NOTE 4 LOANS

The Company had $457 thousand in consumer real estate loans held for sale as of March 31, 2015 as compared to $459 thousand in loans held for sale on December 31, 2014. Due to lack of materiality, these loans are included in the Consumer Real Estate loans below.

Loan balances as of March 31, 2015 and December 31, 2014:


	(In Thousands)
	March 31, 2015			December 31, 2014
Loans:
Commercial real estate	$	271,676		$	270,188
Agricultural real estate		51,467			50,895
Consumer real estate		97,142			97,550
Commercial and industrial		95,128			100,126
Agricultural		71,474			74,611
Consumer		23,605			24,277
Industrial Development Bonds		4,673			4,698

		615,165			622,345
Less: Net deferred loan fees and costs		(456	)		(419	)

		614,709			621,926
Less: Allowance for loan losses		(5,977	)		(5,905	)

Loans - Net	$	608,732		$	616,021

The following is a maturity schedule by major category of loans as of March 31, 2015:


	Maturities (In Thousands)
	Within One Year		After One Year Within Five Years		After Five Years
Consumer Real Estate	$	10,983	$	19,428	$	66,731
Agricultural Real Estate		3,713		13,800		33,954
Agricultural		40,522		26,855		4,097
Commercial Real Estate		30,529		84,230		156,917
Commercial/Industrial		55,841		34,222		5,065
Consumer		4,813		14,487		4,305
Industrial Development Bonds		2,498		127		2,048

The distribution of fixed rate loans and variable rate loans by major loan category is as follows as of March 31, 2015. 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
Consumer Real Estate	$	77,681	$	19,461
Agricultural Real Estate		37,478		13,989
Agricultural		66,318		5,156
Commercial Real Estate		187,012		84,664
Commercial/Industrial		77,104		18,024
Consumer		19,528		4,077
Industrial Development Bonds		4,505		168

As of March 31, 2015 and December 31, 2014 one to four family residential mortgage loans amounting to $20.1 and $20.8 million, respectively, have been pledged as security for future loans the Bank may utilize from the Federal Home Loan Bank.

Unless listed separately, 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, 2015 and December 31, 2014, net of deferred fees and costs:


	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
March 31, 2015
Consumer Real Estate	$	368	$	580	$	227	$	1,175	$	95,844	$	97,019	$	—
Agricultural Real Estate		—		—		222		222		51,174		51,396		—
Agricultural		—		—		54		54		71,517		71,571		—
Commercial Real Estate		14		—		978		992		270,209		271,201		—
Commercial and Industrial		35		—		84		119		99,776		99,895		—
Consumer		34		3		20		57		23,570		23,627		—

Total	$	451	$	583	$	1,585	$	2,619	$	612,090	$	614,709	$	—


	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
December 31, 2014
Consumer Real Estate	$	713	$	50	$	436	$	1,199	$	96,351	$	97,550	$	—
Agricultural Real Estate		—		—		—		—		50,895		50,895		—
Agricultural		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	$	—

The following table presents the recorded investment in nonaccrual loans by class of loans as of March 31, 2015 and December 31, 2014:


	(In Thousands)
	March 31 2015		December 31 2014
Consumer Real Estate	$	703	$	628
Agricultural Real Estate		222		—
Agricultural		78		—
Commercial Real Estate		978		709
Commercial and Industrial		423		339
Consumer		20		29

Total	$	2,424	$	1,705

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, 2015 and December 31, 2014:


	(In Thousands)
	Agricultural Real Estate		Agricultural		Commercial Real Estate		Commercial and Industrial		Industrial Development Bonds
March 31, 2015
1-2	$	4,829	$	9,098	$	983	$	1,817	$	—
3		16,349		25,784		33,466		15,864		4,264
4		29,674		36,611		231,346		74,948		409
5		332		54		2,423		2,179		—
6		212		—		2,274		178		—
7		—		24		709		236		—
8		—		—		—		—		—

Total	$	51,396	$	71,571	$	271,201	$	95,222	$	4,673


	Agricultural Real Estate		Agricultural		Commercial Real Estate		Commercial and Industrial		Industrial Development Bonds
December 31, 2014
1-2	$	4,319	$	11,490	$	1,072	$	1,771	$	—
3		15,780		26,871		34,229		15,582		4,289
4		30,472		36,225		225,015		80,079		409
5		111		—		7,083		2,299		—
6		213		—		2,080		165		—
7		—		25		709		230		—
8		—		—		—		—		—

Total	$	50,895	$	74,611	$	270,188	$	100,126	$	4,698

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, 2015 and December 31, 2014.


	(In Thousands)
	Consumer Real Estate		Consumer Real Estate
	March 31 2015		December 31 2014
Grade
Pass	$	96,404	$	97,007
Special Mention (5)		—		—
Substandard (6)		519		446
Doubtful (7)		96		97

Total	$	97,019	$	97,550


	(In Thousands)
	Consumer - Credit				Consumer - Other
	March 31 2015		December 31 2014		March 31 2015		December 31 2014
	March 31 2015		December 31 2014		March 31 2015		December 31 2014
Performing	$	3,514	$	3,987	$	20,099	$	19,846
Nonperforming		1		—		13		25

Total	$	3,515	$	3,987	$	20,112	$	19,871

Information about impaired loans as of March 31, 2015, December 31, 2014 and March 31, 2014 are as follows:


	(In Thousands)
	March 31, 2015		December 31, 2014		March 31, 2014
Impaired loans without a valuation allowance	$	624	$	675	$	1,116
Impaired loans with a valuation allowance		1,619		1,168		943

Total impaired loans	$	2,243	$	1,843	$	2,059

Valuation allowance related to impaired loans	$	428	$	387	$	261
Total non-accrual loans	$	2,424	$	1,705	$	2,615
Total loans past-due ninety days or more and still accruing	$	—	$	—	$	—
Quarter ended average investment in impaired loans	$	1,958	$	1,730	$	2,312
Year to date average investment in impaired loans	$	1,958	$	1,929	$	2,312

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

The Bank had approximately $1.3 million of its impaired loans classified as troubled debt restructured (TDR) as of March 31, 2015, $797.2 thousand as of December 31, 2014 and $974.0 thousand as of March 31, 2014. During the first quarter 2015, two new loans were considered TDR. These encompassed one loan that is making interest-only payments, and one loan that is on a modified amortization schedule.

The following table represents three months ended March 31, 2015.


March 31, 2015 Troubled Debt Restructurings	Number of Contracts Modified in the Last 3 Months		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Commercial Real Estate		1	$	528	$	430
Commercial and Industrial		1		28		24

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

March 31, 2014

Troubled Debt Restructurings

Number of
Contracts
Modified in the
Last 3 Months

Pre-
Modification
Outstanding
Recorded
Investment

Post-
Modification
Outstanding
Recorded
Investment

Ag Real Estate

153

141

For the three month periods ended March 31, 2015 and 2014, there were no TDRs that subsequently defaulted after modification.

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, 2015 and March 31, 2014.


	(In Thousands)
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Three Months Ended March 31, 2015
With no related allowance recorded:
Consumer real estate	$	157	$	157	$	—	$	173	$	—
Agricultural real estate		—		—		—		—		—
Agricultural		—		—		—		—		—
Commercial real estate		—		—		—		—		—
Commercial and industrial		467		467		—		469		7
Consumer		—		—		—		—		—
With a specific allowance recorded:
Consumer real estate		96		96		35		96		3
Agricultural real estate		—		—		—		—		—
Agricultural		24		24		24		24		—
Commercial real estate		1,139		1,139		131		852		—
Commercial and industrial		360		360		238		337		—
Consumer		—		—		—		7		—

Totals:
Consumer real estate	$	253	$	253	$	35	$	269	$	3

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

Agricultural	$	24	$	24	$	24	$	24	$	—

Commercial real estate	$	1,139	$	1,139	$	131	$	852	$	—

Commercial and industrial	$	827	$	827	$	238	$	806	$	7

Consumer	$	—	$	—	$	—	$	7	$	—


	(In Thousands)
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Three Months Ended March 31, 2014
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	$	—	$	—	$	—	$	—	$	—

On January 1, 2015, the Company adopted Accounting Standards Update (ASU) 2014-04, Receivables – Troubled Debt Restructuring by Creditors. As of March 31, 2015, the Company had $452 thousand of foreclosed residential real estate property obtained by physical possession and $465 thousand of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings are in process according to local jurisdictions.

The Allowance for Loan and Lease Losses (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, 2015			Twelve Months Ended December 31, 2014
Allowance for Loan & Lease Losses
Balance at beginning of year	$	5,905		$	5,194
Provision for loan loss		114			1,191
Loans charged off		(92	)		(778	)
Recoveries		50			298

Allowance for Loan & Lease Losses	$	5,977		$	5,905

Allowance for Unfunded Loan Commitments & Letters of Credit	$	202		$	207

Total Allowance for Credit Losses	$	6,179		$	6,112

The Company segregates its 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, 2015 and 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, 2015
ALLOWANCE FOR CREDIT LOSSES:
Beginning balance	$	537		$	184	$	547		$	2,367		$	1,421		$	323		$	207		$	526	$	6,112
Charge Offs		—			—		—			—			—			(92	)		—			—	$	(92	)
Recoveries		2			—		1			1			5			41			—			—	$	50
Provision (Credit)		(42	)		3		(24	)		(156	)		(7	)		12			—			328	$	114
Other Non-interest expense related to unfunded		—			—		—			—			—			—			(5	)		—	$	(5	)

Ending Balance	$	497		$	187	$	524		$	2,212		$	1,419		$	284		$	202		$	854	$	6,179

Ending balance: individually evaluated for impairment	$	35		$	—	$	24		$	131		$	238		$	—		$	—		$	—	$	428
Ending balance: collectively evaluated for impairment	$	462		$	187	$	500		$	2,081		$	1,181		$	284		$	202		$	854	$	5,751

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

FINANCING RECEIVABLES:
Ending balance	$	97,019		$	51,396	$	71,571		$	271,201		$	99,895		$	23,627		$	—		$	—	$	614,709

Ending balance: individually evaluated for impairment	$	253		$	—	$	24		$	1,139		$	827		$	—		$	—		$	—	$	2,243
Ending balance: collectively evaluated for impairment	$	96,766		$	51,396	$	71,547		$	270,062		$	99,068		$	23,627		$	—		$	—	$	612,466

Ending balance: loans acquired with deteriorated credit quality	$	520		$	—	$	—		$	—		$	—		$	—		$	—		$	—	$	520


	(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