Note 4 – Loans

The Company had $459 thousand in loans held for sale in 2014 as compared to $566 thousand in loans held for sale in 2013. Due to materiality, these loans are included in the Consumer Real Estate loan numbers with a portion from 2014 included in Agricultural Real Estate loans as well.

Loans at December 31 are summarized below:


	(In Thousands)
	2014			2013
Loans:
Commercial real estate	$	270,188		$	248,893
Agricultural real estate		50,895			44,301
Consumer real estate		97,550			92,438
Commercial and industrial		100,126			99,498
Agricultural		74,611			65,449
Consumer		24,277			21,406
Industrial Development Bonds		4,698			4,358

	$	622,345		$	576,343
Less: Net deferred loan fees and costs		(419	)		(230	)

		621,926			576,113
Less: Allowance for loan losses		(5,905	)		(5,194	)


Loans - Net	$	616,021		$	570,919

The following is a maturity schedule by major category of loans at December 31, 2014:


	(In Thousands)
	Within One Year		After One Year Within Five Years		After Five Years		Total
Commercial Real Estate	$	27,291	$	92,076	$	150,821	$	270,188
Agricultural Real Estate		3,546		14,289		33,060		50,895
Consumer Real Estate		11,118		19,377		67,055		97,550
Commercial and industrial		58,741		36,159		5,226		100,126
Agricultural		47,831		22,826		3,954		74,611
Consumer		5,652		14,265		4,360		24,277
Industrial Development Bonds		2,499		126		2,073		4,698

	$	156,678	$	199,118	$	266,549	$	622,345

The distribution of fixed rate loans and variable rate loans by major loan category is as follows as of December 31, 2014:


	(In Thousands)
	Fixed Rate		Variable Rate
Commercial Real Estate	$	190,948	$	79,240
Agricultural Real Estate		36,168		14,727
Consumer Real Estate		77,534		20,016
Commercial and industrial loans		76,625		23,501
Agricultural		69,707		4,904
Consumer, Master Card and Overdrafts		19,566		4,711
Industrial Development Bonds		4,529		169

As of December 31, 2014 and 2013 one to four family residential mortgage loans amounting to $20.8 million and $24.3 million, respectively, have been pledged as security for loans the Bank has received from the Federal Home Loan Bank.

The percentage of delinquent loans has trended downward since the beginning of 2010 from a high of 2.85% of total loans in January 2010 to a low of 0.25% as of the end of December 2013. These percentages do not include nonaccrual loans which are not past due. This level of delinquency is due in part to an adherence to sound underwriting practices over the course of time, an improvement in the financial status of companies to which the Bank extends credit, continued financial stability in the agricultural loan portfolio, and the writing down of uncollectable credits in a timely manner.

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 classification of loans as of December 31, 2014 and 2013 net of deferred fees and costs:


December 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	$	713	$	50	$	436	$	1,199	$	96,351	$	97,550	$	—
Ag Real Estate		—		—		—		—		50,895	$	50,895		—
Ag		25		—		—		25		74,586	$	74,611		—
Commercial Real Estate		78		204		709		991		269,197	$	270,188		—
Commercial and Industrial		—		8		—		8		104,816	$	104,824		—
Consumer		25		8		29		62		23,796	$	23,858		—

Total	$	841	$	270	$	1,174	$	2,285	$	619,641	$	621,926	$	—


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	$	0	$	234	$	1,012	$	91,426	$	92,438	$	—
Ag Real Estate		—		—		—		—		44,301		44,301		—
Ag		—		—		—		—		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 portfolio class of loans as of December 31, 2014 and December 31, 2013:


	(In Thousands)
	2014		2013

Consumer real estate	$	628	$	483
Agricultural real estate		—		—
Agriculture		—		—
Commercial real estate		709		2,436
Commercial		339		410
Consumer		29		—


Total	$	1,705	$	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 The 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 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 portfolio class, net of deferred fees, based on the most recent analysis performed as of the time periods shown of December 31, 2014 and December 31, 2013.


	(In Thousands)
	Agriculture Real Estate				Agriculture				Commercial Real Estate				Commercial				Industrial Development Bonds
	2014		2013		2014		2013		2014		2013		2014		2013		2014		2013

1-2	$	4,319	$	3,764	$	11,490	$	9,263	$	1,072	$	1,104	$	1,771	$	2,525	$	—	$	—
3		15,780		14,588		26,871		27,212		34,229		55,060		15,582		21,610		4,289		3,869
4		30,472		25,186		36,225		28,974		225,015		182,277		80,079		72,059		409		489
5		111		729		—		—		7,083		4,987		2,299		2,119		—		—
6		213		34		—		—		2,080		5,092		165		758		—		—
7		—		—		25		—		709		373		230		427		—		—
8		—		—		—		—		—		—		—		—		—		—

Total	$	50,895	$	44,301	$	74,611	$	65,449	$	270,188	$	248,893	$	100,126	$	99,498	$	4,698	$	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 December 31, 2014 and December 31, 2013.


	(In Thousands)
	Consumer Real Estate
	2014		2013
Grade
Pass	$	97,007	$	92,226
Special mention (5)		—		—
Substandard (6)		446		18
Doubtful (7)		97		194

Total, net of deferred fees	$	97,550	$	92,438


	Consumer - Credit Card				Consumer - Other
	2014		2013		2014		2013
Performing	$	3,987	$	3,721	$	19,846	$	17,425
Nonperforming		—		—		25		30

Total, net of deferred fees	$	3,987	$	3,721	$	19,871	$	17,455

Information about impaired loans as of and for the years ended December 31, 2014 and 2013 are as follows:


	(In Thousands)
	2014		2013
Impaired loans without a valuation allowance	$	675	$	924
Impaired loans with a valuation allowance		1,168		1,516

Total impaired loans	$	1,843	$	2,440

Valuation allowance related to impaired loans	$	387	$	516

Total non-accrual loans	$	1,705	$	3,329

Total loans past-due ninety days or more and still accruing	$	—	$	—


	(In Thousands)
	2014		2013		2012
Average investment in impaired loans	$	1,929	$	3,274	$	3,436

Interest income recognized on impaired loans	$	87	$	60	$	26

Interest income recognized on a cash basis on impaired loans	$	51	$	17	$	21

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

The Bank had approximately $797.2 thousand of its impaired loans classified as trouble debt restructured as of December 31, 2014 as compared to $861.2 thousand of its impaired loans classified as trouble debt restructured as of December 31, 2013.

The following table represents the years ended December 31, 2014 and 2013.

December 31, 2014

Number of

Contracts

Pre-

Modification

Outstanding

Post-

Modification

Outstanding

December 31, 2013

Number of

Contracts

Pre-

Modification

Outstanding

Post-
Modification
Outstanding

Troubled Debt Restructurings

Modified in the
Last 12 Months

Recorded
Investment

Troubled Debt Restructurings

Modified in the
Last 12 Months

Recorded
Investment

Commercial Real Estate

—

Commercial Real Estate

—

Ag Real Estate

—

Ag Real Estate

—

Commercial and Industrial

—

Commercial and Industrial

—

Troubled Debt Restructurings

That Subsequently Defaulted

Number of
Contracts
Modified in the
Last 12 Months

Recorded
Investment

Troubled Debt Restructurings

That Subsequently Defaulted

Number of
Contracts
Modified in the
Last 12 Months

Recorded
Investment

Commercial Real Estate

—

Commercial Real Estate

—

Ag Real Estate

—

Ag Real Estate

—

Commercial and Industrial

—

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 of 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 down 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 portfolio class of loans as of December 31, 2014 and 2013:


	(In Thousands)
	Recorded Investment		Unpaid Principal Balance		Related Allowance		YTD Average Recorded Investment		YTD Interest Income Recognized		YTD Interest Income Recognized Cash Basis
2014
With no related allowance recorded:
Residential	$	204	$	229	$	—	$	52	$	1	$	1
Agriculture real estate		—		—		—		93		7		—
Agriculture		—		—		—		—		—		—
Commercial real estate		471		471		—		740		7		5
Commercial		—		—		—		319		45		18
Consumer		—		—		—		—		—		—
With a specific allowance recorded:
Residential		97		97		36		118		6		6
Agriculture real estate		—		—		—		15		—		—
Agriculture		25		25		25		2		—		—
Commercial real estate		709		709		111		83		21		21
Commercial		326		326		204		506		—		—
Consumer		11		11		11		1		—		—

Totals:
Residential	$	301	$	326	$	36	$	170	$	7	$	7

Agriculture real estate	$	—	$	—	$	—	$	108	$	7	$	—

Agriculture	$	25	$	25	$	25	$	2	$	—	$	—

Commercial real estate	$	1,180	$	1,180	$	111	$	823	$	28	$	26

Commercial	$	326	$	326	$	204	$	825	$	45	$	18

Consumer	$	11	$	11	$	11	$	1	$	—	$	—


	(In Thousands)
	Recorded Investment		Unpaid Principal Balance		Related Allowance		YTD Average Recorded Investment		YTD Interest Income Recognized		YTD Interest Income Recognized Cash Basis
2013
With no related allowance recorded:
Residential	$	18	$	18	$	—	$	138	$	10	$	10
Agriculture real estate		—		—		—		—		—		—
Agriculture		—		—		—		—		—		—
Commercial real estate		906		906		—		630		21		3
Commercial		—		—		—		203		—		—
Consumer		—		—		—		—		—		—
With a specific allowance recorded:
Residential		282		282		78		204		5		3
Agriculture real estate		88		88		9		72		—		—
Agriculture		—		—		—		—		—		—
Commercial real estate		769		1,116		295		518		22		—
Commercial		377		377		134		1,549		2		1
Consumer		—		—		—		—		—		—

Totals:
Residential	$	300	$	300	$	78	$	342	$	15	$	13

Agriculture real estate	$	88	$	88	$	9	$	72	$	—	$	—

Agriculture	$	—	$	—	$	—	$	—	$	—	$	—

Commercial real estate	$	1,675	$	2,022	$	295	$	1,148	$	43	$	3

Commercial	$	377	$	377	$	134	$	1,752	$	2	$	1

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.

The following is an analysis of the allowance for credit losses for the years ended December 31:


	(In Thousands)
	2014			2013			2012
Allowance for Loan Losses
Balance at beginning of year	$	5,194		$	5,224		$	5,091
Provision for loan loss		1,191			858			738
Loans charged off		(778	)		(1,262	)		(891	)
Recoveries		298			374			286

Balance at ending of year	$	5,905		$	5,194		$	5,224

Allowance for Unfunded Loan Commitments & Letters of Credit	$	207		$	163		$	162

Total Allowance for Credit Losses	$	6,112		$	5,357		$	5,386

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 ALLL 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 as of December 31, 2014 and 2013 is as follows:


	(In Thousands)
	Consumer Real Estate			Agriculture Real Estate		Agriculture		Commercial Real Estate			Commercial and Industrial		Consumer			Unfunded Loan Commitment & Letters of Credit		Unallocated			Total
2014
ALLOWANCE FOR CREDIT LOSSES:
Beginning balance	$	257		$	131	$	326	$	2,107		$	1,359	$	292		$	163	$	722		$	5,357
Charge Offs		(168	)		—		—		(229	)		—		(381	)		—		—			(778	)
Recoveries		34			—		44		4			20		196			—		—			298
Provision		414			53		177		485			42		216			—		(196	)		1,191
Other Non-interest expense related to unfunded		—			—		—		—			—		—			44		—			44

Ending Balance	$	537		$	184	$	547	$	2,367		$	1,421	$	323		$	207	$	526		$	6,112

Ending balance: individually evaluated for impairment	$	36		$	—	$	25	$	111		$	204	$	11		$	—	$	—		$	387

Ending balance: collectively evaluated for impairment	$	501		$	184	$	522	$	2,256		$	1,217	$	312		$	207	$	526		$	5,725

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

FINANCING RECEIVABLES:
Ending balance, net of deferred fees	$	97,550		$	50,895	$	74,611	$	270,188		$	104,824	$	23,858		$	—	$	—		$	621,926

Ending balance: individually evaluated for impairment	$	301		$	—	$	25	$	1,179		$	327	$	11		$	—	$	—		$	1,843

Ending balance: collectively evaluated for impairment	$	97,249		$	50,895	$	74,586	$	269,009		$	104,497	$	23,847		$	—	$	—		$	620,083


Ending balance: loans acquired with deteriorated credit quality	$	526		$	—	$	—	$	—		$	—	$	—		$	—	$	—		$	526


	(In Thousands)
	Consumer Real Estate			Agriculture Real Estate		Agriculture		Commercial Real Estate			Commercial and Industrial			Consumer			Unfunded Loan Commitment & Letters of Credit		Unallocated		Total
2013
ALLOWANCE FOR CREDIT LOSSES:
Beginning balance	$	368		$	113	$	290	$	1,749		$	2,183		$	268		$	162	$	253	$	5,386
Charge Offs		(147	)		—		—		(164	)		(513	)		(438	)		—		—		(1,262	)
Recoveries		20			—		5		23			141			185			—		—		374
Provision		16			18		31		499			(452	)		277			—		469		858
Other Non-interest expense related to unfunded		—			—		—		—			—			—			1		—		1

Ending Balance	$	257		$	131	$	326	$	2,107		$	1,359		$	292		$	163	$	722	$	5,357

Ending balance: individually evaluated for impairment	$	78		$	9	$	—	$	295		$	134		$	—		$	—	$	—	$	516

Ending balance: collectively evaluated for impairment	$	179		$	122	$	326	$	1,812		$	1,225		$	292		$	163	$	722	$	4,841

Ending balance: loans acquired with deteriorated credit quality	$	1		$	—	$	—	$	—		$	—		$	—		$	—	$	—	$	1

FINANCING RECEIVABLES:
Ending balance, net of deferred fees	$	92,438		$	44,301	$	65,449	$	248,893		$	103,856		$	21,176		$	—	$	—	$	576,113

Ending balance: individually evaluated for impairment	$	300		$	88	$	—	$	1,675		$	377		$	—		$	—	$	—	$	2,440

Ending balance: collectively evaluated for impairment	$	92,138		$	44,213	$	65,449	$	247,218		$	103,479		$	21,176		$	—	$	—	$	573,673

Ending balance: loans acquired with deteriorated credit quality	$	540		$	—	$	—	$	—		$	—		$	—		$	—	$	—	$	540