NOTE 4 LOANS

The Company had $1.1 million in loans held for sale at March 31, 2016 as compared to $1.2 million in loans held for sale at December 31, 2015. Due to materiality, these loans are included in the Consumer Real Estate and Agricultural Real Estate loan numbers.

Loan balances as of March 31, 2016 and December 31, 2015:


	(In Thousands)
Loans:	March 31, 2016			December 31, 2015
Consumer Real Estate	$	88,365		$	88,189
Agricultural Real Estate		59,533			58,525
Agricultural		77,909			82,654
Commercial Real Estate		345,223			322,762
Commercial and Industrial		102,892			100,125
Consumer		27,995			27,770
Industrial Development Bonds		6,420			6,491

		708,337			686,516
Less: Net deferred loan fees and costs		(677	)		(638	)

		707,660			685,878
Less: Allowance for loan losses		(6,285	)		(6,057	)

Loans - Net	$	701,375		$	679,821

The following is a maturity schedule by major category of loans as of March 31, 2016:


	Maturities (In Thousands)
	Within One Year		After One Year Within Five Years		After Five Years
Consumer Real Estate	$	1,033	$	12,132	$	75,200
Agricultural Real Estate		955		3,569		55,009
Agricultural		48,960		23,832		5,117
Commercial Real Estate		14,434		77,031		253,758
Commercial and Industrial		50,820		31,829		20,243
Consumer		5,186		17,525		5,284
Industrial Development Bonds		1,300		185		4,935

The distribution of fixed rate loans and variable rate loans by major loan category is as follows as of March 31, 2016. Variable rate loans whose current rates are equal to their floor or ceiling are classified as fixed in this table.


	(In Thousands)
	Fixed		Variable
	Rate		Rate
Consumer Real Estate	$	55,792	$	32,573
Agricultural Real Estate		43,422		16,111
Agricultural		45,761		32,148
Commercial Real Estate		224,647		120,576
Commercial and Industrial		60,300		42,592
Consumer		23,957		4,038
Industrial Development Bonds		6,290		130

As of March 31, 2016 and December 31, 2015 one to four family residential mortgage loans amounting to $18.8 and $20.0 million, respectively, have been pledged as security for future loans the Bank has received 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 classification of loans as of March 31, 2016 and December 31, 2015, net of deferred loan fees and costs:


March 31, 2016	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	$	621	$	156	$	443	$	1,220	$	86,877	$	88,097	$	0
Agricultural Real Estate		—		57		162		219		59,260		59,479		—
Agricultural		—		3		—		3		78,018		78,021		—
Commercial Real Estate		148		—		422		570		344,091		344,661		—
Commercial and Industrial		—		—		19		19		109,367		109,386		—
Consumer		37		10		4		51		27,965		28,016		—

Total	$	806	$	226	$	1,050	$	2,082	$	705,578	$	707,660	$	0


December 31, 2015	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	$	303	$	47	$	357	$	707	$	87,240	$	87,947	$	0
Agricultural Real Estate		—		—		162		162		58,301		58,463		—
Agricultural		—		145		—		145		82,617		82,762		—
Commercial Real Estate		236		—		841		1,077		321,153		322,230		—
Commercial and Industrial		51		—		20		71		106,618		106,689		—
Consumer		19		9		—		28		27,759		27,787		—

Total	$	609	$	201	$	1,380	$	2,190	$	683,688	$	685,878	$	0

The following table presents the recorded investment in nonaccrual loans by class of loans as of March 31, 2016 and December 31, 2015:


	(In Thousands)
	March 31,		December 31,
	2016		2015
Consumer Real Estate	$	1,196	$	1,155
Agricultural Real Estate		162		162
Agricultural		—		—
Commercial Real Estate		422		484
Commercial		200		202
Consumer		23		38

Total	$	2,003	$	2,041

Following are the characteristics and underwriting criteria for each major type of loan the Bank offers:

Commercial Real Estate – Construction, purchase, and refinance of business purpose real estate. Risks discussed during the approval process include construction delays and overruns, vacancies, collateral value subject to market value fluctuations, interest rate, market demands, borrower’s ability to repay in a timely fashion, and others. The Bank does employ stress testing on higher balance loans to mitigate risk by ensuring the customer’s ability to repay in a changing rate environment.

Agricultural Real Estate – Purchase of farm real estate or for permanent improvements to the farm real estate. Cash flow from the farm operation is the repayment source and is therefore subject to the financial success of the farm operation.

Consumer Real Estate – Purchase, refinance, or equity financing of one to four family owner occupied dwelling. Success in repayment is subject to borrower’s income, debt level, character in fulfilling payment obligations, employment, and others.

Commercial and Industrial – Loans to proprietorships, partnerships, or corporations to provide temporary working capital and seasonal loans as well as long term loans for capital asset acquisition. Risks include adequacy of cash flow, reasonableness of projections, financial leverage, economic trends, management ability and estimated capital expenditures during the fiscal year. The Bank does employ stress testing on higher balance loans to mitigate risk by ensuring the customer’s ability to repay in a changing rate environment before granting loan approval.

Agricultural – Loans for the production and housing of crops, fruits, vegetables, and livestock or to fund the purchase or re-finance of capital assets such as machinery and equipment and livestock. The production of crops and livestock is especially vulnerable to commodity prices and weather. The vulnerability to commodity prices is offset by the farmer’s ability to hedge their position by the use of the future contracts. The risk related to weather is often mitigated by requiring federal crop insurance.

Consumer – Funding for individual and family purposes. Success in repayment is subject to borrower’s income, debt level, character in fulfilling payment obligations, employment, and others.

Industrial Development Bonds – Funds for public improvements in the Bank’s service area. Repayment ability is based on the continuance of the taxation revenue as the source of repayment.

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 portfolio class, net of deferred fees and costs, based on the most recent analysis performed as of March 31, 2016 and December 31, 2015:


	(In Thousands)
	Agricultural Real Estate		Agricultural		Commercial Real Estate		Commercial and Industrial		Industrial Development Bonds
March 31, 2016
1-2	$	5,912	$	9,251	$	536	$	509	$	—
3		17,289		23,093		27,635		21,747		3,073
4		35,750		45,467		312,972		79,918		3,347
5		110		192		1,284		52		—
6		361		—		1,812		559		—
7		57		18		422		181		—
8		—		—		—		—		—

Total	$	59,479	$	78,021	$	344,661	$	102,966	$	6,420


	Agricultural Real Estate		Agricultural		Commercial Real Estate		Commercial and Industrial		Industrial Development Bonds
December 31, 2015
1-2	$	5,841	$	12,025	$	597	$	261	$	—
3		16,593		21,247		24,264		22,300		3,100
4		35,475		49,220		293,381		76,855		3,391
5		192		250		1,738		57		—
6		362		—		1,828		543		—
7		—		20		422		182		—
8		—		—		—		—		—

Total	$	58,463	$	82,762	$	322,230	$	100,198	$	6,491

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, 2016 and December 31, 2015.


	(In Thousands)
	Consumer Real Estate		Consumer Real Estate
	March 31, 2016		December 31, 2015
Grade
Pass	$	87,257	$	87,292
Special Mention (5)		—		48
Substandard (6)		330		332
Doubtful (7)		510		275

Total	$	88,097	$	87,947

	(In Thousands)
	Consumer—Credit				Consumer —Other
	March 31, 2016		December 31, 2015		March 31, 2016		December 31, 2015
Performing	$	3,587	$	3,901	$	24,408	$	23,863
Nonperforming		—		—		21		23

Total	$	3,587	$	3,901	$	24,429	$	23,886

Information about impaired loans as of March 31, 2016, December 31, 2015 and March 31, 2015 are as follows:


	March 31, 2016		December 31, 2015		March 31, 2015
Impaired loans without a valuation allowance	$	1,042	$	1,257	$	624
Impaired loans with a valuation allowance		1,169		879		1,619

Total impaired loans	$	2,211	$	2,136	$	2,243

Valuation allowance related to impaired loans	$	426	$	330	$	428
Total non-accrual loans	$	2,003	$	2,041	$	2,424
Total loans past-due ninety days or more and still accruing	$	—	$	—	$	—
Quarter ended average investment in impaired loans	$	2,130	$	2,207	$	1,958
Year to date average investment in impaired loans	$	2,130	$	2,509	$	1,958

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

The Bank had approximately $1.1 million of its impaired loans classified as troubled debt restructured (TDR) as of March 31, 2016, $1.1 million as of December 31, 2015 and $1.3 million as of March 31, 2015. During the first quarter 2016, one new loan was considered TDR. This loan is making interest-only payments.

The following table represents three months ended March 31, 2016.


Three Months March 31, 2016 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		—	$	—	$	—
Commercial and Industrial		—		—		—
Consumer Real Estate		1		138		138

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


Three Months 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
Consumer Real Estate		—		—		—

For the three month period ended March 31, 2016 and 2015, there were no TDRs that subsequently defaulted after modification.

For the majority of the Bank’s impaired loans, the Bank will apply the fair value of collateral or use a measurement incorporating the present value of expected future cash flows discounted at the loan’s effective rate of interest. To determine fair value of collateral, 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. 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 tables present loans individually evaluated for impairment by class of loans for three months ended March 31, 2016 and March 31, 2015.


	(In Thousands)
Three Months Ended March 31, 2016	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Interest Income Recognized Cash Basis
With no related allowance recorded:
Consumer Real Estate	$	365	$	365	$	—	$	156	$	3	$	3
Agricultural Real Estate		162		162		—		162		—		—
Agricultural		—		—		—		—		—		—
Commercial Real Estate		515		515		—		409		8		7
Commercial and Industrial		—		—		—		454		6		—
Consumer		—		—		—		—		—		—
With a specific allowance recorded:
Consumer Real Estate		509		628		104		307		1		—
Agricultural Real Estate		57		57		57		38		1		—
Agricultural		—		—		—		—		—		—
Commercial Real Estate		422		422		152		422		—		—
Commercial and Industrial		181		239		113		182		—		—
Consumer		—		—		—		—		—		—

Totals:
Consumer Real Estate	$	874	$	993	$	104	$	463	$	4	$	3

Agricultural Real Estate	$	219	$	219	$	57	$	200	$	1	$	—

Agricultural	$	—	$	—	$	—	$	—	$	—	$	—

Commercial Real Estate	$	937	$	937	$	152	$	831	$	8	$	7

Commercial and Industrial	$	181	$	239	$	113	$	636	$	6	$	—

Consumer	$	—	$	—	$	—	$	—	$	—	$	—


Three Months Ended March 31, 2015	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Interest Income Recognized Cash Basis
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		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	$	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	$	—	$	—

As of March 31, 2016, the Company had $456 thousand of foreclosed residential real estate property obtained by physical possession and $568 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, 2016			Twelve Months Ended December 31, 2015
Allowance for Loan & Lease Losses
Balance at beginning of year	$	6,057		$	5,905
Provision for loan loss		277			625
Loans charged off		(84	)		(1,030	)
Recoveries		35			557

Allowance for Loan & Lease Losses	$	6,285		$	6,057

Allowance for Unfunded Loan Commitments & Letters of Credit	$	220		$	208

Total Allowance for Credit Losses	$	6,505		$	6,265

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.

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The following table breaks down the activity within ACL for each loan portfolio classification 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, 2016 and March 31, 2015 is as follows:


	Consumer Real Estate		Agricultural Real Estate		Agricultural			Commercial Real Estate			Commercial and Industrial			Consumer			Unfunded Loan Commetment & Letters of Credit		Unallocated			Total
Three Months Ended March 31, 2016
ALLOWANCE FOR CREDIT LOSSES:
Beginning balance	$	338	$	211	$	582		$	2,516		$	1,229		$	337		$	208	$	844		$	6,265
Charge Offs		—		—		—			(3	)		(20	)		(61	)		—		—			(84	)
Recoveries		2		—		4			1			3			25			—		—			35
Provision (Credit)		117		61		(38	)		164			39			34			—		(100	)		277
Other Non-interest expense related to unfunded		—		—		—			—			—			—			12		—			12

Ending Balance	$	457	$	272	$	548		$	2,678		$	1,251		$	335		$	220	$	744		$	6,505

Ending balance: individually evaluated for impairment	$	104	$	57	$	—		$	152		$	113		$	—		$	—	$	—		$	426

Ending balance: collectively evaluated for impairment	$	353	$	215	$	548		$	2,526		$	1,138		$	335		$	220	$	744		$	6,079

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

FINANCING RECEIVABLES:
Ending balance	$	88,097	$	59,479	$	78,021		$	344,661		$	109,386		$	28,016		$	—	$	—		$	707,660

Ending balance: individually evaluated for impairment	$	874	$	219	$	—		$	937		$	181		$	—		$	—	$	—		$	2,211

Ending balance: collectively evaluated for impairment	$	87,223	$	59,260	$	78,021		$	343,724		$	109,205		$	28,016		$	—	$	—		$	705,449

Ending balance: loans acquired with deteriorated credit quality	$	502	$	—	$	—		$	—		$	—		$	—		$	—	$	—		$	502


	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