Loans | NOTE 4 LOANS Loan balances as of March 31, 2018 and December 31, 2017: (In Thousands) Loans: March 31, 2018 December 31, 2017 Consumer Real Estate $ 84,501 $ 83,620 Agricultural Real Estate 67,596 64,073 Agricultural 99,836 95,111 Commercial Real Estate 415,296 410,520 Commercial and Industrial 123,439 126,275 Consumer 38,569 37,757 Industrial Development Bonds 6,350 6,415 835,587 823,771 Less: Net deferred loan fees and costs (850 ) (747 ) 834,737 823,024 Less: Allowance for loan losses (6,800 ) (6,868 ) Loans - Net $ 827,937 $ 816,156 The following is a contractual maturity schedule by major category of loans as of March 31, 2018: (In Thousands) Within After One After Consumer Real Estate $ 3,701 $ 14,131 $ 66,669 Agricultural Real Estate 978 6,055 60,563 Agricultural 61,155 27,656 11,025 Commercial Real Estate 18,333 140,155 256,808 Commercial and Industrial 65,252 41,008 17,179 Consumer 5,346 24,530 8,693 Industrial Development Bonds 800 65 5,485 The distribution of fixed rate loans and variable rate loans by major loan category is as follows as of March 31, 2018: (In Thousands) Fixed Rate Variable Consumer Real Estate $ 41,497 $ 43,004 Agricultural Real Estate 49,003 18,593 Agricultural 35,722 64,114 Commercial Real Estate 258,969 156,327 Commercial and Industrial 46,137 77,302 Consumer 33,838 4,731 Industrial Development Bonds 6,350 — As of March 31, 2018 and December 31, 2017 one to four family residential mortgage loans amounting to $17.5 and $17.3 million, respectively, have been pledged as security for future loans and existing 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. [Remainder of this page intentionally left blank] The following table represents the contractual aging of the recorded investment (in thousands) in past due loans by portfolio classification of loans as of March 31, 2018 and December 31, 2017, net of deferred loan fees and costs: March 31, 2018 30-59 Days 60-89 Days Greater Than Total Current Total Recorded Consumer Real Estate $ 461 $ 0 $ 95 $ 556 $ 83,496 $ 84,052 $ — Agricultural Real Estate 18 — — 18 67,551 67,569 — Agricultural — — — — 99,954 99,954 — Commercial Real Estate — — 1 1 414,665 414,666 — Commercial and Industrial 115 — — 115 129,750 129,865 — Consumer 38 5 — 43 38,588 38,631 — Total $ 632 $ 5 $ 96 $ 733 $ 834,004 $ 834,737 $ 0 December 31, 2017 30-59 Days 60-89 Days Greater Than Total Current Total Recorded 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 $ 0 The following table presents the recorded investment in nonaccrual loans by class of loans as of March 31, 2018 and December 31, 2017: (In Thousands) March 31, December 31, Consumer Real Estate $ 790 $ 708 Agricultural Real Estate — 101 Agricultural — — Commercial Real Estate 1 38 Commercial & Industrial 109 149 Consumer — 7 Total $ 900 $ 1,003 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 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. 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. 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. 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. 1. Zero (0) Unclassified. Any loan which has not been assigned a classification. 2. 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. 3. 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. 4. 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: a. At inception, the loan was secured with collateral possessing a loan value adequate to protect the Bank from loss; b. The loan exhibited two or more years of satisfactory repayment with a reasonable reduction of the principal balance; c. 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. 5. 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. 6. 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. 7. Six (6) Substandard. One or more of the following characteristics may be exhibited in loans classified substandard: a. 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. b. Loans are inadequately protected by the current net worth and paying capacity of the borrower. c. 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. d. Loans are characterized by the distinct possibility that the Bank will sustain some loss if deficiencies are not corrected. e. Unusual courses of action are needed to maintain a high probability of repayment. f. The borrower is not generating enough cash flow to repay loan principal; however, continues to make interest payments. g. The lender is forced into a subordinate position or unsecured collateral position due to flaws in documentation. h. Loans have been restructured so that payment schedules, terms and collateral represent concessions to the borrower when compared to the normal loan terms. i. The lender is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan. j. There is significant deterioration in the market conditions and the borrower is highly vulnerable to these conditions. 8. Seven (7) Doubtful. One or more of the following characteristics may be exhibited in loans classified Doubtful: a. 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. b. The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment. c. 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. 9. 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. [Remainder of this page intentionally left blank] 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, 2018 and December 31, 2017: (In Thousands) Agricultural Agricultural Commercial Commercial Industrial March 31, 2018 1-2 $ 4,076 $ 2,109 $ 1,167 $ 9,065 $ — 3 13,087 34,434 31,227 16,752 3,460 4 49,057 62,856 365,841 95,150 2,890 5 1,335 555 7,676 1,696 — 6 14 — 8,755 743 — 7 — — — 109 — 8 — — — — — Total $ 67,569 $ 99,954 $ 414,666 $ 123,515 $ 6,350 Agricultural Agricultural Commercial Commercial Industrial December 31, 2017 1-2 $ 4,143 $ 6,558 $ 1,244 $ 9,205 $ — 3 15,244 37,267 32,498 15,277 3,489 4 43,416 51,312 359,600 99,581 2,926 5 1,125 101 7,758 1,381 — 6 116 — 8,853 817 — 7 — — — 111 — 8 — — — — — Total $ 64,044 $ 95,238 $ 409,953 $ 126,372 $ 6,415 For consumer residential real estate, and other, the Company also evaluates credit quality based on the aging status of the loan, as 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, 2018 and December 31, 2017. (In Thousands) Consumer Consumer March 31, December 31, Grade Pass $ 83,716 $ 82,632 Special Mention (5) — — Substandard (6) 256 488 Doubtful (7) 80 80 Total $ 84,052 $ 83,200 (In Thousands) Consumer - Credit Consumer - Other March 31, December 31, March 31, December 31, Performing $ 3,826 $ 4,108 $ 34,791 $ 33,666 Nonperforming — — 14 28 Total $ 3,826 $ 4,108 $ 34,805 $ 33,694 Information about impaired loans as of March 31, 2018, December 31, 2017 and March 31, 2017 are as follows: (In Thousands) March 31, 2018 December 31, 2017 March 31, 2017 Impaired loans without a valuation $ 999 $ 1,131 $ 1,099 Impaired loans with a valuation allowance 607 614 694 Total impaired loans $ 1,606 $ 1,745 $ 1,793 Valuation allowance related to impaired $ 104 $ 106 $ 117 Total non-accrual $ 900 $ 1,003 $ 1,430 Total loans past-due $ — $ — $ — Quarter ended average investment in $ 1,688 $ 2,160 $ 1,832 Year to date average investment in $ 1,688 $ 1,885 $ 1,832 No additional funds are committed to be advanced in connection with impaired loans. The Bank had approximately $527 thousand of its impaired loans classified as troubled debt restructured (TDR) as of March 31, 2018, $534 thousand as of December 31, 2017 and $551 thousand as of March 31, 2017. During the year to date 2018 and 2017, there were no new loans considered TDR. For the three month period ended March 31, 2018 and 2017, 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 The Bank uses the following guidelines as stated in policy to determine when to realize a charge-off, charge-off work-out charge-off [Remainder of this page intentionally left blank] The following tables present loans individually evaluated for impairment by class of loans for three months ended March 31, 2018 and March 31, 2017. (In Thousands) Three Months Ended March 31, 2018 Recorded Unpaid Related QTD QTD QTD With no related allowance recorded: Consumer Real Estate $ 489 $ 489 $ — $ 492 $ 8 $ 6 Agricultural Real Estate — — — 67 — — Agricultural — — — — — — Commercial Real Estate 200 200 — 201 3 — Commercial and Industrial 310 310 — 209 4 — Consumer — — — — — — With a specific allowance recorded: Consumer Real Estate 80 80 20 80 — — Agricultural Real Estate — — — — — — Agricultural — — — — — — Commercial Real Estate 418 418 42 420 4 — Commercial and Industrial 109 109 42 219 — — Consumer — — — — — — Totals: Consumer Real Estate $ 569 $ 569 $ 20 $ 572 $ 8 $ 6 Agricultural Real Estate $ — $ — $ — $ 67 $ — $ — Agricultural $ — $ — $ — $ — $ — $ — Commercial Real Estate $ 618 $ 618 $ 42 $ 621 $ 7 $ — Commercial and Industrial $ 419 $ 419 $ 42 $ 428 $ 4 $ — Consumer $ — $ — $ — $ — $ — $ — [Remainder of this page intentionally left blank] (In Thousands) Three Months Ended March 31, 2017 Recorded Unpaid Related QTD QTD QTD With no related allowance recorded: Consumer Real Estate $ 998 $ 998 $ — $ 1,003 $ 8 $ 6 Agricultural Real Estate 101 101 — 121 — — Agricultural — — — — — — Commercial Real Estate — — — — — — Commercial and Industrial — — — — — — Consumer — — — — — — With a specific allowance recorded: Consumer Real Estate 83 83 23 94 — — Agricultural Real Estate — — — — — — Agricultural — — — — — — Commercial Real Estate 496 496 61 498 5 — Commercial and Industrial 115 115 33 116 — — Consumer — — — — — — Totals: Consumer Real Estate $ 1,081 $ 1,081 $ 23 $ 1,097 $ 8 $ 6 Agricultural Real Estate $ 101 $ 101 $ — $ 121 $ — $ — Agricultural $ — $ — $ — $ — $ — $ — Commercial Real Estate $ 496 $ 496 $ 61 $ 498 $ 5 $ — Commercial and Industrial $ 115 $ 115 $ 33 $ 116 $ — $ — Consumer $ — $ — $ — $ — $ — $ — As of March 31, 2018, the Company had $3 thousand of foreclosed residential real estate property obtained by physical possession and $49 thousand of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings are in process according to local jurisdictions. As of March 31, 2017, the Company had $169 thousand of foreclosed residential real estate property obtained by physical possession and $190 thousand of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings were 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 Twelve Months Ended Allowance for Loan & Lease Losses Balance at beginning of year $ 6,868 $ 6,784 Provision for loan loss 40 222 Loans charged off (145 ) (288 ) Recoveries 37 150 Allowance for Loan & Lease Losses $ 6,800 $ 6,868 Allowance for Unfunded Loan Commitments & Letters of Credit $ 265 $ 227 Total Allowance for Credit Losses $ 7,065 $ 7,095 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. [Remainder of this page intentionally left blank] 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, presented in thousands, related to the allowance for credit losses for three months ended March 31, 2018 and March 31, 2017 is as follows: Consumer Agricultural Agricultural Commercial Commercial Consumer Unfunded Unallocated Total Three Months Ended March 31, 2018 ALLOWANCE FOR CREDIT LOSSES: Beginning balance $ 343 $ 244 $ 667 $ 3,149 $ 1,546 $ 441 $ 227 $ 478 $ 7,095 Charge Offs (34 ) — — (14 ) — (97 ) — — (145 ) Recoveries — — 3 2 2 30 — — 37 Provision (Credit) (55 ) 19 36 537 (105 ) 57 — (449 ) 40 Other Non-interest — — — — — — 38 — 38 Ending Balance $ 254 $ 263 $ 706 $ 3,674 $ 1,443 $ 431 $ 265 $ 29 $ 7,065 Ending balance: individually evaluated for impairment $ 20 $ — $ — $ 42 $ 42 $ — $ — $ — $ 104 Ending balance: collectively evaluated for impairment $ 234 $ 263 $ 706 $ 3,632 $ 1,401 $ 431 $ 265 $ 29 $ 6,961 Ending balance: loans acquired with deteriorated credit quality $ — $ — $ — $ — $ — $ — $ — $ — $ — FINANCING RECEIVABLES: Ending balance $ 84,052 $ 67,569 $ 99,954 $ 414,666 $ 129,865 $ 38,631 $ — $ — $ 834,737 Ending balance: individually evaluated for impairment $ 569 $ — $ — $ 618 $ 419 $ — $ — $ — $ 1,606 Ending balance: collectively evaluated for impairment $ 83,483 $ 67,569 $ 99,954 $ 414,048 $ 129,446 $ 38,631 $ — $ — $ 833,131 Ending balance: loans acquired with deteriorated credit quality $ 121 $ — $ — $ — $ — $ — $ — $ — $ 121 Consumer Agricultural Agricultural Commercial Commercial Consumer Unfunded Unallocated Total Three Months Ended March 31, 2017 ALLOWANCE FOR CREDIT LOSSES: Beginning balance $ 316 $ 241 $ 616 $ 3,250 $ 1,318 $ 394 $ 217 $ 649 $ 7,001 Charge Offs — — — — — (44 ) — — (44 ) Recoveries 10 — 1 2 3 21 — — 37 Provision (Credit) (49 ) 3 17 (244 ) (22 ) 26 — 342 73 Other Non-interest — — — — — — 2 — 2 Ending Balance $ 277 $ 244 $ 634 $ 3,008 $ 1,299 $ 397 $ 219 $ 991 $ 7,069 Ending balance: individually evaluated for impairment $ 23 $ — $ — $ 61 $ 33 $ — $ — $ — $ 117 Ending balance: collectively evaluated for impairment $ 254 $ 244 $ 634 $ 2,947 $ 1,266 $ 397 $ 219 $ 991 $ 6,952 Ending balance: loans acquired with deteriorated credit quality $ — $ — $ — $ — $ — $ — $ — $ — $ — FINANCING RECEIVABLES: Ending balance $ 84,081 $ 62,803 $ 87,078 $ 382,183 $ 121,183 $ 33,878 $ — $ — $ 771,206 Ending balance: individually evaluated for impairment $ 1,081 $ 101 $ — $ 496 $ 115 $ — $ — $ — $ 1,793 Ending balance: collectively evaluated for impairment $ 83,000 $ 62,702 $ 87,078 $ 381,687 $ 121,068 $ 33,878 $ — $ — $ 769,413 Ending balance: loans acquired with deteriorated credit quality $ 198 $ — $ — $ — $ — $ — $ — $ — $ 198 |