Loans

12 Months Ended

Dec. 31, 2019

Note 4 - Loans

The Company had $4.2 million in loans held for sale at December 31, 2019 as compared to $495 thousand in loans held for sale at December 31, 2018.

Loans at December 31 are summarized below:

	(In Thousands)
Loans:	2019			2018
Consumer Real Estate	$	165,349		$	80,766
Agricultural Real Estate		199,105			68,609
Agricultural		111,820			108,495
Commercial Real Estate		551,309			419,784
Commercial and Industrial		135,631			121,793
Consumer		49,237			41,953
Other		8,314			5,889
	$	1,220,765		$	847,289
Less: Net deferred loan fees and costs		(1,766	)		(915	)
		1,218,999			846,374
Less: Allowance for loan losses		(7,228	)		(6,775	)
Loans - Net	$	1,211,771		$	839,599

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.

Other: Primarily funds 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 excluding fair value adjustments at December 31, 2019:

	(In Thousands)
			After One
	Within		Year Within		After
	One Year		Five Years		Five Years		Total
Consumer Real Estate	$	5,163	$	19,025	$	141,231	$	165,419
Agricultural Real Estate		272		4,668		195,162		200,102
Agricultural		66,851		29,954		15,006		111,811
Commercial Real Estate		49,976		230,817		270,698		551,491
Commercial and Industrial		68,257		54,718		12,708		135,683
Consumer		6,215		32,711		10,227		49,153
Other		340		804		7,163		8,307
	$	197,074	$	372,697	$	652,195	$	1,221,966

The distribution of fixed rate loans and variable rate loans by major loan category is as follows as of December 31, 2019:

	(In Thousands)
	Fixed		Variable
	Rate		Rate
Consumer Real Estate	$	88,907	$	76,442
Agricultural Real Estate		97,684		101,421
Agricultural		66,555		45,265
Commercial Real Estate		392,933		158,376
Commercial and Industrial		85,108		50,523
Consumer		44,422		4,815
Other		8,219		95

Other loans 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, 2019 and 2018, net of deferred loan fees and costs:

December 31, 2019	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	$	355	$	70	$	-	$	425	$	164,266	$	164,691	$	-
Agricultural Real Estate		-		107		-		107		198,752		198,859		-
Agricultural		78		7		-		85		111,864		111,949		-
Commercial Real Estate		-		-		-		-		550,082		550,082		-
Commercial and Industrial		201		267		-		468		143,541		144,009		-
Consumer		54		-		-		54		49,355		49,409		-
Total	$	688	$	451	$	-	$	1,139	$	1,217,860	$	1,218,999	$	-

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	$	-

The following table presents the recorded investment in nonaccrual loans by portfolio class of loans as of December 31, 2019 and December 31, 2018:

	(In Thousands)
	2019		2018
Consumer Real Estate	$	1,209	$	462
Agricultural Real Estate		88		-
Agriculture		1,769		-
Commercial Real Estate		37		-
Commercial and Industrial		288		72
Consumer		9		8
Total	$	3,400	$	542

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, 2019 and December 31, 2018.

	(In Thousands)
	Agricultural Real Estate				Agricultural				Commercial Real Estate				Commercial and Industrial				Industrial Development Bonds
	2019		2018		2019		2018		2019		2018		2019		2018		2019		2018
1-2	$	14,655	$	4,442	$	4,093	$	5,753	$	7,860	$	4,698	$	3,844	$	3,199	$	-	$	-
3		33,951		14,118		36,913		38,852		131,780		64,341		19,790		16,284		3,168		3,135
4		116,834		49,596		65,414		63,380		401,404		346,072		103,527		100,644		5,146		2,754
5		14,836		422		2,300		631		3,699		2,171		2,465		308		-		-
6		18,583		10		3,229		-		5,339		1,849		4,983		542		-		-
7		-		-		-		-		-		-		1,086		886		-		-
8		-		-		-		-		-		-		-		-		-		-
Total	$	198,859	$	68,588	$	111,949	$	108,616	$	550,082	$	419,131	$	135,695	$	121,863	$	8,314	$	5,889

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, 2019 and December 31, 2018.

	(In Thousands)
	Consumer Real Estate
	2019		2018
Grade
Pass	$	160,930	$	79,121
Special mention (5)		415		232
Substandard (6)		3,346		879
Doubtful (7)				-
Total	$	164,691	$	80,232

	(In Thousands)
	Consumer - Credit Card				Consumer - Other
	2019		2018		2019		2018
Performing	$	4,076	$	3,909	$	44,831	$	38,073
Nonperforming		15		19		487		54
Total	$	4,091	$	3,928	$	45,318	$	38,127

Information about impaired loans as of and for the years ended December 31, 2019 and 2018 are as follows:

	(In Thousands)
	2019		2018
Impaired loans without a valuation allowance	$	2,420	$	1,808
Impaired loans with a valuation allowance		641		246
Total impaired loans	$	3,061	$	2,054
Valuation allowance related to impaired loans	$	197	$	31
Total non-accrual loans	$	3,400	$	542
Total loans past-due ninety days or more and still accruing	$	-	$	-

	(In Thousands)
	2019		2018		2017
Average investment in impaired loans	$	2,649	$	1,958	$	1,885
Interest income recognized on impaired loans	$	118	$	69	$	57
Interest income recognized on a cash basis on impaired loans	$	9	$	17	$	23

Additional funds of $4 thousand are committed to be advanced in connection with impaired loans.

The Bank had approximately $956 thousand and $178 thousand of its impaired loans classified as troubled debt restructured as of December 31, 2019 and December 31, 2018.

Modification programs focused on payment pattern changes and/or modified maturity dates with most receiving a combination of the two concessions. The modifications did not result in the contractual forgiveness of principal. In 2019, four of the loans resulted in payment changes to interest only for an extended period of time and one loan had a lowering of payment to match an extended maturity. Consequently, the financial impact of the modifications was immaterial. The following table represents the years ended December 31, 2019 and 2018.

December 31, 2019							December 31, 2018
			(In thousands)							(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
Consumer Real Estate		1	$	74	$	74	Consumer Real Estate		-	$	-	$	-
Commercial and Industrial		4		812		812	Commercial and Industrial		-		-		-

For the years ended December 31, 2019 and 2018, 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, 2019 and 2018:

	(In Thousands)
2019	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	$	648	$	648	$	-	$	626	$	32	$	9
Agricultural Real Estate		-		-		-		204		-		-
Agricultural		491		491		-		124		-		-
Commercial Real Estate		299		299		-		238		19		-
Commercial and Industrial		982		982		-		637		66		-
Consumer		-		-		-		-		-		-
With a specific allowance recorded:
Consumer Real Estate		181		184		30		211		-		-
Agricultural Real Estate		-		-		-		22		1		-
Agricultural		200		200		21		29		-		-
Commercial Real Estate		-		-		-		-		-		-
Commercial and Industrial		227		377		142		555		-		-
Consumer		33		33		4		3		-		-
Totals:
Consumer Real Estate	$	829	$	832	$	30	$	837	$	32	$	9
Agricultural Real Estate	$	-	$	-	$	-	$	226	$	1	$	-
Agricultural	$	691	$	691	$	21	$	153	$	-	$	-
Commercial Real Estate	$	299	$	299	$	-	$	238	$	19	$	-
Commercial and Industrial	$	1,209	$	1,359	$	142	$	1,192	$	66	$	-
Consumer	$	33	$	33	$	4	$	3	$	-	$	-

	(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	$	-	$	-	$	-	$	-	$	-	$	-

As of December 31, 2019 the Company had $50 thousand of foreclosed residential real estate property obtained by physical possession and $383 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 $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 as of December 31, 2018.

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)
	2019			2018			2017
Allowance for Loan Losses
Balance at beginning of year	$	6,775		$	6,868		$	6,784
Provision for loan loss		1,138			324			222
Loans charged off		(841	)		(580	)		(288	)
Recoveries		156			163			150
Balance at ending of year	$	7,228		$	6,775		$	6,868
Allowance for Unfunded Loan Commitments & Letters of Credit	$	479		$	274		$	227
Total Allowance for Credit Losses	$	7,707		$	7,049		$	7,095

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.

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Additional analysis related to the allowance for credit losses as of December 31, 2019 and 2018 is as follows:

	(In Thousands)
2019	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	$	247		$	250	$	768		$	3,217	$	1,305		$	484		$	274	$	504		$	7,049
Charge Offs		(98	)		-		(37	)		-		(215	)		(491	)		-		-			(841	)
Recoveries		-			-		3			11		22			120			-		-			156
Provision (Credit)		162			64		(43	)		406		615			438			-		(504	)		1,138
Other Non-interest expense related to unfunded		-			-		-			-		-			-			205		-			205
Ending Balance	$	311		$	314	$	691		$	3,634	$	1,727		$	551		$	479	$	-		$	7,707
Ending balance: individually evaluated for impairment	$	30		$	-	$	21		$	-	$	142		$	4		$	-	$	-		$	197
Ending balance: collectively evaluated for impairment	$	281		$	314	$	670		$	3,634	$	1,585		$	547		$	479	$	-		$	7,510
Ending balance: loans acquired with deteriorated credit quality	$	-		$	-	$	-		$	-	$	-		$	-		$	-	$	-		$	-
FINANCING RECEIVABLES:
Ending balance	$	164,691		$	198,859	$	111,949		$	550,082	$	144,009		$	49,409		$	-	$	-		$	1,218,999
Ending balance: individually evaluated for impairment	$	829		$	-	$	691		$	299	$	1,209		$	33		$	-	$	-		$	3,061
Ending balance: collectively evaluated for impairment	$	163,816		$	198,859	$	111,258		$	549,783	$	142,694		$	49,376		$	-	$	-		$	1,215,786
Ending balance: loans acquired with deteriorated credit quality	$	46		$	-	$	-		$	-	$	106		$	-		$	-	$	-		$	152

	(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	$	79,359		$	68,588	$	108,616	$	418,937		$	126,649		$	42,055		$	-	$	-	$	844,204
Ending balance: loans acquired with deteriorated credit quality	$	116		$	-	$	-	$	-		$	-		$	-		$	-	$	-	$	116