Loans

12 Months Ended

Dec. 31, 2018

Note 4 - Loans

The Company had $495 thousand in loans held for sale at December 31, 2018 as compared to $1.2 million in loans held for sale at December 31, 2017.

Loans at December 31 are summarized below:

	(In Thousands)
Loans:	2018			2017
Consumer Real Estate	$	80,766		$	83,620
Agricultural Real Estate		68,609			64,073
Agricultural		108,495			95,111
Commercial Real Estate		419,784			410,520
Commercial and Industrial		121,793			126,275
Consumer		41,953			37,757
Industrial Development Bonds		5,889			6,415
	$	847,289		$	823,771
Less: Net deferred loan fees and costs		(915	)		(747	)
		846,374			823,024
Less: Allowance for loan losses		(6,775	)		(6,868	)
Loans - Net	$	839,599		$	816,156

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

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.

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.

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 crop insurance.

Commercial Real Estate: Construction, purchase, and refinance of business purpose real estate. Risks include potential construction delays and overruns, vacancies, collateral value subject to market value fluctuations, interest rate, market demands, borrower’s ability to repay in orderly 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 before granting loan approval.

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.

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 (IDB): 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 following is a maturity schedule by major category of loans at December 31, 2018:

	(In Thousands)
			After One
	Within		Year Within		After
	One Year		Five Years		Five Years		Total
Consumer Real Estate	$	4,226	$	16,495	$	60,045	$	80,766
Agricultural Real Estate		615		4,818		63,176		68,609
Agricultural		70,505		28,073		9,917		108,495
Commercial Real Estate		16,339		160,783		242,662		419,784
Commercial and Industrial		61,382		52,678		7,733		121,793
Consumer		5,211		27,369		9,373		41,953
Industrial Development Bonds		600		270		5,019		5,889
	$	158,878	$	290,486	$	397,925	$	847,289

The distribution of fixed rate loans and variable rate loans by major loan category is as follows as of December 31, 2018:

	(In Thousands)
	Fixed		Variable
	Rate		Rate
Consumer Real Estate	$	35,174	$	45,592
Agricultural Real Estate		49,717		18,892
Agricultural		37,053		71,442
Commercial Real Estate		265,197		154,587
Commercial and Industrial		45,934		75,859
Consumer		37,487		4,466
Industrial Development Bonds		5,889		-

Industrial Development Bonds are included in the commercial and industrial category for the remainder of the tables in this Note 4, unless specifically noted separately.

The following table represents the contractual aging of the recorded investment in past due loans by portfolio classification of loans as of December 31, 2018 and 2017, net of deferred loan fees and costs:

December 31, 2018	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	$	342	$	24	$	254	$	620	$	79,612	$	80,232	$	-
Agricultural Real Estate		-		-		-		-		68,588		68,588		-
Agricultural		-		-		-		-		108,616		108,616		-
Commercial Real Estate		-		-		-		-		419,131		419,131		-
Commercial and Industrial		-		-		-		-		127,752		127,752		-
Consumer		85		24		8		117		41,938		42,055		-
Total	$	427	$	48	$	262	$	737	$	845,637	$	846,374	$	-

December 31, 2017	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	$	565	$	212	$	113	$	890	$	82,310	$	83,200	$	-
Agricultural Real Estate		-		-		101		101		63,943		64,044		-
Agricultural		-		-		-		-		95,238		95,238		-
Commercial Real Estate		-		-		38		38		409,915		409,953		-
Commercial and Industrial		-		42		-		42		132,745		132,787		-
Consumer		34		2		7		43		37,759		37,802		-
Total	$	599	$	256	$	259	$	1,114	$	821,910	$	823,024	$	-

The following table presents the recorded investment in nonaccrual loans by portfolio class of loans as of December 31, 2018 and December 31, 2017:

	(In Thousands)
	2018		2017
Consumer Real Estate	$	462	$	708
Agricultural Real Estate		-		101
Agriculture		-		-
Commercial Real Estate		-		38
Commercial and Industrial		72		149
Consumer		8		7
Total	$	542	$	1,003

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 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-to-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 these credit weaknesses are 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 deserve close attention but 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 and 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 but 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, 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, 2018 and December 31, 2017.

	(In Thousands)
	Agricultural Real Estate				Agricultural				Commercial Real Estate				Commercial and Industrial				Industrial Development Bonds
	2018		2017		2018		2017		2018		2017		2018		2017		2018		2017
1-2	$	4,442	$	4,143	$	5,753	$	6,558	$	4,698	$	1,244	$	3,199	$	9,205	$	-	$	-
3		14,118		15,244		38,852		37,267		64,341		32,498		16,284		15,277		3,135		3,489
4		49,596		43,416		63,380		51,312		346,072		359,600		100,644		99,581		2,754		2,926
5		422		1,125		631		101		2,171		7,758		308		1,381		-		-
6		10		116		-		-		1,849		8,853		542		817		-		-
7		-		-		-		-		-		-		886		111		-		-
8		-		-		-		-		-		-		-		-		-		-
Total	$	68,588	$	64,044	$	108,616	$	95,238	$	419,131	$	409,953	$	121,863	$	126,372	$	5,889	$	6,415

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, 2018 and December 31, 2017.

	(In Thousands)
	Consumer Real Estate
	2018		2017
Grade
Pass	$	79,121	$	82,300
Special mention (5)		232		-
Substandard (6)		879		820
Doubtful (7)		-		80
Total	$	80,232	$	83,200

	(In Thousands)
	Consumer - Credit Card				Consumer - Other
	2018		2017		2018		2017
Performing	$	3,909	$	4,108	$	38,073	$	33,666
Nonperforming		19		-		54		28
Total	$	3,928	$	4,108	$	38,127	$	33,694

Information about impaired loans as of and for the years ended December 31, 2018 and 2017 are as follows:

	(In Thousands)
	2018		2017
Impaired loans without a valuation allowance	$	1,808	$	1,131
Impaired loans with a valuation allowance		246		614
Total impaired loans	$	2,054	$	1,745
Valuation allowance related to impaired loans	$	31	$	106
Total non-accrual loans	$	542	$	1,003
Total loans past-due ninety days or more and still accruing	$	-	$	-

	(In Thousands)
	2018		2017		2016
Average investment in impaired loans	$	1,958	$	1,885	$	1,802
Interest income recognized on impaired loans	$	69	$	57	$	64
Interest income recognized on a cash basis on impaired loans	$	17	$	23	$	27

Additional funds of $7 thousand are committed to be advanced in connection with impaired loans.

The Bank had approximately $178 thousand and $0.7 million of its impaired loans classified as troubled debt restructured as of December 31, 2018 and December 31, 2017.

The following table represents the years ended December 31, 2018 and 2017.

December 31, 2018

December 31, 2017

(In thousands)

Troubled Debt Restructurings

Number of Contracts Modified in the

Last 12 Months

Pre- Modification Outstanding Recorded Investment

Post-Modification Outstanding Recorded Investment

Troubled Debt Restructurings

Number of Contracts Modified in the

Last 12 Months

Pre- Modification Outstanding Recorded Investment

Post-Modification Outstanding Recorded Investment

Commercial and Industrial

For the years ended December 31, 2018 and 2017, there were no TDR’s that subsequently defaulted after modification.

For the Bank’s impaired TDR loans, the Bank may utilize a measurement incorporating the present value of expected future cash flows discounted at the loan's effective rate of interest or the fair value of collateral if the loan is collateral dependent. To determine the 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 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 tables present loans individually evaluated for impairment by portfolio class of loans as of December 31, 2018 and 2017:

	(In Thousands)
2018	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	$	583	$	583	$	-	$	562	$	31	$	17
Agricultural Real Estate		-		-		-		17		-		-
Agricultural		-		-		-		-		-		-
Commercial Real Estate		194		194		-		198		11		-
Commercial and Industrial		1,031		1,031		-		438		25		-
Consumer		-		-		-		-		-		-
With a specific allowance recorded:
Consumer Real Estate		174		174		26		158		-		-
Agricultural Real Estate		-		-		-		-		-		-
Agricultural		-		-		-		-		-		-
Commercial Real Estate		-		-		-		140		-		-
Commercial and Industrial		72		72		5		445		2		-
Consumer		-		-		-		-		-		-
Totals:
Consumer Real Estate	$	757	$	757	$	26	$	720	$	31	$	17
Agricultural Real Estate	$	-	$	-	$	-	$	17	$	-	$	-
Agricultural	$	-	$	-	$	-	$	-	$	-	$	-
Commercial Real Estate	$	194	$	194	$	-	$	338	$	11	$	-
Commercial and Industrial	$	1,103	$	1,103	$	5	$	883	$	27	$	-
Consumer	$	-	$	-	$	-	$	-	$	-	$	-

	(In Thousands)
2017	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	$	495	$	495	$	-	$	911	$	30	$	21
Agricultural Real Estate		101		101		-		123		-		-
Agricultural		-		-		-		27		-		-
Commercial Real Estate		202		202		-		51		1		-
Commercial and Industrial		333		333		-		85		2		-
Consumer		-		-		-		-		-		-
With a specific allowance recorded:
Consumer Real Estate		80		80		21		88		-		-
Agricultural Real Estate		-		-		-		-		-		-
Agricultural		-		-		-		-		-		-
Commercial Real Estate		423		423		46		486		24		2
Commercial and Industrial		111		111		39		114		-		-
Consumer		-		-		-		-		-		-
Totals:
Consumer Real Estate	$	575	$	575	$	21	$	999	$	30	$	21
Agricultural Real Estate	$	101	$	101	$	-	$	123	$	-	$	-
Agricultural	$	-	$	-	$	-	$	27	$	-	$	-
Commercial Real Estate	$	625	$	625	$	46	$	537	$	25	$	2
Commercial and Industrial	$	444	$	444	$	39	$	199	$	2	$	-
Consumer	$	-	$	-	$	-	$	-	$	-	$	-

As of December 31, 2018 the Company had $61 thousand of foreclosed residential real estate property obtained by physical possession and $278 thousand of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings are in process according to local jurisdictions. This compares to the Company having $25 thousand of foreclosed residential real estate property obtained by physical possession and $55 thousand of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings are in process according to local jurisdictions as of December 31, 2017.

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)
	2018			2017			2016
Allowance for Loan Losses
Balance at beginning of year	$	6,868		$	6,784		$	6,057
Provision for loan loss		324			222			1,121
Loans charged off		(580	)		(288	)		(550	)
Recoveries		163			150			156
Balance at ending of year	$	6,775		$	6,868		$	6,784
Allowance for Unfunded Loan Commitments & Letters of Credit	$	274		$	227		$	217
Total Allowance for Credit Losses	$	7,049		$	7,095		$	7,001

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 on the consolidated balance sheet. 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, 2018 and 2017 is as follows:

	(In Thousands)
2018	Consumer Real Estate			Agricultural Real Estate		Agricultural		Commercial Real Estate			Commercial and Industrial			Consumer			Unfunded Loan Commitment & Letters of Credit		Unallocated		Total
ALLOWANCE FOR CREDIT LOSSES:
Beginning balance	$	343		$	244	$	667	$	3,149		$	1,546		$	441		$	227	$	478	$	7,095
Charge Offs		(63	)		-		-		(16	)		(142	)		(359	)		-		-		(580	)
Recoveries		18			-		8		10			13			114			-		-		163
Provision (Credit)		(51	)		6		93		74			(112	)		288			-		26		324
Other Non-interest expense related to unfunded		-			-		-		-			-			-			47		-		47
Ending Balance	$	247		$	250	$	768	$	3,217		$	1,305		$	484		$	274	$	504	$	7,049
Ending balance: individually evaluated for impairment	$	26		$	-	$	-	$	-		$	5		$	-		$	-	$	-	$	31
Ending balance: collectively evaluated for impairment	$	221		$	250	$	768	$	3,217		$	1,300		$	484		$	274	$	504	$	7,018
Ending balance: loans acquired with deteriorated credit quality	$	-		$	-	$	-	$	-		$	-		$	-		$	-	$	-	$	-
FINANCING RECEIVABLES:
Ending balance	$	80,232		$	68,588	$	108,616	$	419,131		$	127,752		$	42,055		$	-	$	-	$	846,374
Ending balance: individually evaluated for impairment	$	757		$	-	$	-	$	194		$	1,103		$	-		$	-	$	-	$	2,054
Ending balance: collectively evaluated for impairment	$	79,475		$	68,588	$	108,616	$	418,937		$	126,649		$	42,055		$	-	$	-	$	844,320

	(In Thousands)
2017	Consumer Real Estate			Agricultural Real Estate		Agricultural		Commercial Real Estate			Commercial and Industrial		Consumer			Unfunded Loan Commitment & Letters of Credit		Unallocated			Total
ALLOWANCE FOR CREDIT LOSSES:
Beginning balance	$	316		$	241	$	616	$	3,250		$	1,318	$	394		$	217	$	649		$	7,001
Charge Offs		(4	)		-		-		(21	)		-		(263	)		-		-			(288	)
Recoveries		13			-		8		15			12		102			-		-			150
Provision (Credit)		18			3		43		(95	)		216		208			-		(171	)		222
Other Non-interest expense related to unfunded		-			-		-		-			-		-			10		-			10
Ending Balance	$	343		$	244	$	667	$	3,149		$	1,546	$	441		$	227	$	478		$	7,095
Ending balance: individually evaluated for impairment	$	21		$	-	$	-	$	46		$	39	$	-		$	-	$	-		$	106
Ending balance: collectively evaluated for impairment	$	322		$	244	$	667	$	3,103		$	1,507	$	441		$	227	$	478		$	6,989
Ending balance: loans acquired with deteriorated credit quality	$	-		$	-	$	-	$	-		$	-	$	-		$	-	$	-		$	-
FINANCING RECEIVABLES:
Ending balance	$	83,200		$	64,044	$	95,238	$	409,953		$	132,787	$	37,802		$	-	$	-		$	823,024
Ending balance: individually evaluated for impairment	$	575		$	101	$	-	$	625		$	444	$	-		$	-	$	-		$	1,745
Ending balance: collectively evaluated for impairment	$	82,625		$	63,943	$	95,238	$	409,328		$	132,343	$	37,802		$	-	$	-		$	821,279

- Definition

The entire disclosure for claims held for amounts due a entity, excluding financing receivables. Examples include, but are not limited to, trade accounts receivables, notes receivables, loans receivables. Includes disclosure for allowance for credit losses.

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