NOTE C - LOANS AND ALLOWANCE FOR LOAN LOSSES

The following table presents the Corporation's loan portfolio by category of loans for 2014 and 2013.

LOAN PORTFOLIO

(DOLLARS IN THOUSANDS)

	December 31,
	2014		2013
	$		$
Commercial real estate
Commercial mortgages	95,914		97,243
Agriculture mortgages	140,322		114,533
Construction	7,387		9,399
Total commercial real estate	243,623		221,175

Consumer real estate (a)
1-4 family residential mortgages	123,395		127,253
Home equity loans	12,563		10,889
Home equity lines of credit	27,308		21,097
Total consumer real estate	163,266		159,239

Commercial and industrial
Commercial and industrial	31,998		28,719
Tax-free loans	11,806		10,622
Agriculture loans	16,496		14,054
Total commercial and industrial	60,300		53,395

Consumer	3,517		4,063

Gross loans prior to deferred costs
and allowance for loan losses	470,706		437,872
Less:
Deferred loan costs, net	(462	)	(348	)
Allowance for loan losses	7,141		7,219
Total net loans	464,027		431,001

(a)	Real estate loans serviced for others, which are not included in the Consolidated Balance Sheets, totaled $16,670,000 and $4,866,000 as of December 31, 2014, and 2013, respectively.

The Corporation grades commercial credits differently than consumer credits. The following tables represent all of the Corporation's commercial credit exposures by internally assigned grades as of December 31, 2014 and 2013. The grading analysis estimates the capability of the borrower to repay the contractual obligations under the loan agreements as scheduled or at all. The Corporation's internal commercial credit risk grading system is based on experiences with similarly graded loans.

The Corporation's internally assigned grades for commercial credits are as follows:

•

Pass – loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral.

•

Special Mention – loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected.

•

Substandard – loans that have a well-defined weakness based on objective evidence and characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected.

•

Doubtful – loans classified as doubtful have all the weaknesses inherent in a substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.

•

Loss – loans classified as a loss are considered uncollectible, or of such value that continuance as an asset is not warranted.

COMMERCIAL CREDIT EXPOSURE

CREDIT RISK PROFILE BY INTERNALLY ASSIGNED GRADE

(DOLLARS IN THOUSANDS)

December 31, 2014	Commercial Mortgages		Agriculture Mortgages		Construction		Commercial and Industrial		Tax-free Loans		Agriculture Loans		Total
		$		$		$		$		$		$		$
Grade:
Pass		82,478		135,298		5,350		31,006		11,806		16,255		282,193
Special Mention		2,649		3,237		—		29		—		29		5,944
Substandard		10,787		1,787		2,037		963		—		212		15,786
Doubtful		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—

Total		95,914		140,322		7,387		31,998		11,806		16,496		303,923


December 31, 2013	Commercial Mortgages		Agriculture Mortgages		Construction		Commercial and Industrial		Tax-free Loans		Agriculture Loans		Total
		$		$		$		$		$		$		$
Grade:
Pass		85,683		112,253		7,402		27,082		10,390		13,425		256,235
Special Mention		4,996		—		—		213		—		293		5,502
Substandard		6,564		2,280		1,997		1,424		232		336		12,833
Doubtful		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—

Total		97,243		114,533		9,399		28,719		10,622		14,054		274,570

For consumer loans, the Corporation evaluates credit quality based on whether the loan is considered performing or non-performing. A consumer loan is considered non-performing when it is over 90 days past due. Management will generally charge off consumer loans more than 120 days past due for closed end loans and over 180 days for open-end consumer loans. The following table presents the balances of consumer loans by classes of the loan portfolio based on payment performance as of December 31, 2014 and 2013:

CONSUMER CREDIT EXPOSURE

CREDIT RISK PROFILE BY PAYMENT PERFORMANCE

(DOLLARS IN THOUSANDS)

	1-4 Family				Home Equity
December 31, 2014	Residential		Home Equity		Lines of
	Mortgages		Loans		Credit		Consumer		Total
Payment performance:		$	$		$		$		$

Performing		123,023		12,551		27,308		3,517		166,399
Non-performing		372		12		—		—		384

Total		123,395		12,563		27,308		3,517		166,783


	1-4 Family				Home Equity
December 31, 2013	Residential		Home Equity		Lines of
	Mortgages		Loans		Credit		Consumer		Total
Payment performance:	$		$		$		$		$

Performing		127,039		10,889		21,097		4,046		163,071
Non-performing		214		—		—		17		231

Total		127,253		10,889		21,097		4,063		163,302

The following tables present an age analysis of the Corporation's past due loans, segregated by loan portfolio class, as of December 31, 2014 and 2013:

AGING OF LOANS RECEIVABLE

(DOLLARS IN THOUSANDS)


													Loans
December 31, 2014					Greater								Receivable >
	30-59 Days		60-89 Days		than 90		Total Past				Total Loans		90 Days and
	Past Due		Past Due		Days		Due		Current		Receivable		Accruing
	$		$		$		$		$		$		$
Commercial real estate
Commercial mortgages		—		189		266		455		95,459		95,914		—
Agriculture mortgages		—		—		—		—		140,322		140,322		—
Construction		—		—		—		—		7,387		7,387		—
Consumer real estate
1-4 family residential mortgages		665		349		372		1,386		122,009		123,395		372
Home equity loans		78		14		12		104		12,459		12,563		12
Home equity lines of credit		13		—		—		13		27,295		27,308		—
Commercial and industrial
Commercial and industrial		21		73		—		94		31,904		31,998		—
Tax-free loans		—		—		—		—		11,806		11,806		—
Agriculture loans		—		—		—		—		16,496		16,496		—
Consumer		23		1		—		24		3,493		3,517		—
Total		800		626		650		2,076		468,630		470,706		384


													Loans
December 31, 2013					Greater								Receivable >
	30-59 Days		60-89 Days		than 90		Total Past				Total Loans		90 Days and
	Past Due		Past Due		Days		Due		Current		Receivable		Accruing
	$		$		$		$		$		$		$
Commercial real estate
Commercial mortgages		—		205		—		205		97,038		97,243		—
Agriculture mortgages		69		—		—		69		114,464		114,533		—
Construction		—		—		—		—		9,399		9,399		—
Consumer real estate
1-4 family residential mortgages		1,089		401		214		1,704		125,549		127,253		214
Home equity loans		57		—		—		57		10,832		10,889		—
Home equity lines of credit		15		13		—		28		21,069		21,097		—
Commercial and industrial
Commercial and industrial		20		—		—		20		28,699		28,719		-
Tax-free loans		—		—		—		—		10,622		10,622		—
Agriculture loans		—		—		—		—		14,054		14,054		—
Consumer		10		13		17		40		4,023		4,063		17
Total		1,260		632		231		2,123		435,749		437,872		231

As of December 31, 2014, 2013, and 2012, all of the Corporation's loans on non-accrual status were also considered impaired. Interest income on loans would have increased by approximately $39,000, $82,000, and $88,000 during 2014, 2013, and 2012, respectively, if these loans had performed in accordance with their original terms.

The following table presents non-accrual loans by classes of the loan portfolio as of December 31:

NON-ACCRUAL LOANS BY LOAN CLASS

(DOLLARS IN THOUSANDS)

	2014		2013
	$		$

Commercial real estate
Commercial mortgages		894		992
Agriculture mortgages		—		—
Construction		—		—
Consumer real estate
1-4 family residential mortgages		—		—
Home equity loans		—		—
Home equity lines of credit		—		—
Commercial and industrial
Commercial and industrial		73		109
Tax-free loans		—		—
Agriculture loans		—		—
Consumer		—		—
Total		967		1,101

Information with respect to impaired loans as of and for the years ended December 31 is as follows:

IMPAIRED LOANS

(DOLLARS IN THOUSANDS)

	2014		2013		2012
	$		$		$
Impaired loans
Loan balances without a related allowance for loan losses		2,209		2,693		1,992
Loan balances with a related allowance for loan losses		149		—		935
Related allowance for loan losses		1		—		110

Average recorded balance of impaired loans		2,624		2,827		3,203
Interest income recognized on impaired loans		110		113		135

During 2014 and 2013 there were no loan modifications made that would cause a loan to be considered a troubled debt restructuring (TDR). A TDR is a loan where management has granted a concession to the borrower from the original terms. A concession is generally granted in order to improve the financial condition of the borrower and improve the likelihood of full collection by the lender. A concession is generally defined as more favorable payment or credit terms granted to a borrower in an effort to improve the likelihood of the lender collecting principal in its entirety. Concessions usually are in the form of interest only for a period of time, or a lower interest rate offered in an effort to enable the borrower to continue to make normally scheduled payments.

The following table summarizes information in regards to impaired loans by loan portfolio class as of December 31, 2014:

IMPAIRED LOAN ANALYSIS

(DOLLARS IN THOUSANDS)

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	$		$		$		$		$

With no related allowance recorded:
Commercial real estate
Commercial mortgages		745		931		—		931		—
Agriculture mortgages		1,391		1,391		—		1,539		104
Construction		—		-		—		—		—
Total commercial real estate		2,136		2,322		—		2,470		104

Commercial and industrial
Commercial and industrial		73		73		—		86		6
Tax-free loans		—		—		—		—		—
Agriculture loans		—		—		—		—		—
Total commercial and industrial		73		73		—		86		6

Total with no related allowance		2,209		2,395		—		2,556		110

With an allowance recorded:
Commercial real estate
Commercial mortgages		149		264		1		68		—
Agriculture mortgages		—		—		—		—		—
Construction		—		—		—		—		—
Total commercial real estate		149		264		1		68		—

Commercial and industrial
Commercial and industrial		—		—		—		—		—
Tax-free loans		—		—		—		—		—
Agriculture loans		—		—		—		—		—
Total commercial and industrial		—		—		—		—		—

Total with a related allowance		149		264		1		68		—

Total by loan class:
Commercial real estate
Commercial mortgages		894		1,195		1		999		—
Agriculture mortgages		1,391		1,391		—		1,539		104
Construction		—		—		—		—		—
Total commercial real estate		2,285		2,586		1		2,538		104

Commercial and industrial
Commercial and industrial		73		73		—		86		6
Tax-free loans		—		—		—		—		—
Agriculture loans		—		—		—		—		—
Total commercial and industrial		73		73		—		86		6

Total		2,358		2,659		1		2,624		110

The following table summarizes information in regards to impaired loans by loan portfolio class as of December 31, 2013:

IMPAIRED LOAN ANALYSIS

(DOLLARS IN THOUSANDS)

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	$		$		$		$		$

With no related allowance recorded:
Commercial real estate
Commercial mortgages		992		1,088		—		1,119		1
Agriculture mortgages		1,592		1,592		—		1,609		112
Construction		—		—		—		—		—
Total commercial real estate		2,584		2,680		—		2,728		113

Commercial and industrial
Commercial and industrial		109		109		—		99		—
Tax-free loans		—		—		—		—		—
Agriculture loans		—		—		—		—		—
Total commercial and industrial		109		109		—		99		—

Total with no related allowance		2,693		2,789		—		2,827		113

With an allowance recorded:
Commercial real estate
Commercial mortgages		—		—		—		—		—
Agriculture mortgages		—		—		—		—		—
Construction		—		—		—		—		—
Total commercial real estate		—		—		—		—		—

Commercial and industrial
Commercial and industrial		—		—		—		—		—
Tax-free loans		—		—		—		—		—
Agriculture loans		—		—		—		—		—
Total commercial and industrial		—		—		—		—		—

Total with a related allowance		—		—		—		—		—

Total by loan class:
Commercial real estate
Commercial mortgages		992		1,088		—		1,119		1
Agriculture mortgages		1,592		1,592		—		1,609		112
Construction		—		—		—		—		—
Total commercial real estate		2,584		2,680		—		2,728		113

Commercial and industrial
Commercial and industrial		109		109		—		99		—
Tax-free loans		—		—		—		—		—
Agriculture loans		—		—		—		—		—
Total commercial and industrial		109		109		—		99		—

Total		2,693		2,789		—		2,827		113

The following table details activity in the allowance for loan losses by portfolio segment for the year ended December 31, 2014:

ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS RECEIVABLE

(DOLLARS IN THOUSANDS)


						Commercial
	Commercial			Consumer		and
	Real Estate			Real Estate		Industrial			Consumer			Unallocated			Total
	$			$		$			$			$			$

Allowance for credit losses:
Beginning balance		3,657			1,346		1,416			102			698			7,219

Charge-offs		(204	)		-		(12	)		(19	)		—			(235	)
Recoveries		-			5		201			1			—			207
Provision (credit)		381			16		(304	)		(18	)		(125	)		(50	)

Ending balance		3,834			1,367		1,301			66			573			7,141

Ending balance: individually
evaluated for impairment		1			—		—			—			—			1
Ending balance: collectively
evaluated for impairment		3,833			1,367		1,301			66			573			7,140

Loans receivable:
Ending balance		243,623			163,266		60,300			3,517						470,706
Ending balance: individually
evaluated for impairment		2,285			—		73			—						2,358
Ending balance: collectively
evaluated for impairment		241,338			163,266		60,227			3,517						468,348

The Corporation allocated increased provisions to the commercial real estate segment due to increased charge-off activity in that segment. The Corporation decreased the amount of the allowance for loan loss allocated to the commercial and industrial segment due to continued improvements in credit loss experience and additional recoveries received. Actual credit losses were materially below previous estimates. Commercial and industrial charge offs in 2014 were only a third of the 2013 amount while recoveries nearly tripled. This enabled management to decrease this element of the allowance. Delinquencies and credit losses remain very low in the three categories of commercial and industrial. This segment also includes tax free loans to municipalities and agricultural purpose loans, which account for nearly half of the total commercial and industrial loans.

The following table details activity in the allowance for loan losses by portfolio segment for the year ended December 31, 2013:

ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS RECEIVABLE

(DOLLARS IN THOUSANDS)

						Commercial
	Commercial		Consumer			and
	Real Estate		Real Estate			Industrial			Consumer			Unallocated			Total
	$		$			$			$			$			$

Allowance for credit losses:
Beginning balance		3,575		1,510			1,640			61			730			7,516

Charge-offs		—		(84	)		(41	)		(22	)		—			(147	)
Recoveries		—		—			74			1			—			75
Provision (credit)		82		(80)			(257	)		62			(32	)		(225	)

Ending balance		3,657		1,346			1,416			102			698			7,219

Ending balance: individually
evaluated for impairment		—		—			—			—			—			—
Ending balance: collectively
evaluated for impairment		3,657		1,346			1,416			102			698			7,219

Loans receivable:
Ending balance		221,175		159,239			53,395			4,063						437,872
Ending balance: individually
evaluated for impairment		2,584		—			109			—						2,693
Ending balance: collectively
evaluated for impairment		218,591		159,239			53,286			4,063						435,179

The Corporation decreased the amount of the allowance for loan loss allocated to the commercial and industrial segment due to actual credit loss experience being less than previously estimated. Commercial and industrial loans are generally viewed with a higher degree of credit risk than commercial real estate. However, the Corporation has experienced a very low level of commercial and industrial charge-offs. During 2013, the Corporation experienced more recoveries than charge-offs in this area. This segment includes tax-free loans to municipalities and agricultural purpose loans, which account for nearly half of the total commercial and industrial loans. Both of these areas have exhibited a lack of non-performing loans, resulting in a lower required allowance.

The following table details activity in the allowance for loan losses by portfolio segment for the year ended December 31, 2012:

ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS RECEIVABLE

(DOLLARS IN THOUSANDS)

								Commercial
	Commercial			Consumer				and
	Real Estate			Real Estate				Industrial				Consumer			Unallocated		Total
		$			$				$			$			$			$

Allowance for credit losses:
Beginning balance			3,441			1,424				2,825			61			729			8,480

Charge-offs			—			(17	)			(47	)		(13	)		—			(77	)
Recoveries			—			1				78			9			—			88
Provision (credit)			134			102				(1,216	)		4			1			(975	)

Ending balance			3,575			1,510				1,640			61			730			7,516

Ending balance: individually
evaluated for impairment			110			—				—			—			—			110
Ending balance: collectively
evaluated for impairment			3,465			1,510				1,640			61			730			7,406

Loans receivable:
Ending balance			193,879			155,764				60,698			3,872						414,213
Ending balance: individually
evaluated for impairment			2,874			—				53			—						2,927
Ending balance: collectively
evaluated for impairment			191,005			155,764				60,645			3,872						411,286

The Corporation decreased the amount of the allowance for loan loss allocated to the commercial and industrial segment due to actual credit loss experience being less than previously estimated. As a result of large losses taken on commercial and industrial loans by financial institutions during the financial crisis, this area has been under a higher amount of regulatory scrutiny. Management was allocating more of the allowance toward the commercial and industrial loans segment based on the higher perceived risk and estimates of larger charge-offs than what were occurring. Several years of historical experience has demonstrated a lower level of actual losses and management reacted by lowering the required allowance. The Corporation experienced a very low level of commercial and industrial charge-offs in 2012, and received more recoveries than charge-offs. This segment includes tax-free loans to municipalities and agricultural purpose loans, which account for approximately half of the total commercial and industrial loans. Both of these areas have exhibited a lack of non-performing loans, resulting in a lower required allowance.