Loans

6 Months Ended

Jun. 30, 2011

Loans [Abstract]

LOANS

NOTE 4 LOANS

Loan balances as of June 30, 2011 and December 31, 2010.:

	(In Thousands)
	June 30, 2011			December 31, 2010
Loans:
Commercial real estate	$	193,993		$	194,268
Agricultural real estate		32,228			33,650
Consumer real estate		81,557			86,036
Commercial and industrial		113,947			117,344
Agricultural		57,221			65,400
Consumer		25,342			29,008
Industrial Development Bonds		1,965			1,965
	$	506,253		$	527,671
Less: Net deferred loan fees and costs		(93	)		(82	)
		506,160			527,589
Less: Allowance for loan losses		(5,489	)		(5,706	)
Loans – Net	$	500,671		$	521,883

The following is a maturity schedule by major category of loans as of June 30, 2011:

	(In Thousands)
			After One
	Within		Year Within		After
	One Year		Five Years		Five Years
Commercial Real Estate	$	32,032	$	114,655	$	47,306
Agricultural Real Estate		2,556		12,896		16,776
Consumer Real Estate		5,511		15,820		60,226
Commercial/Industrial		78,992		27,844		7,111
Agricultural		39,601		14,920		2,700
Consumer		5,493		17,781		1,975
Industrial Development Bonds		556		446		963

The distribution of fixed rate loans and variable rate loans by major loan category is as follows as of June 30, 2011. Variable rate loans whose current rates are equal to their floor or ceiling are classified as fixed in this table.

	(In Thousands)
	Fixed		Variable
	Rate		Rate
Commercial Real Estate	$	77,983	$	116,010
Agricultural Real Estate		18,517		13,711
Consumer Real Estate		69,412		12,145
Commercial/Industrial		84,188		29,759
Agricultural		49,126		8,095
Consumer		20,860		4,389
Industrial Development Bonds		1,965		—

As of June 30, 2011 and 2010 one to four family residential mortgage loans amounting to $71.2 million and $75.3 million, respectively, have been pledged as security for loans the Bank has received from the Federal Home Loan Bank.

The percentage of delinquent loans has trended downward since the beginning of 2010 from a high of 2.85% of total loans in January to a low of .76% as of the end of March 2011. At the end of the second quarter 2011, the percentage increased to 1.99% with one large agricultural related credit behind the increase. A credit for which the Bank is fully collateralized and should be removed yet in 2011. Consumer delinquency continued to decrease and remained extremely low. These percentages do not include nonaccrual loans which are not past due. This level of delinquency is due in part to an adherence to sound underwriting practices over the course of time, an improvement in the financial status of companies to which the Bank extends credit, continued financial stability in the agricultural loan portfolio, and the writing down of uncollectible credits in a timely manner.

Industrial Development Bonds are included in the commercial and industrial category for the remainder of the tables in this Note 4.

The following table represents the contractual aging of the recorded investment in past due loans by class or loans as of June 30, 2011 and December 31, 2010 (in thousands):

													Recorded
					Greater Than						Total		Investment
	30-59 Days		60-89 Days		90 Days		Total				Financing		> 90 Days
June 30, 2011	Past Due		Past Due		Past Due		Past Due		Current		Receivables		and Accruing
Consumer real estate	$	756	$	220	$	907	$	1,882	$	79,675	$	81,557	$	—
Agricultural real estate		—		223		—		223		32,005		32,228		—
Agricultural		—		4,577		—		4,577		52,644		57,221		—
Commercial Real Estate		376		883		333		1,592		192,401		193,993		—
Commercial and Industrial		16		165		1,616		1,797		114,115		115,912		7
Consumer		23		1		—		24		25,225		25,249		—
Total	$	1,171	$	6,069	$	2,856	$	10,095	$	496,065	$	506,160	$	7

													Recorded
					Greater Than						Total		Investment
	30-59 Days		60-89 Days		90 Days		Total				Financing		> 90 Days
December 31, 2010	Past Due		Past Due		Past Due		Past Due		Current		Receivables		and Accruing
Consumer real estate	$	610	$	29	$	169	$	808	$	85,228	$	86,036	$	—
Agricultural real estate		—		—		—		—		33,650		33,650		—
Agricultural		—		—		1,474		1,474		63,926		65,400		—
Commercial Real Estate		548		—		445		993		193,275		194,268		—
Commercial and Industrial		957		52		831		1,840		117,469		119,309		15
Consumer		147		6		33		186		28,740		28,926		33
Total	$	2,262	$	87	$	2,952	$	5,301	$	522,288	$	527,589	$	48

The following table presents the recorded investment in nonaccrual loans by class or loans as of June 30, 2011 and December 31, 2010:

	(In Thousands)
	June 30		December 31
	2011		2010
Consumer real estate	$	1,132	$	587
Agricultural real estate		223		531
Agricultural		4,577		1,474
Commercial Real Estate		1,216		1,705
Commercial and Industrial		1,716		1,543
Consumer		3		4
Total	$	8,867	$	5,844

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 RMA 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 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.

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.

The following table represents the risk category of loans by class based on the most recent analysis performed as of June 30, 2011 and December 31, 2010 (in thousands):

									Industrial
	Agriculture				Commercial		Commercial		Development
	Real Estate		Agriculture		Real Estate		and Industrial		Bonds
June 30, 2011
1-2	$	513	$	1,131	$	56	$	613	$	275
3		12,530		23,427		21,961		20,549		733
4		17,833		27,709		159,388		83,415		957
5		222		356		6,165		2,260		—
6		1,110		4,577		6,368		7,085		—
7		20		21		55		25		—
8		—		—		—		—
Total	$	32,228	$	57,221	$	193,993	$	113,947	$	1,965

									Industrial
	Agriculture				Commercial		Commercial		Development
	Real Estate		Agriculture		Real Estate		and Industrial		Bonds
December 31, 2010
1-2	$	484	$	109	$	—	$	341	$	275
3		12,216		27,964		26,333		14,026		733
4		19,624		35,655		153,948		92,066		957
5		208		173		6,765		3,388		—
6		1,097		1,474		6,771		6,688		—
7		21		25		451		835		—
8		—		—		—		—		—
Total	$	33,650	$	65,400	$	194,268	$	117,344	$	1,965

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 grading as of June 30, 2011 and December 31, 2010 (in thousands):

	Consumer		Consumer
	Real Estate		Real Estate
	June 30		December 31
	2011		2010
Grade
Pass	$	79,898	$	84,723
Special Mention (5)		653		387
Substandard (6)		606		639
Doubtful (7)		400		287
Total	$	81,557	$	86,036

	Consumer		Consumer		Consumer		Consumer
	Credit		Credit		Other		Other
	June 30		December 31		June 30		December 31
		2011		2010		2011		2010
Performing	$	3,338	$	3,553	$	21,848	$	25,323
Nonperforming		5		6		58		44
Total	$	3,343	$	3,559	$	21,906	$	25,367

The Bank did classify approximately $3.5 million of its impaired loans as troubled debt restructured (TDR) during 2010 and this balance decreased to $3.2 million as of June 30, 2011 for those TDRs still current and accruing. The following table indicates the number of contracts and their corresponding balances which the Bank has classified as TDR ($ in thousands).

			Pre-		Post-
			Modification		Modification
June 30, 2011			Outstanding		Outstanding
	Number of		Recorded		Recorded
Troubled Debt Restructurings	Contracts		Investment		Investment
Commercial Real Estate		5	$	3,940	$	3,255
Ag Real Estate		2	$	154	$	152
Commercial and Industrial		2	$	1,431	$	159
Troubled Debt Restructurings	Number of		Recorded
That Subsequently Defaulted	Contracts		Investment
Commercial Real Estate		1	$	207
Ag Real Estate		—	$	—
Commercial and Industrial		1	$	132

For the majority of the Bank’s impaired loans, the Bank will apply the observable market price methodology. However, the Bank may also utilize a measurement incorporating the present value of expected future cash flows discounted at the loan’s effective rate of interest. To determine observable market price, 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 table presents loans individually evaluated for impairment by class of loans as of June 30, 2011 and December 31, 2010 (in thousands):

June 30, 2011			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Consumer real estate	$	137	$	137	$	—	$	191	$	6
Agriculture real estate		—		—		—		291		5
Agriculture		4,900		4,900		—		4,582		1
Commercial real estate		760		953		—		1,506		12
Commercial and industrial		1,148		2,192		—		100		—
Consumer		—		—		—		4		—
With a specific allowance recorded:
Consumer real estate		915		924		292		463		1
Agriculture real estate		—		—		—		—		—
Agriculture		—		—		—		—		—
Commercial real estate		106		106		25		288		—
Commercial and industrial		—		—		—		595		4
Consumer		—		—		—		—		—
Totals:
Consumer real estate	$	1,052	$	1,061	$	292	$	654	$	7
Agriculture real estate	$	0	$	0	$	0	$	291	$	5
Agriculture	$	4,900	$	4,900	$	0	$	4,582	$	1
Commercial real estate	$	866	$	1,059	$	25	$	1,794	$	12
Commercial and industrial	$	1,148	$	2,192	$	0	$	695	$	4
Consumer	$	—	$	—	$	—	$	4	$	—

December 31, 2010			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Consumer real estate	$	—	$	—	$	—	$	—	$	—
Agriculture real estate		219		219		—		119		31
Agriculture		1,397		1,397		—		2,786		—
Commercial real estate		849		1,699		—		2,209		26
Commercial and industrial		—		—		—		2,221		2
Consumer		—		—		—		—		—
With a specific allowance recorded:
Consumer real estate		671		701		66		1,375		—
Agriculture real estate		—		—		—		—		—
Agriculture		—		—		—		5		1
Commercial real estate		476		476		73		296		1
Commercial and industrial		757		757		493		1,125		—
Consumer		—		—		—		—		—
Totals:
Consumer real estate	$	671	$	701	$	66	$	1,375	$	—
Agriculture real estate	$	219	$	219	$	0	$	119	$	31
Agriculture	$	1,397	$	1,397	$	0	$	2,791	$	1
Commercial real estate	$	1,325	$	2,175	$	73	$	2,505	$	27
Commercial and industrial	$	757	$	757	$	493	$	3,346	$	2
Consumer	$	—	$	—	$	—	$	—	$	—

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.

	(In Thousands)
	June 30, 2011			December 31, 2010
Allowance for Loan Losses
Balance at beginning of year	$	5,706		$	6,008
Provision for loan loss		1,429			5,325
Loans charged off		(1,854	)		(6,422	)
Recoveries		208			795
Allowance for Loan & Leases Losses	$	5,489		$	5,706
Allowance for Unfunded Loan Commitments & Letters of Credit	$	144		$	153
Total Allowance for Credit Losses	$	5,633		$	5,859

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, net asset line. The ACL presented above represents the full amount of reserves available to absorb possible credit losses. The next table breaks down the activity within ALLL for each loan portfolio segment and shows the contribution provided by both the recoveries and the provision along with the reduction of the allowance caused by charge-offs.

Additional analysis related to the allowance for credit losses (in thousands) as of June 30, 2011 and December 31, 2010 is as follows:

																		Unfunded Loan
	Consumer			Agriculture					Commercial						Consumer (incl.			Commitment &
	Real Estate			Real Estate		Agriculture			Real Estate			Commercial			Credit Cards)			Letters of Credit			Unallocated			Total
June 30, 2011
ALLOWANCE FOR CREDIT LOSSES:
Beginning balance	$	258		$	122	$	327		$	1,868		$	2,354		$	380		$	153		$	397		$	5,859
Charge Offs		(190	)		—		(24	)		(155	)		(1,316	)		(169	)		—			—		$	(1,854	)
Recoveries		23			—		65			29			6			85			—			—		$	208
Provision		432			34		(80	)		310			1,002			44			—			(313	)	$	1,429
Other Non-interest expense related to unfunded	$	—			—		—			—			—			—			(9	)		—		$	(9	)
Ending Balance	$	523		$	156	$	288		$	2,052		$	2,046		$	340		$	144		$	84		$	5,633
Ending balance: individually evaluated for impairment	$	292			—		—		$	25		$	—			—			—			—		$	317
Ending balance: collectively evaluated for impairment	$	232		$	156	$	288		$	2,027		$	2,046		$	340		$	144		$	84		$	5,317
Ending balance: loans acquired with deteriorated credit quality		2			—		—			—			—			—			—			—		$	2
FINANCING RECEIVABLES:
Ending balance	$	81,557		$	32,228	$	57,221		$	193,993		$	115,912		$	25,249			—			—		$	506,160
Ending balance: individually evaluated for impairment	$	1,052		$	—	$	4,900		$	1,749		$	265			—			—			—		$	7,966
Ending balance: collectively evaluated for impairment	$	80,505		$	32,228	$	52,321		$	192,244		$	115,647		$	25,249			—			—		$	498,194
Ending balance: loans acquired with deteriorated credit quality	$	989		$	—	$	—		$	—		$	—		$	—			—			—		$	989

																		Unfunded Loan
	Consumer			Agriculture					Commercial						Consumer (incl.			Commitment &
	Real Estate			Real Estate		Agriculture			Real Estate			Commercial			Credit Cards)			Letters of Credit			Unallocated		Total
December 31, 2010
ALLOWANCE FOR CREDIT LOSSES:
Beginning balance	$	439		$	120	$	647		$	1,810		$	2,494		$	497		$	227		$	1	$	6,235
Charge Offs		(507	)		—		(136	)		(1,147	)		(4,188	)		(444	)		—			—		(6,422	)
Recoveries		55			—		17			52			515			156			—			—		795
Provision		271			2		(201	)		1,153			3,533			171			—			396		5,325
Other Non-interest expense		—			—		—			—			—			—			(74	)		—		(74	)
related to unfunded
Ending Balance	$	258		$	122	$	327		$	1,868		$	2,354		$	380		$	153		$	397	$	5,859
Ending balance: individually evaluated for impairment	$	66			—		—		$	73		$	493			—			—			—	$	632
Ending balance: collectively evaluated for impairment	$	190		$	122	$	327		$	1,795		$	1,861		$	380		$	153		$	397	$	5,226
Ending balance: loans acquired with deteriorated credit quality	$	2			—		—			—			—			2			—			—	$	4
FINANCING RECEIVABLES:
Ending balance	$	75,785		$	34,446	$	65,400		$	204,327		$	119,262		$	28,451			—			—	$	527,671
Ending balance: individually evaluated for impairment	$	671		$	219	$	1,397		$	1,325		$	757			—			—			—	$	4,369
Ending balance: collectively evaluated for impairment	$	75,114		$	34,227	$	64,003		$	203,002		$	118,505		$	28,451			—			—	$	523,302
Ending balance: loans acquired with deteriorated credit quality	$	987			—		—			—			—			156			—			—	$	1,143