,302		-	$	-
Other agricultural loans		1		124		-		-		1		124		-		-
Total recidivism		3	$	1,426		-	$	-		3	$	1,426		-	$	-

Allowance for Loan Losses

The following table segregates the allowance for loan losses (ALLL) into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of September 30, 2018 and December 31, 2017, respectively (in thousands):

	September 30, 2018						December 31, 2017
	Individually evaluated for impairment		Collectively evaluated for impairment		Total		Individually evaluated for impairment		Collectively evaluated for impairment		Total
Real estate loans:
Residential	$	27	$	1,025	$	1,052	$	56	$	993	$	1,049
Commercial		224		3,701		3,925		94		3,773		3,867
Agricultural		86		3,843		3,929		3		3,140		3,143
Construction		-		49		49		-		23		23
Consumer		-		123		123		-		124		124
Other commercial loans		152		1,067		1,219		231		1,041		1,272
Other agricultural loans		165		534		699		26		466		492
State and political
subdivision loans		-		751		751		-		816		816
Unallocated		-		636		636		-		404		404
Total	$	654	$	11,729	$	12,383	$	410	$	10,780	$	11,190

The following tables roll forward the balance of the ALLL by portfolio segment for the three and nine months ended September 30, 2018 and 2017, respectively (in thousands):

	For the three months ended September 30, 2018
	Balance at June 30, 2018		Charge-offs			Recoveries		Provision			Balance at September 30, 2018
Real estate loans:
Residential	$	1,045	$	(10	)	$	1	$	16		$	1,052
Commercial		3,794		(25	)		-		156			3,925
Agricultural		3,673		-			-		256			3,929
Construction		44		-			-		5			49
Consumer		115		(13	)		9		12			123
Other commercial loans		1,266		-			5		(52	)		1,219
Other agricultural loans		589		-			-		110			699
State and political
subdivision loans		767		-			-		(16	)		751
Unallocated		648		-			-		(12	)		636
Total	$	11,941	$	(48	)	$	15	$	475		$	12,383

	For the nine months ended September 30, 2018
	Balance at December 31, 2017		Charge-offs			Recoveries		Provision			Balance at September 30, 2018
Real estate loans:
Residential	$	1,049	$	(27	)	$	70	$	(40	)	$	1,052
Commercial		3,867		(25	)		3		80			3,925
Agricultural		3,143		-			-		786			3,929
Construction		23		-			-		26			49
Consumer		124		(32	)		26		5			123
Other commercial loans		1,272		(91	)		19		19			1,219
Other agricultural loans		492		(50	)		-		257			699
State and political
subdivision loans		816		-			-		(65	)		751
Unallocated		404		-			-		232			636
Total	$	11,190	$	(225	)	$	118	$	1,300		$	12,383

	For the three months ended September 30, 2017
	Balance at June 30, 2017		Charge-offs			Recoveries		Provision			Balance at September 30, 2017
Real estate loans:
Residential	$	1,104	$	(11	)	$	-	$	(13	)	$	1,080
Commercial		3,541		-			5		36			3,582
Agricultural		2,452							242			2,694
Construction		45		-			-		(14	)		31
Consumer		125		(45	)		13		44			137
Other commercial loans		1,131		-			5		(24	)		1,112
Other agricultural loans		431		-			1		30			462
State and political
subdivision loans		838		-			-		36			874
Unallocated		312		-			-		163			475
Total	$	9,979	$	(56	)	$	24	$	500		$	10,447

	For the nine months ended September 30, 2017
	Balance at December 31, 2016		Charge-offs			Recoveries		Provision			Balance at September 30, 2017
Real estate loans:
Residential	$	1,064	$	(104	)	$	-	$	120		$	1,080
Commercial		3,589		(41	)		11		23			3,582
Agricultural		1,494		-					1,200			2,694
Construction		47		-			-		(16	)		31
Consumer		122		(90	)		35		70			137
Other commercial loans		1,327		-			14		(229	)		1,112
Other agricultural loans		312		(5	)		1		154			462
State and political
subdivision loans		833		-			-		41			874
Unallocated		98		-			-		377			475
Total	$	8,886	$	(240	)	$	61	$	1,740		$	10,447

The Company allocates the ALLL based on the factors described below, which conform to the Company's loan classification policy and credit quality measurements. In reviewing risk within the Company's loan portfolio, management has determined there to be several different risk categories within the loan portfolio. The ALLL consists of amounts applicable to: (i) residential real estate loans; (ii) residential real estate home equity loans; (iii) commercial real estate loans; (iv) agricultural real estate loans; (v) real estate construction loans; (vi) other commercial and agricultural loans; (vii) consumer loans; (viii) other agricultural loans and (ix) state and political subdivision loans. Factors considered in this process include general loan terms, collateral, and availability of historical data to support the analysis. Historical loss percentages are calculated and used as the basis for calculating allowance allocations. Certain qualitative factors are evaluated to determine additional inherent risks in the loan portfolio, which are not necessarily reflected in the historical loss percentages. These factors are then added to the historical allocation percentage to get the adjusted factor to be applied to non-classified loans. The following qualitative factors are analyzed:

·	Level of and trends in delinquencies and impaired/classified loans

§	Change in volume and severity of past due loans

§	Volume of non-accrual loans

§	Volume and severity of classified, adversely or graded loans;

·	Level of and trends in charge-offs and recoveries;

·	Trends in volume, terms and nature of the loan portfolio;

·	Effects of any changes in risk selection and underwriting standards and any other changes in lending and recovery policies, procedures and practices;

·	Changes in the quality of the Company's loan review system;

·	Experience, ability and depth of lending management and other relevant staff;

·	National, state, regional and local economic trends and business conditions

§	General economic conditions

§	Unemployment rates

§	Inflation rate/ Consumer Price Index

§	Changes in values of underlying collateral for collateral-dependent loans;

·	Industry conditions including the effects of external factors such as competition, legal, and regulatory requirements on the level of estimated credit losses;

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

·	Any change in the level of board oversight.

The Company analyzes its loan portfolio at least each quarter to determine the adequacy of its ALLL.

Loans determined to be TDRs are impaired and for purposes of estimating the ALLL must be individually evaluated for impairment. In calculating the impairment, the Company calculates the present value utilizing an analysis of discounted cash flows. If the present value calculated is below the recorded investment of the loan, impairment is recognized by a charge to the provision for loan and lease losses and a credit to the ALLL.

For the three months ended September 30, 2018, the allowance for commercial real estate was increased in general reserves due to an increase in the size of the portfolio as well as an increase in specific reserves. This was represented as an increase in the provision. The allowance for agricultural real estate loans was increased in general reserves as a result of higher loan balances, an increase in the amount of loans classified as non-accrual and an increase in specific reserves. The result of this was represented as an increase in the provision. The allowance for other agricultural loans was increased as a result of an increase in specific reserves, which offset the decrease due to the decrease in the portfolio size. The result of these changes was represented as an increase in the provision.

For the nine months ended September 30, 2018, the allowance for commercial real estate was decreased in general reserves due to a decrease in the qualitative factor associated with unemployment rates and an improvement in the number of loans classified as special mention. There was an increase in specific reserves for commercial real estate. The total change was represented as an increase in the provision. The allowance for agricultural real estate loans was increased in general reserves as a result of higher loan balances and an increase in the amount of loans classified as special mention and nonaccrual. Additionally, there was an increase in specific reserves. These resulted in an increase in the provision. The allowance for other agricultural loans was increased in general reserves as a result of higher loan balances, loans past due and an increase in non-accrual loans. Additionally, specific reserves also increased. The result of these changes was represented as an increase in the provision.

For the three months ended September 30, 2017, the allowance for residential real estate increased in general reserves for pooled loans as a result of increased loss rates reflected in the charge-offs for the three month period, as well as higher loan balances. The increase was offset by a decrease in the specific reserve for individually evaluated residential loans. This was represented as a decrease to the provision.  The allowance for commercial real estate was increased in general reserves due to growth in the commercial real estate loan portfolio, which was represented as an increase in the provision. The allowance for agricultural real estate loans was increased in general reserves as a result of higher loan balances. The result of this growth was represented as an increase in the provision. The allowance for other commercial loans was reduced as a result of a decrease in the historical loss factor in the portfolio segment and decrease in specific reserves. This was represented by a decrease to the provision.  The allowance for other agricultural loans was increased in general reserves as a result of higher loan balances. It was also impacted by an increase in specific reserves during the quarter. The result of these changes was represented as an increase in the provision.

For the nine months ended September 30, 2017, the allowance for residential real estate increased in general reserves as a result of increased loss rates reflected in the charge-offs for the nine month period. This was represented as an increase to the provision. The allowance for agricultural real estate loans was increased in general reserves as a result of higher loan balances as well as an increase in specific reserves. It was also impacted by the classified loan trend in the agricultural real estate portfolio. The result of these changes was represented as an increase in the provision. The allowance for other commercial loans was reduced as a result of lower loan balances, an improvement in the amount of classified loans and a reduction in the historical loss factor. This was represented by a decrease to the provision.  The allowance for other agricultural loans was increased in general reserves as a result of higher loan balances. It was also impacted by the classified loan trend in the other agricultural loan portfolio. The result of these changes was represented as an increase in the provision.

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, 2018 and December 31, 2017, included with other assets are $628,000 and $1,119,000, respectively, of foreclosed assets. As of September 30, 2018, included within the foreclosed assets are $307,000 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 2018, the Company has initiated formal foreclosure proceedings on $2,168,000 of consumer residential mortgages, which have not yet been transferred into foreclosed assets.