NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES

The following table lists categories of loans at June 30, 2018 and December 31, 2017.

	June 30, 2018			December 31, 2017
Commercial real estate	$	1,226,397		$	987,661
Commercial and industrial		503,716			507,519
Residential real estate		409,571			376,705
Agricultural real estate		118,241			86,486
Consumer		54,464			49,361
Agricultural		99,082			95,547
Total loans		2,411,471			2,103,279
Allowance for loan losses		(10,083	)		(8,498	)
Net loans	$	2,401,388		$	2,094,781

The Company has participated in mortgage finance loans with another institution, (the “originator”). These mortgage finance loans consist of ownership interests purchased in single family residential mortgages funded through the originator’s mortgage finance group. These loans are typically on the Company’s balance sheet for 10 to 20 days. As of June 30, 2018 and December 31, 2017, the Company had balances of $10,000 and $10,000 in mortgage finance loans classified as commercial and industrial.

From time to time the Company has purchased pools of residential real estate loans originated by other financial institutions to hold for investment with the intent to diversify the residential real estate portfolio. As of June 30, 2018 and December 31, 2017, residential real estate loans include $74,944 and $85,868 of purchased residential real estate loans.

The unamortized balance of merger purchase accounting adjustments related to non-purchase credit impaired loans included in the loan totals above are $11,070 with related loans of $895,686 at June 30, 2018, and $6,842 with related loans of $796,064 at December 31, 2017.

Over-draft deposit accounts are reclassified and included in consumer loans above. These accounts totaled $1,367 at June 30, 2018 and $741 at December 31, 2017.

The following tables present the activity in the allowance for loan losses by class for the three-month periods ended June 30, 2018 and 2017.

June 30, 2018	Commercial Real Estate		Commercial and Industrial			Residential Real Estate			Agricultural Real Estate			Consumer			Agricultural			Total
Allowance for loan losses:
Beginning balance	$	3,010	$	2,388		$	2,442		$	267		$	878		$	331		$	9,316
Provision for loan losses		216		(64	)		185			147			247			19			750
Loans charged-off		—		(77	)		(148	)		(80	)		(203	)		(4	)		(512	)
Recoveries		269		7			184			—			61			8			529
Total ending allowance balance	$	3,495	$	2,254		$	2,663		$	334		$	983		$	354		$	10,083

June 30, 2017	Commercial Real Estate			Commercial and Industrial			Residential Real Estate			Agricultural Real Estate			Consumer			Agricultural		Total
Allowance for loan losses:
Beginning balance	$	2,592		$	2,059		$	1,875		$	66		$	391		$	65	$	7,048
Provision for loan losses		(245	)		397			58			46			298			74		628
Loans charged-off		(29	)		(409	)		(27	)		(3	)		(242	)		—		(710	)
Recoveries		406			23			93			—			75			5		602
Total ending allowance balance	$	2,724		$	2,070		$	1,999		$	109		$	522		$	144	$	7,568

The following tables present the activity in the allowance for loan losses by class for the six-month periods ended June 30, 2018 and 2017.

June 30, 2018	Commercial Real Estate			Commercial and Industrial			Residential Real Estate			Agricultural Real Estate			Consumer			Agricultural			Total
Allowance for loan losses:
Beginning balance	$	2,740		$	2,136		$	2,262		$	319		$	768		$	273		$	8,498
Provision for loan losses		507			196			475			92			535			115			1,920
Loans charged-off		(29	)		(86	)		(271	)		(80	)		(509	)		(43	)		(1,018	)
Recoveries		277			8			197			3			189			9			683
Total ending allowance balance	$	3,495		$	2,254		$	2,663		$	334		$	983		$	354		$	10,083

June 30, 2017	Commercial Real Estate			Commercial and Industrial			Residential Real Estate			Agricultural Real Estate			Consumer			Agricultural			Total
Allowance for loan losses:
Beginning balance	$	2,420		$	1,881		$	1,765		$	35		$	266		$	65		$	6,432
Provision for loan losses		(78	)		585			374			77			650			115			1,723
Loans charged-off		(92	)		(422	)		(238	)		(3	)		(601	)		(41	)		(1,397	)
Recoveries		474			26			98			—			207			5			810
Total ending allowance balance	$	2,724		$	2,070		$	1,999		$	109		$	522		$	144		$	7,568

The following tables present the recorded investment in loans and the balance in the allowance for loan losses by portfolio and class based on impairment method as of June 30, 2018 and December 31, 2017.

June 30, 2018	Commercial Real Estate		Commercial and Industrial		Residential Real Estate		Agricultural Real Estate		Consumer		Agricultural		Total
Allowance for loan losses:
Individually evaluated for impairment	$	28	$	27	$	411	$	25	$	49	$	12	$	552
Collectively evaluated for impairment		3,460		2,212		2,235		306		934		336		9,483
Purchase credit impaired loans		7		15		17		3		—		6		48
Total	$	3,495	$	2,254	$	2,663	$	334	$	983	$	354	$	10,083
Loan Balance:
Individually evaluated for impairment	$	2,029	$	5,242	$	4,851	$	2,496	$	523	$	280	$	15,421
Collectively evaluated for impairment		1,209,070		491,874		402,324		110,974		53,936		96,436		2,364,614
Purchase credit impaired loans		15,298		6,600		2,396		4,771		5		2,366		31,436
Total	$	1,226,397	$	503,716	$	409,571	$	118,241	$	54,464	$	99,082	$	2,411,471

December 31, 2017	Commercial Real Estate		Commercial and Industrial		Residential Real Estate		Agricultural Real Estate		Consumer		Agricultural		Total
Allowance for loan losses:
Individually evaluated for impairment	$	130	$	87	$	386	$	46	$	56	$	36	$	741
Collectively evaluated for impairment		2,582		2,028		1,815		190		712		236		7,563
Purchase credit impaired loans		28		21		61		83		—		1		194
Total	$	2,740	$	2,136	$	2,262	$	319	$	768	$	273	$	8,498
Loan Balance:
Individually evaluated for impairment	$	2,728	$	7,886	$	4,829	$	533	$	556	$	1,050	$	17,582
Collectively evaluated for impairment		971,376		493,903		369,471		82,493		48,802		90,795		2,056,840
Purchase credit impaired loans		13,557		5,730		2,405		3,460		3		3,702		28,857
Total	$	987,661	$	507,519	$	376,705	$	86,486	$	49,361	$	95,547	$	2,103,279

The following table presents information related to impaired loans, excluding purchased credit impaired loans which have not deteriorated since acquisition, by class of loans as of June 30, 2018 and December 31, 2017. The recorded investment in loans excludes accrued interest receivable due to immateriality.

	June 30, 2018						December 31, 2017
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Commercial real estate	$	1,690	$	1,629	$	—	$	1,878	$	1,567	$	—
Commercial and industrial		6,271		4,970		—		8,679		8,020		—
Residential real estate		747		742		—		1,230		969		—
Agricultural real estate		2,273		2,242		—		52		52		—
Consumer		41		38		—		1		—		—
Agricultural		162		158		—		7		7		—
Subtotal		11,184		9,779		—		11,847		10,615		—
With an allowance recorded:
Commercial real estate		628		466		35		4,049		1,597		158
Commercial and industrial		511		423		42		1,310		1,113		108
Residential real estate		4,492		4,276		428		4,868		4,468		447
Agricultural real estate		300		283		28		1,266		1,034		129
Consumer		592		486		49		677		559		56
Agricultural		210		182		18		1,798		1,444		37
Subtotal		6,733		6,116		600		13,968		10,215		935
Total	$	17,917	$	15,895	$	600	$	25,815	$	20,830	$	935

The tables below present average recorded investment and interest income related to impaired loans for the three months and six months ended June 30, 2018 and 2017. Interest income recognized in the following table was substantially recognized on the cash basis. The recorded investment in loans excludes accrued interest receivable due to immateriality.

	As of and for the three months ended
	June 30, 2018				June 30, 2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial real estate	$	1,773	$	118	$	1,099	$	—
Commercial and industrial		6,186		56		1,034		—
Residential real estate		565		9		330		1
Agricultural real estate		1,189		11		31		12
Consumer		19		—		—		—
Agricultural		307		18		7		—
Subtotal		10,039		212		2,501		13
With an allowance recorded:
Commercial real estate		665		1		2,229		7
Commercial and industrial		514		—		558		—
Residential real estate		3,774		22		3,563		13
Agricultural real estate		313		2		339		—
Consumer		473		3		383		2
Agricultural		218		4		150		—
Subtotal		5,957		32		7,222		22
Total	$	15,996	$	244	$	9,723	$	35

	As of and for the six months ended
	June 30, 2018				June 30, 2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial real estate	$	1,704	$	118	$	841	$	7
Commercial and industrial		6,797		66		667		3
Residential real estate		700		10		688		1
Agricultural real estate		810		12		437		12
Consumer		13		—		26		—
Agricultural		207		18		6		—
Subtotal		10,231		224		2,665		23
With an allowance recorded:
Commercial real estate		975		2		2,195		9
Commercial and industrial		714		—		378		1
Residential real estate		4,005		22		3,207		15
Agricultural real estate		553		2		211		—
Consumer		502		3		368		2
Agricultural		627		4		141		—
Subtotal		7,376		33		6,500		27
Total	$	17,607	$	257	$	9,165	$	50

The following tables present the aging of the recorded investment in past due loans as of June 30, 2018 and December 31, 2017, by portfolio and class of loans.

June 30, 2018	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater Than 90 Days Past Due Still On Accrual		Nonaccrual		Loans Not Past Due		Total
Commercial real estate	$	1,762	$	301	$	—	$	12,603	$	1,211,731	$	1,226,397
Commercial and industrial		208		754		302		11,114		491,338		503,716
Residential real estate		710		627		—		5,371		402,863		409,571
Agricultural real estate		—		—		—		5,690		112,551		118,241
Consumer		336		62		—		524		53,542		54,464
Agricultural		52		99		—		2,646		96,285		99,082
Total	$	3,068	$	1,843	$	302	$	37,948	$	2,368,310	$	2,411,471

December 31, 2017	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater Than 90 Days Past Due Still On Accrual		Nonaccrual		Loans Not Past Due		Total
Commercial real estate	$	1,284	$	22	$	—	$	11,607	$	974,748	$	987,661
Commercial and industrial		251		6		—		13,217		494,045		507,519
Residential real estate		1,457		1,176		—		6,148		367,924		376,705
Agricultural real estate		123		—		—		3,993		82,370		86,486
Consumer		359		112		—		559		48,331		49,361
Agricultural		415		—		—		4,752		90,380		95,547
Total	$	3,889	$	1,316	$	—	$	40,276	$	2,057,798	$	2,103,279

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. Consumer loans are considered pass credits unless downgraded due to payment status or reviewed as part of a larger credit relationship. The Company uses the following definitions for risk ratings:

Pass: Loans classified as pass do not have any noted weaknesses and repayment of the loan is expected. These loans are considered unclassified.

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date. These loans are considered classified.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. These loans are considered classified.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, 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. These loans are considered classified.

The risk category of loans by class of loans is as follows as of June 30, 2018 and December 31, 2017.

June 30, 2018	Unclassified		Classified		Total
Commercial real estate	$	1,211,285	$	15,112	$	1,226,397
Commercial and industrial		486,469		17,247		503,716
Residential real estate		403,988		5,583		409,571
Agricultural real estate		108,349		9,892		118,241
Consumer		53,931		533		54,464
Agricultural		92,555		6,527		99,082
Total	$	2,356,577	$	54,894	$	2,411,471

December 31, 2017	Unclassified		Classified		Total
Commercial real estate	$	971,458	$	16,203	$	987,661
Commercial and industrial		486,150		21,369		507,519
Residential real estate		370,151		6,554		376,705
Agricultural real estate		77,084		9,402		86,486
Consumer		48,777		584		49,361
Agricultural		88,261		7,286		95,547
Total	$	2,041,881	$	61,398	$	2,103,279

Purchased Credit Impaired Loans

The Company has acquired loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The table below lists recorded investments in purchase credit impaired loans as of June 30, 2018 and December 31, 2017.

	June 30, 2018			December 31, 2017
Contractually required principal payments	$	43,601		$	41,349
Discount		(12,165	)		(12,492	)
Recorded investment	$	31,436		$	28,857

The accretable yield associated with these loans was $2,537 and $1,980 as of June 30, 2018 and December 31, 2017. The interest income recognized on these loans for the three-month and six-month periods ended June 30, 2018 and 2017 was $813, $1,378, $699 and $1,412. For the three month period ended June 30, 2018 there was a $25 provision for loan loss recorded for these loans and for the six month period ended June 30, 2018 there was a provision for loan loss reversal of $146 for these loans. For the three and six-month periods ended June 30, 2017, there was a provision for loan losses of $8 and $61 recorded for these loans.

Troubled Debt Restructurings

The Company had no loans modified under troubled debt restructurings as of June 30, 2018 or December 31, 2017.