NOTE 4 LOANS

The Company had $226 thousand in loans held for sale as of March 31, 2014 as compared to $556 thousand in loans held for sale on December 31, 2013. Due to lack of materiality, these loans are included in the Consumer Real Estate loans below.

Loan balances as of March 31, 2014 and December 31, 2013:


	(In Thousands)
Loans:	March 31, 2014			December 31, 2013
Commercial real estate	$	261,634		$	248,893
Agricultural real estate		49,629			44,301
Consumer real estate		91,368			92,438
Commercial and industrial		90,024			99,498
Agricultural		64,859			65,449
Consumer		21,322			21,406
Industrial Development Bonds		4,334			4,358

		583,170			576,343
Less: Net deferred loan fees and costs		(298	)		(230	)

		582,872			576,113
Less: Allowance for loan losses		(5,325	)		(5,194	)

Loans - Net	$	577,547		$	570,919

The following is a maturity schedule by major category of loans as of March 31, 2014:


	Maturities (In Thousands)
	Within One Year		After One Year Within Five Years		After Five Years
Commercial Real Estate	$	46,874	$	98,903	$	115,857
Agricultural Real Estate		2,986		15,099		31,544
Consumer Real Estate		9,786		16,834		64,748
Commercial/Industrial		49,684		34,923		5,417
Agricultural		40,408		20,987		3,464
Consumer		5,316		12,318		3,688
Industrial Development Bonds		1,933		542		1,859

The distribution of fixed rate loans and variable rate loans by major loan category is as follows as of March 31, 2014. Variable rate loans whose current rates are equal to their floor or ceiling are classified as fixed in this table.


	(In Thousands)
	Fixed Rate		Variable Rate
Commercial Real Estate	$	170,058	$	91,576
Agricultural Real Estate		35,240		14,389
Consumer Real Estate		74,606		16,762
Commercial/Industrial		68,909		21,115
Agricultural		60,876		3,983
Consumer		17,194		4,128
Industrial Development Bonds		4,137		197

As of March 31, 2014 and December 31, 2013 one to four family residential mortgage loans amounting to $22.9 and $24.2 million, respectively, have been pledged as security for loans the Bank has received from the Federal Home Loan Bank.

Industrial Development Bonds are included in the commercial and industrial category for the remainder of the tables in this Note 4.

The following table represents the contractual aging of the recorded investment in past due loans by portfolio segment of loans as of March 31, 2014 and December 31, 2013, net of deferred fees:


	(In Thousands)
March 31, 2014	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Financing Receivables		Recorded Investment > 90 Days and Accruing
Consumer Real Estate	$	784	$	—	$	116	$	900	$	90,468	$	91,368	$	—
Agricultural Real Estate		—		—		—		—		49,629		49,629		—
Agricultural		—		5		—		5		64,854		64,859		—
Commercial Real Estate		1,102		94		32		1,228		260,406		261,634		—
Commercial and Industrial		62		41		—		103		94,255		94,358		—
Consumer		32		—		—		32		20,992		21,024		—

Total	$	1,980	$	140	$	148	$	2,268	$	580,604	$	582,872	$	—


December 31, 2013	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Financing Receivables		Recorded Investment > 90 Days and Accruing
Consumer Real Estate	$	778	$	—	$	234	$	1,012	$	91,426	$	92,438	$	—
Agricultural Real Estate		—		—		—		—		44,301		44,301		—
Agricultural		—		—		—		—		65,449		65,449		—
Commercial Real Estate		—		—		373		373		248,520		248,893		—
Commercial and Industrial		—		—		26		26		103,830		103,856		—
Consumer		28		2		—		30		21,146		21,176		—

Total	$	806	$	2	$	633	$	1,441	$	574,672	$	576,113	$	—

The following table presents the recorded investment in nonaccrual loans by class of loans as of March 31, 2014 and December 31, 2013:


	(In Thousands)
	March 31		December 31
	2014		2013
Consumer Real Estate	$	379	$	483
Agricultural Real Estate		—		—
Agricultural		—		—
Commercial Real Estate		1,875		2,436
Commercial and Industrial		361		410
Consumer		—		—

Total	$	2,615	$	3,329

The Bank uses a nine tier risk rating system to grade its loans. The grade of a loan may change during the life of the loan.

The risk ratings are described as follows.

Zero (0) Unclassified. Any loan which has not been assigned a classification.

One (1) Excellent. Credit to premier customers having the highest credit rating based on an extremely strong financial condition, which compares favorably with industry standards (upper quartile of Risk Management Association ratios). Financial statements indicate a sound earnings and financial ratio trend for several years with satisfactory profit margins and excellent liquidity exhibited. Prime credits may also be borrowers with loans fully secured by highly liquid collateral such as traded stocks, bonds, certificates of deposit, savings account, etc. No credit or collateral exceptions exist and the loan adheres to the Bank’s loan policy in every respect. Financing alternatives would be readily available and would qualify for unsecured credit. This grade is summarized by high liquidity, minimum risk, strong ratios, and low handling costs.

Two (2) Good. Desirable loans of somewhat less stature than Grade 1, but with strong financial statements. Loan supported by financial statements containing strong balance sheets, generally with a leverage position less than 1.50, and a history of profitability. Probability of serious financial deterioration is unlikely. Possessing a sound repayment source (and a secondary source), which would allow repayment in a reasonable period of time. Individual loans backed by liquid personal assets, established history and unquestionable character.

Three (3) Satisfactory. Satisfactory loans of average or slightly above average risk – having some deficiency or vulnerability to changing economic conditions, but still fully collectible. Projects should normally demonstrate acceptable debt service coverage. Generally, customers should have a leverage position less than 2.00. May be some weakness but with offsetting features of other support readily available. Loans that are meeting the terms of repayment. Loans may be graded 3 when there is no recent information on which to base a current risk evaluation and the following conditions apply:

At inception, the loan was properly underwritten and did not possess an unwarranted level of credit risk:

At inception, the loan was secured with collateral possessing a loan value adequate to protect the Bank from loss;

The loan exhibited two or more years of satisfactory repayment with a reasonable reduction of the principal balance;

During the period that the loan has been outstanding, there has been no evidence of any credit weakness. Some examples of weakness include slow payment, lack of cooperation by the borrower, breach of loan covenants, or the business is in an industry which is known to be experiencing problems. If any of the credit weaknesses is observed, a lower risk grade is warranted.

Four (4) Satisfactory / Monitored. A “4” (Satisfactory/Monitored) risk grade may be established for a loan considered satisfactory but which is of average credit risk due to financial weakness or uncertainty. The loans warrant a higher than average level of monitoring to ensure that weaknesses do not advance. The level of risk in Satisfactory/Monitored classification is considered acceptable and within normal underwriting guidelines, so long as the loan is given management supervision.

Five (5) Special Mention. Loans that possess some credit deficiency or potential weakness which deserves close attention, but which do not yet warrant substandard classification. Such loans pose unwarranted financial risk that, if not corrected, could weaken the loan and increase risk in the future. The key distinctions of a 5 (Special Mention) classification are that (1) it is indicative of an unwarranted level of risk, and (2) weaknesses are considered “potential”, versus “defined”, impairments to the primary source of loan repayment and collateral.

Six (6) Substandard. One or more of the following characteristics may be exhibited in loans classified substandard:

Loans, which possess a defined credit weakness and the likelihood that a loan will be paid from the primary source, are uncertain. Financial deterioration is underway and very close attention is warranted to ensure that the loan is collected without loss.

Loans are inadequately protected by the current net worth and paying capacity of the borrower.

The primary source of repayment is weakened, and the Bank is forced to rely on a secondary source of repayment such as collateral liquidation or guarantees.

Loans are characterized by the distinct possibility that the Bank will sustain some loss if deficiencies are not corrected.

Unusual courses of action are needed to maintain a high probability of repayment.

The borrower is not generating enough cash flow to repay loan principal; however, continues to make interest payments.

The lender is forced into a subordinate position or unsecured collateral position due to flaws in documentation.

Loans have been restructured so that payment schedules, terms and collateral represent concessions to the borrower when compared to the normal loan terms.

The lender is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan.

There is significant deterioration in the market conditions and the borrower is highly vulnerable to these conditions.

Seven (7) Doubtful. One or more of the following characteristics may be exhibited in loans classified Doubtful:

Loans have all of the weaknesses of those classified as Substandard. Additionally, however, these weaknesses make collection or liquidation in full based on existing conditions improbable.

The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment.

The possibility of loss is high, but, because of certain important pending factors which may strengthen the loan, loss classification is deferred until its exact status is known. A Doubtful classification is established deferring the realization of the loss.

Eight (8) Loss. Loans are considered uncollectable and of such little value that continuing to carry them as assets on the institution’s financial statements is not feasible. Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.

The following table represents the risk category of loans by class based on the most recent analysis performed as of March 31, 2014 and December 31, 2013:


	(In Thousands)
	Agricultural Real Estate		Agricultural		Commercial Real Estate		Commercial and Industrial		Industrial Development Bonds
March 31, 2014
1-2	$	3,510	$	6,803	$	1,113	$	1,817	$	—
3		15,139		25,732		53,771		20,615		3,845
4		30,363		32,304		199,701		64,399		489
5		584		20		1,978		2,074		—
6		33		—		5,039		717		—
7				—		32		402		—
8		—		—		—		—		—

Total	$	49,629	$	64,859	$	261,634	$	90,024	$	4,334


	Agricultural Real Estate		Agricultural		Commercial Real Estate		Commercial and Industrial		Industrial Development Bonds
December 31, 2013
1-2	$	3,764	$	9,263	$	1,104	$	2,525	$	—
3		14,588		27,212		55,060		21,610		3,869
4		25,186		28,974		182,277		72,059		489
5		729		—		4,987		2,119		—
6		34		—		5,092		758		—
7		—		—		373		427		—
8		—		—		—		—		—

Total	$	44,301	$	65,449	$	248,893	$	99,498	$	4,358

For consumer residential real estate, and other, the Company also evaluates credit quality based on the aging status of the loan, which was previously stated, and by payment activity. The following tables present the recorded investment in those classes based on payment activity and assigned risk grading as of March 31, 2014 and December 31, 2013.


	(In Thousands)
	Consumer Real Estate		Consumer Real Estate
	March 31 2014		December 31 2013
Grade
Pass	$	91,178	$	92,226
Special Mention (5)		—		—
Substandard (6)		81		18
Doubtful (7)		109		194

Total	$	91,368	$	92,438


	(In Thousands)
	Consumer - Credit				Consumer - Other
	March 31 2014		December 31 2013		March 31 2014		December 31 2013
Performing	$	3,497	$	3,721	$	17,507	$	17,425
Nonperforming		—		—		20		30

Total	$	3,497	$	3,721	$	17,527	$	17,455

Information about impaired loans as of March 31, 2014, December 31, 2013 and March 31, 2013 are as follows:


	(In Thousands)
	March 31, 2014		December 31, 2013		March 31, 2013
Impaired loans without a valuation allowance	$	1,116	$	924	$	1,119
Impaired loans with a valuation allowance		943		1,516		3,025

Total impaired loans	$	2,059	$	2,440	$	4,144

Valuation allowance related to impaired loans	$	261	$	516	$	860
Total non-accrual loans	$	2,615	$	3,329	$	4,582
Total loans past-due ninety days or more and still accruing	$	—	$	—	$	3

Quarter ended average investment in impaired loans	$	2,312	$	2,532	$	4,321

Year to date average investment in impaired loans	$	2,312	$	3,274	$	4,321

No additional funds are committed to be advanced in connection with impaired loans.

The Bank had approximately $974 thousand of its impaired loans classified as troubled debt restructured as of March 31, 2014, $861.2 thousand as of December 31, 2013 and $670 thousand as of March 31, 2013.

The following table represents three months ended March 31, 2014.

(In Thousands)

Pre-

Post-

Number of

Modification

March 31, 2014

Contracts

Outstanding

Modified in the

Recorded

Troubled Debt Restructurings

Last 3 Months

Investment

Ag Real Estate

153

141

Number of

Contracts

Troubled Debt Restructurings

Modified in the

Recorded

That Subsequently Defaulted

Last 3 Months

Investment

Commercial Real Estate

—

Ag Real Estate

—

Commercial and Industrial

—

The following table represents three months ended March 31, 2013.

(In Thousands)

Pre-

Post-

Number of

Modification

March 31, 2013

Contracts

Outstanding

Modified in the

Recorded

Troubled Debt Restructurings

Last 3 Months

Investment

Commercial and Industrial

Number of

Contracts

Troubled Debt Restructurings

Modified in the

Recorded

That Subsequently Defaulted

Last 3 Months

Investment

Commercial Real Estate

—

Ag Real Estate

—

Commercial and Industrial

—

For the majority of the Bank’s impaired loans, the Bank will apply the observable market price methodology. However, the Bank may also utilize a measurement incorporating the present value of expected future cash flows discounted at the loan’s effective rate of interest. To determine observable market price, collateral asset values securing an impaired loan are periodically evaluated. Maximum time for re-evaluation is every 12 months for chattels and titled vehicles and every two years for real estate. In this process, third party evaluations are obtained and heavily relied upon. Until such time that updated appraisals are received, the Bank may discount the collateral value used.

The Bank uses the following guidelines as stated in policy to determine when to realize a charge-off, whether a partial or full loan balance. A charge-off in whole or in part is realized when unsecured consumer loans, credit card credits and overdraft lines of credit reach 90 days delinquency. At 120 days delinquent, secured consumer loans are charged down to the value of the collateral, if repossession of the collateral is assured and/or in the process of repossession. Consumer mortgage loan deficiencies are charged down upon the sale of the collateral or sooner upon the recognition of collateral deficiency. Commercial and agricultural credits are charged down at 120 days delinquency, unless an established and approved work-out plan is in place or litigation of the credit will likely result in recovery of the loan balance. Upon notification of bankruptcy, unsecured debt is charged off. Additional charge-off may be realized as further unsecured positions are recognized.

The following table presents loans individually evaluated for impairment by class of loans for three months ended March 31, 2014


	(In Thousands)
Three Months Ended March 31, 2013	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Consumer real estate	$	72	$	72	$	—	$	145	$	—
Agricultural real estate		141		141		—		328		—
Agricultural		—		—		—		—		—
Commercial real estate		904		904		—		2,112		14
Commercial and industrial		—		—		—		25		9
Consumer		—		—		—		—		—
With a specific allowance recorded:
Consumer real estate		109		109		44		523		1
Agricultural real estate		—		—		—		177		—
Agricultural		—		—		—		—		—
Commercial real estate		481		481		107		284		—
Commercial and industrial		352		352		110		1,968		7
Consumer		—		—		—		—		—

Totals:
Consumer real estate	$	181	$	181	$	44	$	668	$	1

Agricultural real estate	$	141	$	141	$	—	$	505	$	—

Agricultural	$	—	$	—	$	—	$	—	$	—

Commercial real estate	$	1,385	$	1,385	$	107	$	2,396	$	14

Commercial and industrial	$	352	$	352	$	110	$	1,993	$	16

Consumer	$	—	$	—	$	—	$	—	$	—


	(In Thousands)
Three Months Ended March 31, 2013	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Consumer real estate	$	33	$	33	$	—	$	60	$	1
Agricultural real estate		—		—		—		—		—
Agricultural		—		—		—		—		—
Commercial real estate		801		1,225		—		207		—
Commercial and industrial		285		285		—		286		—
Consumer		—		—		—		—		—
With a specific allowance recorded:								—
Consumer real estate		277		349		79		131		3
Agricultural real estate		—		—		—		—		—
Agricultural		—		—		—		—		—
Commercial real estate		44		64		29		650		—
Commercial and industrial		2,704		2,704		751		2,743		—
Consumer		—		—		—		—		—

Totals:
Consumer real estate	$	310	$	382	$	79	$	191	$	4

Agricultural real estate	$	—	$	—	$	—	$	—	$	—

Agricultural	$	—	$	—	$	—	$	—	$	—

Commercial real estate	$	845	$	1,289	$	29	$	857	$	—

Commercial and industrial	$	2,989	$	2,989	$	751	$	3,029	$	—

Consumer	$	—	$	—	$	—	$	—	$	—

The ALLL has a direct impact on the provision expense. An increase in the ALLL is funded through recoveries and provision expense. The following tables summarize the activities in the allowance for credit losses.


	(In Thousands)
	Three Months Ended March 31, 2014			Twelve Months Ended December 31, 2013
Allowance for Loan Losses
Balance at beginning of year	$	5,194		$	5,224
Provision for loan loss		428			858
Loans charged off		(366	)		(1,262	)
Recoveries		69			374

Allowance for Loan & Lease Losses	$	5,325		$	5,194

Allowance for Unfunded Loan Commitments & Letters of Credit	$	180		$	163

Total Allowance for Credit Losses	$	5,505		$	5,357

The Company segregates its Allowance for Loan and Lease Losses (ALLL) into two reserves: The ALLL and the Allowance for Unfunded Loan Commitments and Letters of Credit (AULC). When combined, these reserves constitute the total Allowance for Credit Losses (ACL).

The AULC is reported within other liabilities on the balance sheet while the ALLL is netted within the loans, net asset line. The ACL presented above represents the full amount of reserves available to absorb possible credit losses.

The following table breaks down the activity within ACL for each loan portfolio segment and shows the contribution provided by both the recoveries and the provision along with the reduction of the allowance caused by charge-offs.

Additional analysis related to the allowance for credit losses for three months ended March 31, 2014 is as follows:


	(In Thousands)
	Consumer Real Estate			Agricultural Real Estate		Agricultural			Commercial Real Estate			Commercial and Industrial			Consumer			Unfunded Loan Commitment & Letters of Credit		Unallocated		Total
Three Months Ended March 31, 2014
ALLOWANCE FOR CREDIT LOSSES:
Beginning balance	$	257		$	131	$	326		$	2,107		$	1,359		$	292		$	163	$	722	$	5,357
Charge Offs		(64	)		—		—			(201	)		—			(101	)		—		—	$	(366	)
Recoveries		10			—		1			2			5			51			—		—	$	69
Provision (Credit)		199			—		(3	)		50			(34	)		28			—		188	$	428
Other Non-interest expense related to unfunded		—			—		—			—			—			—			17		—	$	17

Ending Balance	$	402		$	131	$	324		$	1,958		$	1,330		$	270		$	180	$	910	$	5,505

Ending balance: individually evaluated for impairment	$	44		$	—	$	—		$	107		$	110		$	—		$	—	$	—	$	261
Ending balance: collectively evaluated for impairment	$	358		$	131	$	324		$	1,851		$	1,220		$	270		$	180	$	910	$	5,244

Ending balance: loans acquired with deteriorated credit quality	$	2		$	—	$	—		$	—		$	—		$	—		$	—	$	—	$	2

FINANCING RECEIVABLES:
Ending balance	$	91,368		$	49,629	$	64,859		$	261,634		$	94,358		$	21,024		$	—	$	—	$	582,872

Ending balance: individually evaluated for impairment	$	181		$	141	$	—		$	1,385		$	352		$	—		$	—	$	—	$	2,059
Ending balance: collectively evaluated for impairment	$	91,187		$	49,488	$	64,859		$	260,249		$	94,006		$	21,024		$	—	$	—	$	580,813

Ending balance: loans acquired with deteriorated credit quality	$	536		$	—	$	—		$	—		$	—		$	—		$	—	$	—	$	536


	(In Thousands)
	Consumer Real Estate			Agricultural Real Estate			Agricultural			Commercial Real Estate			Commercial and Industrial			Consumer			Unfunded Loan Commitment & Letters of Credit		Unallocated		Total
Three Months Ended March 31, 2013
ALLOWANCE FOR CREDIT LOSSES:
Beginning balance	$	368		$	113		$	290		$	1,749		$	2,183		$	268		$	162	$	253	$	5,386
Charge Offs		(10	)		—			—			(20	)		—			(86	)		—		—	$	(116	)
Recoveries		4			—			1			—			15			49			—		—	$	69
Provision (Credit)		101			(8	)		(31	)		(163	)		(226	)		25			—		469	$	167
Other Non-interest expense related to unfunded		—			—			—			—			—			—			10		—	$	10

Ending Balance	$	463		$	105		$	260		$	1,566		$	1,972		$	256		$	172	$	722	$	5,516

Ending balance: individually evaluated for impairment	$	79		$	—		$	—		$	29		$	752		$	—		$	—	$	—	$	860
Ending balance: collectively evaluated for impairment	$	384		$	105		$	260		$	1,537		$	1,220		$	256		$	172	$	722	$	4,656

Ending balance: loans acquired with deteriorated credit quality	$	2		$	—		$	—		$	—		$	—		$	—		$	—	$	—	$	2

FINANCING RECEIVABLES:
Ending balance	$	77,160		$	35,898		$	51,896		$	209,601		$	90,981		$	19,292		$	—	$	—	$	484,828

Ending balance: individually evaluated for impairment	$	310		$	—		$	—		$	845		$	2,990		$	—		$	—	$	—	$	4,145
Ending balance: collectively evaluated for impairment	$	76,850		$	35,898		$	51,896		$	208,756		$	87,991		$	19,292		$	—	$	—	$	480,683

Ending balance: loans acquired with deteriorated credit quality	$	556		$	—		$	—		$	—		$	—		$	—		$	—	$	—	$	556