Loans

12 Months Ended

Dec. 31, 2013

Receivables [Abstract]

Loans

Loans

Loans are comprised of the following:

Iin thousands)	December 31, 2013		December 31, 2012
Commercial and Business loans	$	68,460	$	69,780
Government program loans	2,226		2,337
Total Commercial and Industrial	70,686		72,117
Real estate – mortgage:
Commercial real estate	143,919		133,599
Residential mortgages	52,036		55,016
Home Improvement and Home Equity loans	1,410		1,319
Total Real Estate Mortgage	197,365		189,934
RE Construction and Development	87,004		90,941
Agricultural Loans	30,932		36,169
Installment	9,330		10,884
Commercial lease financing	—		12
Total Loans	$	395,317	$	400,057

The Company's loans are predominantly in the San Joaquin Valley, and the greater Oakhurst/East Madera County area, as well as the Campbell area of Santa Clara County, although the Company does participate in loans with other financial institutions, primarily in the state of California.

Commercial and industrial loans represent 17.9% of total loans at December 31, 2013, and are generally made to support the ongoing operations of small-to-medium sized commercial businesses. Commercial and industrial loans have a high degree of industry diversification and provide, working capital, financing for the purchase of manufacturing plants and equipment, or funding for growth and general expansion of businesses. A substantial portion of commercial and industrial loans are secured by accounts receivable, inventory, leases or other collateral including real estate. The remainder are unsecured; however, extensions of credit are predicated upon the financial capacity of the borrower. Repayment of commercial loans is generally from the cash flow of the borrower.

Real estate mortgage loans, representing 49.9% of total loans at December 31, 2013, are secured by trust deeds on primarily commercial property, but are also secured by trust deeds on single family residences. Repayment of real estate mortgage loans is generally from the cash flow of the borrower.

• Commercial real estate mortgage loans comprise the largest segment of this loan category and are available on all types of income producing and commercial properties, including: office buildings, shopping centers; apartments and motels; owner occupied buildings; manufacturing facilities and more. Commercial real estate mortgage loans can also be used to refinance existing debt. Although real estate associated with the business is the primary collateral for commercial real estate mortgage loans, the underlying real estate is not the source of repayment. Commercial real estate loans are made under the premise that the loan will be repaid from the borrower's business operations, rental income associated with the real property, or personal assets.

• Residential mortgage loans are provided to individuals to finance or refinance single-family residences. Residential mortgages are not a primary business line offered by the Company, and are generally of a shorter term than conventional mortgages, with maturities ranging from three to fifteen years on average.

• Home Equity loans comprise a relatively small portion of total real estate mortgage loans, and are offered to borrowers for the purpose of home improvements, although the proceeds may be used for other purposes. Home equity loans are generally secured by junior trust deeds, but may be secured by 1^st trust deeds.

Real estate construction and development loans, representing 22.0% of total loans at December 31, 2013, consist of loans for residential and commercial construction projects, as well as land acquisition and development, or land held for future development. Loans in this category are secured by real estate including improved and unimproved land, as well as single-family residential, multi-family residential, and commercial properties in various stages of completion. All real estate loans have established equity requirements. Repayment on construction loans is generally from long-term mortgages with other lending institutions obtained at completion of the project.

Agricultural loans represent 7.8% of total loans at December 31, 2013, and are generally secured by land, equipment, inventory and receivables. Repayment is from the cash flow of the borrower.

In the normal course of business, the Company is party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. At December 31, 2013 and 2012, these financial instruments include commitments to extend credit of $63,271,000 and $60,050,000, respectively, and standby letters of credit of $2,001,000 and $2,504,000, respectively. These instruments involve elements of credit risk in excess of the amount recognized on the balance sheet. The contract amounts of these instruments reflect the extent of the involvement the Company has in off-balance sheet financial instruments.

The Company’s exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amounts of those instruments. The Company uses the same credit policies as it does for on-balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer, as long as there is no violation of any condition established in the contract. Substantially all of these commitments are at floating interest rates based on the Prime rate. Commitments generally have fixed expiration dates. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management's credit evaluation. Collateral held varies but includes accounts receivable, inventory, leases, property, plant and equipment, residential real estate and income-producing properties.

Standby letters of credit are generally unsecured and are issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.

Loans to directors, officers, principal shareholders and their affiliates are summarized below:

	December 31,
(In thousands)	2013			2012
Aggregate amount outstanding, beginning of year	3,330			3,244
New loans or advances during year	1,098			2,043
Repayments during year	(1,512		)	(1,957		)
Aggregate amount outstanding, end of year	$	2,916		$	3,330
Loan commitments	$	3,930		$	2,916

Past Due Loans

The Company monitors delinquency and potential problem loans on an ongoing basis through weekly reports to the Loan Committee and monthly reports to the Board of Directors. The following is a summary of delinquent loans at December 31, 2013 (in thousands):

December 31, 2013	Loans 30-60 Days Past Due		Loans 61-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Commercial and Business Loans	$	—	$	94	$	—	$	94	$	68,366	$	68,460	$	—
Government Program Loans	—		—		—		—		2,226		2,226		—
Total Commercial and Industrial	—		94		—		94		70,592		70,686		—
Commercial Real Estate Loans	1,991		—		6,866		8,857		135,062		143,919		—
Residential Mortgages	—		614		359		973		51,063		52,036		—
Home Improvement and Home Equity Loans	96		—		—		96		1,314		1,410		—
Total Real Estate Mortgage	2,087		614		7,225		9,926		187,439		197,365		—
RE Construction and Development Loans	—		—		220		220		86,784		87,004		—
Agricultural Loans	—		—		—		—		30,932		30,932		—
Consumer Loans	—		—		—		—		9,086		9,086		—
Overdraft protection Lines	—		—		—		—		87		87		—
Overdrafts	—		—		—		—		157		157		—
Total Installment	—		—		—		—		9,330		9,330		—
Commercial Lease Financing	—		—		—		—		—		—		—
Total Loans	$	2,087	$	708	$	7,445	$	10,240	$	385,077	$	395,317	$	—

The following is a summary of delinquent loans at December 31, 2012 (in thousands):

December 31, 2012	Loans 30-60 Days Past Due		Loans 61-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Commercial and Business Loans	$	65	$	—	$	256	$	321	$	69,459	$	69,780	$	—
Government Program Loans	88		—		—		88		2,249		2,337		—
Total Commercial and Industrial	153		—		256		409		71,708		72,117		—
Commercial Real Estate Loans	3,152		2,130		5,328		10,610		122,989		133,599		—
Residential Mortgages	333		322		437		1,092		53,924		55,016		—
Home Improvement and Home Equity Loans	119		140		—		259		1,060		1,319		—
Total Real Estate Mortgage	3,604		2,592		5,765		11,961		177,973		189,934		—
RE Construction and Development Loans	—		—		—		—		90,941		90,941		—
Agricultural Loans	—		136		—		136		36,033		36,169		—
Consumer Loans	305		34		—		339		10,300		10,639		—
Overdraft protection Lines	—		—		—		—		90		90		—
Overdrafts	—		—		—		—		155		155		—
Total Installment	305		34		—		339		10,545		10,884		—
Commercial Lease Financing	—		—		—		—		12		12		—
Total Loans	$	4,062	$	2,762	$	6,021	$	12,845	$	387,212	$	400,057	$	—

Nonaccrual Loans

Commercial, construction and commercial real estate loans are placed on non-accrual status under the following circumstances:

- When there is doubt regarding the full repayment of interest and principal.

- When principal and/or interest on the loan has been in default for a period of 90-days or more, unless the asset is both well secured and in the process of collection that will result in repayment in the near future.

- When the loan is identified as having loss elements and/or is risk rated "8" Doubtful.

Other circumstances which jeopardize the ultimate collectability of the loan including certain troubled debt restructurings, identified loan impairment, and certain loans to facilitate the sale of OREO.

Loans meeting any of the preceding criteria are placed on non-accrual status and the accrual of interest for financial statement purposes is discontinued. Previously accrued but unpaid interest is reversed and charged against interest income.

All other loans where principal or interest is due and unpaid for 90 days or more are placed on non-accrual and the accrual of interest for financial statement purposes is discontinued. Previously accrued but unpaid interest is reversed and charged against interest income.

When a loan is placed on non-accrual status and subsequent payments of interest (and principal) are received, the interest received may be accounted for in two separate ways.

Cost recovery method: If the loan is in doubt as to full collection, the interest received in subsequent payments is diverted from interest income to a valuation reserve and treated as a reduction of principal for financial reporting purposes.

Cash basis: This method is only used if the recorded investment or total contractual amount is expected to be fully collectible, under which circumstances the subsequent payments of interest is credited to interest income as received.

Loans on non-accrual status are usually not returned to accruing status unless and until all delinquent principal and/or interest has been brought current, there is no identified element of loss, and current and continued satisfactory performance is expected (loss of the contractual amount not the carrying amount of the loan). Repayment ability is generally demonstrated through the timely receipt of at least six monthly payments on a loan with monthly amortization.

Nonaccrual loans totaled $12,341,000 and $13,425,000 at December 31, 2013 and 2012, respectively. There were no remaining undisbursed commitments to extend credit on nonaccrual loans at December 31, 2013 and 2012.

The following is a summary of nonaccrual loan balances at December 31, 2013 and 2012 (in thousands).

	December 31, 2013		December 31, 2012
Commercial and Business Loans	$	—	$	1,093
Government Program Loans	—		88
Total Commercial and Industrial	—		1,181
Commercial Real Estate Loans	10,188		8,415
Residential Mortgages	1,685		1,834
Home Improvement and Home Equity Loans	—		10
Total Real Estate Mortgage	11,873		10,259
RE Construction and Development Loans	468		1,730
Agricultural Loans	—		136
Consumer Loans	—		119
Total Installment	—		119
Commercial Lease Financing	—		—
Total Loans	$	12,341	$	13,425

Impaired Loans

A loan is considered impaired when based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the loan agreement.

The Company applies its normal loan review procedures in making judgments regarding probable losses and loan impairment. The Company evaluates for impairment those loans on non-accrual status, graded doubtful, graded substandard or those that are troubled debt restructures. The primary basis for inclusion in impaired status under generally accepted accounting pronouncements is that it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement.

A loan is not considered impaired if there is merely an insignificant delay or shortfall in the amounts of payments and the Company expects to collect all amounts due, including interest accrued, at the contractual interest rate for the period of the delay.

Review for impairment does not include large groups of smaller balance homogeneous loans that are collectively evaluated to estimate the allowance for loan losses. The Company’s present allowance for loan losses methodology, including migration analysis, captures required reserves for these loans in the formula allowance.

For loans determined to be impaired, the Company evaluates impairment based upon either the fair value of underlying collateral, discounted cash flows of expected payments, or observable market price.

- For loans secured by collateral including real estate and equipment, the fair value of the collateral less selling costs will determine the carrying value of the loan. The difference between the recorded investment in the loan and the fair value, less selling costs, determines the amount of impairment. The Company uses the measurement method based on fair value of collateral when the loan is collateral dependent and foreclosure is probable.

- The discounted cash flow method of measuring the impairment of a loan is used for unsecured loans or for loans secured by collateral where the fair value cannot be easily determined. Under this method, the Company assesses both the amount and timing of cash flows expected from impaired loans. The estimated cash flows are discounted using the loan's effective interest rate. T he difference between the amount of the loan on the Bank's books and the discounted cash flow amounts determines the amount of impairment to be provided. This method is used for most of the Company’s troubled debt restructurings or other impaired loans where some payment stream is being collected.

- The observable market price method of measuring the impairment of a loan is only used by the Company when the sale of loans or a loan is in process.

The method for recognizing interest income on impaired loans is dependent on whether the loan is on nonaccrual status or is a troubled debt restructuring. For income recognition, the existing nonaccrual and troubled debt restructuring policies are applied to impaired loans. Generally, except for certain troubled debt restructurings which are performing under the restructure agreement, the Company does not recognize interest income received on impaired loans, but reduces the carrying amount of the loan for financial reporting purposes.

Loans other than certain homogeneous loan portfolios are reviewed on a quarterly basis for impairment. Impaired loans are written down to estimated realizable values by the establishment of specific reserves or charge-offs when required.

The following is a summary of impaired loans at December 31, 2013 (in thousands).

December 31, 2013	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment		Interest Recognized
Commercial and Business Loans	$	675	$	275	$	402	$	677	$	9	$	831	$	52
Government Program Loans	—		—		—		—		—		35		—
Total Commercial and Industrial	675		275		402		677		9		866		52
Commercial Real Estate Loans	10,188		8,721		1,468		10,189		415		10,671		232
Residential Mortgages	5,375		1,794		3,590		5,384		338		6,139		211
Home Improvement and Home Equity Loans	—		—		—		—		—		13		—
Total Real Estate Mortgage	15,563		10,515		5,058		15,573		753		16,823		443
RE Construction and Development Loans	1,772		1,789		—		1,789		—		2,266		60
Agricultural Loans	44		45		—		45		—		84		10
Consumer Loans	48		48		—		48		—		72		4
Total Installment	48		48		—		48		—		72		4
Total Impaired Loans	$	18,102	$	12,672	$	5,460	$	18,132	$	762	$	20,111	$	569

The following is a summary of impaired loans at December 31, 2012 (in thousands).

December 31, 2012	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment		Interest Recognized
Commercial and Business Loans	$	1,488	$	767	$	576	$	1,343	$	37	$	5,468	$	26
Government Program Loans	109		88		—		88		—		147		—
Total Commercial and Industrial	1,597		855		576		1,431		37		5,615		26
Commercial Real Estate Loans	11,393		6,818		4,237		11,055		436		8,498		135
Residential Mortgages	7,461		3,726		3,666		7,392		185		4,416		251
Home Improvement and Home Equity Loans	10		10		—		10		—		21		—
Total Real Estate Mortgage	18,864		10,554		7,903		18,457		621		12,935		386
RE Construction and Development Loans	1,730		1,730		—		1,730		—		7,298		—
Agricultural Loans	504		192		—		192		—		991		50
Consumer Loans	139		121		—		121		—		200		6
Total Installment	139		121		—		121		—		200		6
Total Impaired Loans	$	22,834	$	13,452	$	8,479	$	21,931	$	658	$	27,039	$	468

In most cases, the Company uses the cash basis method of income recognition for impaired loans. In the case of certain troubled debt restructuring for which the loan is performing under the current contractual terms for a reasonable period of time, income is recognized under the accrual method.

Troubled Debt Restructurings

Under the circumstances, when the Company grants a concession to a borrower as part of a loan restructuring, the restructuring is accounted for as a troubled debt restructuring (TDR). TDRs are reported as a component of impaired loans.

A TDR is a type of restructuring in which the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession (either imposed by court order, law, or agreement between the borrower and the Bank) to the borrower that it would not otherwise consider. Although the restructuring may take different forms, the Company's objective is to maximize recovery of its investment by granting relief to the borrower.

A TDR may include, but is not limited to, one or more of the following:

- A transfer from the borrower to the Company of receivables from third parties, real estate, other assets, or an equity interest in the borrower is granted to fully or partially satisfy the loan.

- A modification of terms of a debt such as one or a combination of:

◦ The reduction (absolute or contingent) of the stated interest rate.

◦ The extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk.

◦ The reduction (absolute or contingent) of the face amount or maturity amount of debt as stated in the instrument or agreement.

◦ The reduction (absolute or contingent) of accrued interest.

For a restructured loan to return to accrual status there needs to be, among other factors, at least 6 months successful payment history. In addition, the Company performs a financial analysis of the credit to determine whether the borrower has the ability to continue to meet payments over the remaining life of the loan. This includes, but is not limited to, a review of financial statements and cash flow analysis of the borrower. Only after determination that the borrower has the ability to perform under the terms of the loans, will the restructured credit be considered for accrual status. Although the Company does not have a policy which specifically addresses when a loan may be removed from TDR classification, as a matter of practice, loans classified as TDRs generally remain classified as such until the loan either reaches maturity or its outstanding balance is paid off.

The following tables illustrate TDR activity for the periods indicated (dollars in thousands):

	Year Ended December 31, 2013
	Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts in Default	Recorded Investment on Defaulted TDRs
Troubled Debt Restructurings
Commercial and Business Loans	—	$	—	$	—	—	$	—
Government Program Loans	—	—		—		—	—
Commercial Real Estate Term Loans	—	—		—		1	106
Single Family Residential Loans	—	—		—		—	—
Home Improvement and Home Equity Loans	—	—		—		—	—
RE Construction and Development Loans	41	1,034		1,304		—	—
Agricultural Loans	—	—		—		—	—
Consumer Loans	1	48		48		—	—
Overdraft protection Lines	—	—		—		—	—
Commercial Lease Financing	—	—		—		—	—
Total Loans	42	$	1,082	$	1,352	1	$	106

	Year Ended December 31, 2012
	Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts in Default	Recorded Investment on Defaulted TDRs
Troubled Debt Restructurings
Commercial and Business Loans	3	$	320	$	303	—	$	—
Government Program Loans	1	103		88		—	—
Commercial Real Estate Term Loans	4	2,535		2,506		—	—
Single Family Residential Loans	2	324		323		—	—
Home Improvement and Home Equity Loans	1	—		—		—	—
RE Construction and Development Loans	14	1,130		1,130		—	—
Agricultural Loans	2	192		191		—	—
Consumer Loans	1	20		19		—	—
Overdraft protection Lines	—	—		—		—	—
Commercial Lease Financing	—	—		—		—	—
Total Loans	28	$	4,624	$	4,560	—	$	—

The following tables summarize TDR activity by loan category for the years ended December 31, 2013 and 2012 (in thousands).

Year Ended December 31, 2013	Commercial and Industrial			Commercial Real Estate			Residential Mortgages			Home Equity			RE Construction Development			Agricultural			Installment & Other			Lease Financing		Total
Beginning balance	$	990		$	5,395		$	7,289		$	10		$	2,860		$	191		$	38		$	—	$	16,773
Defaults	—			(106		)	—			—			—			—			—			—		(106		)
Additions	—			—			—			44			4,399			—			48			—		4,491
Principal reductions	(315		)	(3,821		)	(2,016		)	(54		)	(5,708		)	(147		)	(38		)	—		(12,099		)
Ending balance	$	675		$	1,468		$	5,273		$	—		$	1,551		$	44		$	48		$	—	$	9,059
Allowance for loan loss	$	9		$	415		$	338		$	—		$	—		$	—		$	—		$	—	$	762

Year Ended December 31, 2012	Commercial and Industrial			Commercial Real Estate			Residential Mortgages			Home Equity			RE Construction Development			Agricultural			Installment & Other			Lease Financing		Total
Beginning balance	$	1,507		$	5,174		$	7,689		$	36		$	4,550		$	60		$	34		$	—	$	19,050
Defaults	—			—			—			—			—			—			—			—		—
Additions	391			2,506			323			—			1,130			191			19			—		4,560
Principal reductions	(908		)	(2,285		)	(723		)	(26		)	(2,820		)	(60		)	(15		)	—		(6,837		)
Ending balance	$	990		$	5,395		$	7,289		$	10		$	2,860		$	191		$	38		$	—	$	16,773
Allowance for loan loss	$	152		$	325		$	128		$	—		$	6		$	—		$	—		$	—	$	611

The Company makes various types of concessions when structuring TDR’s including rate reductions, payment extensions, and forbearance. At December 31, 2013, the Company had 35 restructured loans totaling $9,059,000, as compared to 58 restructured loans totaling $16,773,000 at December 31, 2012.

Credit Quality Indicators

As part of its credit monitoring program, the Company utilizes a risk rating system which quantifies the risk the Company estimates it has assumed during the life of a loan. The system rates the strength of the borrower and the facility or transaction, and is designed to provide a program for risk management and early detection of problems.

For each new credit approval, credit extension, renewal, or modification of existing credit facilities, the Company assigns risk ratings utilizing the rating scale identified in this policy. In addition, on an on-going basis, loans and credit facilities are reviewed for internal and external influences impacting the credit facility that would warrant a change in the risk rating. Each loan credit facility is to be given a risk rating that takes into account factors that materially affect credit quality.

When assigning risk ratings, the Company evaluates two risk rating approaches, a facility rating and a borrower rating as follows.

Facility Rating:

The facility rating is determined by the analysis of positive and negative factors that may indicate that the quality of a particular loan or credit arrangement requires that it be rated differently from the risk rating assigned to the borrower. The Company assesses the risk impact of these factors:

Collateral - The rating may be affected by the type and quality of the collateral, the degree of coverage, the economic life of the collateral, liquidation value and the Company's ability to dispose of the collateral.

Guarantees - The value of third party support arrangements varies widely. Unconditional guaranties from persons with demonstrable ability to perform are more substantial than that of closely related persons to the borrower who offer only modest support.

Unusual Terms - Credit may be extended on terms that subject the Company to a higher level of risk than indicated in the rating of the borrower.

Borrower Rating:

The borrower rating is a measure of loss possibility based on the historical, current and anticipated financial characteristics of the borrower in the current risk environment. To determine the rating, the Company considers at least the following factors:

-    Quality of management

-    Liquidity

-    Leverage/capitalization

-    Profit margins/earnings trend

-    Adequacy of financial records

-    Alternative funding sources

-    Geographic risk

-    Industry risk

-    Cash flow risk

-    Accounting practices

-    Asset protection

-    Extraordinary risks

The Company assigns risk ratings to loans other than consumer loans and other homogeneous loan pools based on the following scale. The risk ratings are used when determining borrower ratings as well as facility ratings. When the borrower rating and the facility ratings differ, the lowest rating applied is:

- Grades 1 and 2 – These grades include loans which are given to high quality borrowers with high credit quality and sound financial strength. Key financial ratios are generally above industry averages and the borrower’s strong earnings history or net worth. These may be secured by deposit accounts or high-grade investment securities.

- Grade 3 – This grade includes loans to borrowers with solid credit quality with minimal risk. The borrower’s balance sheet and financial ratios are generally in line with industry averages, and the borrower has historically demonstrated the ability to manage economic adversity. Real estate and asset-based loans assigned this risk rating must have characteristics, which place them well above the minimum underwriting requirements for those departments. Asset-based borrowers assigned this rating must exhibit extremely favorable leverage and cash flow characteristics, and consistently demonstrate a high level of unused borrowing capacity.

- Grades 4 and 5 – These include “pass” grade loans to borrowers of acceptable credit quality and risk. The borrower’s balance sheet and financial ratios may be below industry averages, but above the lowest industry quartile. Leverage is above and liquidity is below industry averages. Inadequacies evident in financial performance and/or management sufficiency are offset by readily available features of support, such as adequate collateral, or good guarantors having the liquid assets and/or cash flow capacity to repay the debt. The borrower may have recognized a loss over three or four years, however recent earnings trends, while perhaps somewhat cyclical, are improving and cash flows are adequate to cover debt service and fixed obligations. Real estate and asset-borrowers fully comply with all underwriting standards and are performing according to projections would be assigned this rating. These also include grade 5 loans which are “leveraged” or on management’s “watch list.” While still considered pass loans (loans given a grade 5), the borrower’s financial condition, cash flow or operations evidence more than average risk and short term weaknesses, these loans warrant a higher than average level of monitoring, supervision and attention from the Company, but do not reflect credit weakness trends that weaken or inadequately protect the Company’s credit position. Loans with a grade rating of 5 are not normally acceptable as new credits unless they are adequately secured or carry substantial endorser/guarantors.

- Grade 6 – This grade includes “special mention” loans which are loans that are currently protected but are potentially weak. This generally is an interim grade classification and should usually be upgraded to an Acceptable rating or downgraded to Substandard within a reasonable time period. Weaknesses in special mention loans may, if not checked or corrected, weaken the asset or inadequately protect the Company’s credit position at some future date. Special mention loans are often loans with weaknesses inherent from the loan origination, loan servicing, and perhaps some technical deficiencies. The main theme in special mention credits is the distinct probability that the classification will deteriorate to a more adverse class if the noted deficiencies are not addressed by the loan officer or loan management.

- Grade 7 – This grade includes “substandard” loans which are inadequately supported by the current sound net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that may impair the regular liquidation of the debt. Substandard loans exhibit a distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Substandard loans also include impaired loans.

- Grade 8 - This grade includes “doubtful” loans which exhibit the same characteristics as the Substandard loans with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the loan, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include a proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans.

- Grade 9 - This grade includes loans classified “loss” which are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off the asset even though partial recovery may be achieved in the future.

The following tables summarize the credit risk ratings for commercial, construction, and other non-consumer related loans for December 31, 2013 and 2012. The Company did not carry any loans graded as loss at December 31, 2013 and 2012.

	Commercial and Industrial		Commercial RE		RE Construction and Development		Agricultural		Total
December 31, 2013
(In thousands)
Grades 1and 2	$	355	$	—	$	—	$	70	$	425
Grade 3	44		5,287		816		—		6,147
Grades 4 and 5 – pass	69,070		127,189		66,048		30,862		293,169
Grade 6 – special mention	590		—		—		—		590
Grade 7 – substandard	627		11,443		20,140		—		32,210
Grade 8 – doubtful	—		—		—		—		—
Total	$	70,686	$	143,919	$	87,004	$	30,932	$	332,541

	Commercial and Industrial		Commercial RE		RE Construction and Development		Agricultural		Total
December 31, 2012
(In thousands)
Grades 1and 2	$	825	$	—	$	—	$	60	$	885
Grade 3	2,071		5,947		856		—		8,874
Grades 4 and 5 – pass	66,098		116,606		75,191		35,973		293,868
Grade 6 – special mention	1,867		—		141		—		2,008
Grade 7 – substandard	1,256		11,046		14,753		136		27,191
Grade 8 – doubtful	—		—		—		—		—
Total	$	72,117	$	133,599	$	90,941	$	36,169	$	332,826

The Company follows consistent underwriting standards outlined in its loan policy for consumer and other homogeneous loans but, does not specifically assign a risk rating when these loans are originated. Consumer loans are monitored for credit risk and are considered “pass” loans until some issue or event requires that the credit be downgraded to special mention or worse.

The following tables summarize the credit risk ratings for consumer related loans and other homogeneous loans for December 31, 2013 and 2012 (in thousands).

	December 31, 2013								December 31, 2012
	Residential Mortgages		Home Improvement and Home Equity		Installment		Total		Residential Mortgages		Home Improvement and Home Equity		Installment		Total
Not graded	$	29,063	$	1,378	$	7,862	$	38,303	$	30,727	$	1,309	$	9,221	$	41,257
Pass	19,320		—		1,468		20,788		20,572		—		1,422		21,994
Special Mention	1,204		32		—		1,236		909		—		49		958
Substandard	2,449		—		—		2,449		2,808		10		192		3,010
Total	$	52,036	$	1,410	$	9,330	$	62,776	$	55,016	$	1,319	$	10,884	$	67,219

Allowance for Loan Losses

The Company analyzes risk characteristics inherent in each loan portfolio segment as part of the quarterly review of the adequacy of the allowance for loan losses. The following summarizes some of the key risk characteristics for the eleven segments of the loan portfolio (Consumer loans include three segments):

Commercial and business loans – Commercial loans are subject to the effects of economic cycles and tend to exhibit increased risk as economic conditions deteriorate, or if the economic downturn is prolonged. The Company considers this segment to be one of higher risk given the size of individual loans and the balances in the overall portfolio.

Government program loans – This is a relatively a small part of the Company’s loan portfolio, but has historically had a high percentage of loans that have migrated from pass to substandard given there vulnerability to economic cycles.

Commercial real estate loans – This segment is considered to have more risk in part because of the vulnerability of commercial businesses to economic cycles as well as the exposure to fluctuations in real estate prices because most of these loans are secured by real estate. Losses in this segment have however been historically low because most of the loans are real estate secured.

Residential mortgages – This segment is considered to have low risk factors both from the Company and peer statistics. These loans are secured by first deeds of trust. The losses experienced over the past twelve quarters are isolated to approximately seven loans and are generally the result of short sales.

Home improvement and home equity loans – Because of their junior lien position, these loans have an inherently higher risk level. Because residential real estate has been severely distressed in the recent past, the anticipated risk for this loan segment has increased.

Real estate construction and development loans –In a normal economy, this segment of loans is considered to have a higher risk profile due to construction and market value issues in conjunction with normal credit risks. In the current distressed residential real estate markets the risk has increased.

Agricultural loans – This segment is considered to have risks associated with weather, insects, and marketing issues. In addition, concentrations in certain crops or certain agricultural areas can increase risk.

Installment loans (Includes consumer loans, overdrafts, and overdraft protection lines) – This segment is higher risk because many of the loans are unsecured.

Commercial lease financing – This segment of the portfolio is small, but is considered to be vulnerable to economic cycles given the nature of the leasing relationship where businesses are relatively small or have minimal cash flow. This lending program was terminated in 2005.

The following summarizes the activity in the allowance for credit losses by loan category for the years ended December 31, 2013 and 2012 (in thousands).

December 31, 2013	Commercial and Industrial			Real Estate Mortgage			RE Construction Development			Agricultural			Installment & Other			Commercial Lease Financing			Unallocated			Total
Beginning balance	$	1,614		$	1,292		$	2,814		$	352		$	288		$	1		$	5,423		$	11,784
Provision for credit losses	1,134			1,101			1,285			222			160			(1		)	(4,999		)	(1,098		)
Charge-offs	(542		)	(540		)	(95		)	(136		)	(244		)	—			(29		)	(1,586		)
Recoveries	134			9			1,529			145			71			—			—			1,888
Net charge-offs	(408		)	(531		)	1,434			9			(173		)	—			(29		)	302
Ending balance	$	2,340		$	1,862		$	5,533		$	583		$	275		$	—		$	395		$	10,988
Period-end amount allocated to:
Loans individually evaluated for impairment	9			753			—			—			—			—			—			762
Loans collectively evaluated for impairment	2,331			1,109			5,533			583			275			—			395			10,226
Ending balance	$	2,340		$	1,862		$	5,533		$	583		$	275		$	—		$	395		$	10,988

December 31, 2012	Commercial and Industrial			Real Estate Mortgage			RE Construction Development			Agricultural			Installment & Other			Commercial Lease Financing			Unallocated		Total
Beginning balance	$	4,782		$	2,070		$	5,634		$	803		$	117		$	1		$	241	$	13,648
Provision for credit losses	(2,730		)	(235		)	(3,431		)	1,860			384			(11		)	5,182		1,019
Charge-offs	(1,080		)	(620		)	(10		)	(2,317		)	(251		)	—			—		(4,278		)
Recoveries	642			77			621			6			38			11			—		1,395
Net charge-offs	(438		)	(543		)	611			(2,311		)	(213		)	11			—		(2,883		)
Ending balance	$	1,614		$	1,292		$	2,814		$	352		$	288		$	1		$	5,423	$	11,784
Period-end amount allocated to:
Loans individually evaluated for impairment	37			621			—			—			—			—			—		658
Loans collectively evaluated for impairment	1,577			671			2,814			352			288			1			5,423		11,126
Ending balance	$	1,614		$	1,292		$	2,814		$	352		$	288		$	1		$	5,423	$	11,784

The following summarizes information with respect to the loan balances at December 31, 2013 and 2012.

	December 31, 2013						December 31, 2012
	Loans Individually Evaluated for Impairment		Loans Collectively Evaluated for Impairment		Total Loans		Loans Individually Evaluated for Impairment		Loans Collectively Evaluated for Impairment		Total Loans
(In thousands)
Commercial and Business Loans	$	677	$	67,783	$	68,460	$	1,343	$	68,437	$	69,780
Government Program Loans	—		2,226		2,226		88		2,249		2,337
Total Commercial and Industrial	677		70,009		70,686		1,431		70,686		72,117
Commercial Real Estate Loans	10,189		133,730		143,919		11,055		122,544		133,599
Residential Mortgage Loans	5,384		46,652		52,036		7,392		47,624		55,016
Home Improvement and Home Equity Loans	—		1,410		1,410		10		1,309		1,319
Total Real Estate Mortgage	15,573		181,792		197,365		18,457		171,477		189,934
RE Construction and Development Loans	1,789		85,215		87,004		1,730		89,211		90,941
Agricultural Loans	45		30,887		30,932		192		35,977		36,169
Installment Loans	48		9,282		9,330		121		10,763		10,884
Commercial Lease Financing	—		—		—		—		12		12
Total Loans	$	18,132	$	377,185	$	395,317	$	21,931	$	378,126	$	400,057