1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES

The unaudited consolidated financial statements include the accounts of MBT Financial Corp. (the “Company”) and its subsidiary, Monroe Bank & Trust (the “Bank”). The Bank includes the accounts of its wholly owned subsidiary, MB&T Financial Services, Inc. The Bank operates fourteen branches in Monroe County, Michigan, six branches in Wayne County, Michigan, and one loan and wealth management office in each Wayne County and Lenawee County. The Bank’s primary source of revenue is from providing loans to customers, who are predominantly small and middle-market businesses and middle-income individuals. The Company’s sole business segment is community banking.

 

The accounting and reporting policies of the Bank conform to practice within the banking industry and are in accordance with accounting principles generally accepted in the United States. Preparation of financial statements in conformity with generally accepted accounting principles requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near term are the determination of the allowance for loan losses, the valuation of other real estate owned, and the fair value of investment securities.

 

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, such information reflects all adjustments (consisting of normal recurring adjustments), which are, in the opinion of Management, necessary for fair statement of results for the interim periods.

 

The significant accounting policies are as follows:

 

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and its subsidiary. All material intercompany transactions and balances have been eliminated.

 

COMPREHENSIVE INCOME

Accounting principles generally require that revenue, expenses, gains, and losses be included in net income. Certain changes in assets and liabilities, however, such as unrealized gains and losses on securities available for sale and amounts recognized related to postretirement benefit plans (gains and losses, prior service costs, and transition assets or obligations), are reported as a direct adjustment to the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income.

 

BUSINESS SEGMENTS

While the Company's chief decision makers monitor the revenue streams of various products and services, operations are managed and financial performance is evaluated on a company wide basis. Accordingly, all of the Company’s operations are considered by management to be aggregated in one reportable segment.

   

 

FAIR VALUE

The Company measures or monitors many of its assets and liabilities on a fair value basis. Fair value is used on a recurring basis for assets and liabilities that are elected to be accounted for under The Fair Value Option as well as for certain assets and liabilities in which fair value is the primary basis of accounting. Examples of these include derivative instruments and available for sale securities. Additionally, fair value is used on a non-recurring basis to evaluate assets or liabilities for impairment or for disclosure purposes. Examples of these non-recurring uses of fair value include certain loans held for sale accounted for on a lower of cost or market basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, the Company uses various valuation techniques and assumptions when estimating fair value.

 

When determining the fair value measurements for assets and liabilities required or permitted to be recorded at and/or marked to fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability. When possible, the Company looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Company looks to market observable data for similar assets or liabilities. Nevertheless, certain assets and liabilities are not actively traded in observable markets and the Company must use alternative valuation techniques to derive a fair value measurement.

 

ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2014-09 (ASU 2014-09), “Revenue from Contracts with Customers (Topic 606)”. ASU 2014-09 adopts a standardized approach for revenue recognition and was a joint effort with the International Accounting Standards Board (IASB). The new revenue recognition standard is based on a core principle of recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 does not apply to financial instruments. ASU 2014-09 is effective for public entities for reporting periods beginning after December 15, 2016 (therefore, for the year ending December 31, 2017 for the Corporation). Early implementation is not allowed for public companies. Management is currently assessing the impact to the Corporation’s consolidated financial statements.

 

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”. The amendments in ASU 2016-01 supersede the guidance to classify equity securities with readily determinable fair values into different categories (that is, trading or available-for-sale) and require equity securities (including other ownership interests, such as partnerships, unincorporated joint ventures, and limited liability companies) to be measured at fair value with changes in the fair value recognized through net income. The amendments allow equity investments that do not have readily determinable fair values to be re-measured at fair value either upon the occurrence of an observable price change or upon identification of an impairment. The amendments also require enhanced disclosures about those investments. The amendments improve financial reporting by providing relevant information about an entity’s equity investments and reducing the number of items that are recognized in other comprehensive income. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The adoption of this guidance is not expected to have a material effect on the Company’s financial position or results of operations.

 

In February 2016, the Financial Accounting Standards Board issued ASU 2016-02, “Leases”, which will supersede the current lease requirements in ASC 840. The ASU requires lessees to recognize a right of use asset and related lease liability for all leases, with a limited exception for short-term leases.  Leases will be classified as either finance or operating, with the classification affecting the pattern of expense recognition in the statement of operations.  Currently, leases are classified as either capital or operating, with only capital leases recognized on the balance sheet.  The reporting of lease related expenses in the statements of operations and cash flows will be generally consistent with the current guidance. The new lease footnote guidance will be effective for the Company’s year ending December 31, 2019 and will be applied using a modified retrospective transition method to the beginning of the earliest period presented.  The effect of applying the new lease guidance on the financial statements as not yet been determined, however the new lease standard is not expected to have a significant effect on the Company’s financial statements.

 

 

In June 2016, the Financial Accounting Standards Board issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income.

 

ASU 2016-13 requires an entity measure expected credit losses for financial assets over the estimated lifetime of expected credit loss and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The standard includes the following core concepts in determining the expected credit loss estimate: (a) be based on an asset’s amortized cost (including premiums or discounts, net deferred fees and costs, foreign exchange and fair value hedge accounting adjustments), (b) reflect losses expected over the remaining contractual life of an asset (considering the effect of voluntary prepayments), (c) consider available relevant information about the estimated collectability of cash flows (including information about past events, current conditions, and reasonable and supportable forecasts), and (d) reflect the risk of loss, even when that risk is remote.

 

ASU 2016-13 also amends the recording of purchased credit-deteriorated assets. Under the new guidance, an allowance will be recognized at acquisition through a gross-up approach whereby an entity will record as the initial amortized cost the sum of (a) the purchase price and (b) an estimate of credit losses as of the date of acquisition. In addition, the guidance also requires immediate recognition in earnings any subsequent changes, both favorable and unfavorable, in expected cash flows by adjusting this allowance.

 

ASU 2016-13 amends the impairment model for available-for-sale debt securities and requires entities to determine whether all or a portion of the unrealized loss on an available-for-sale debt security is a credit loss. Management may not use the length of time a security has been in an unrealized loss position as a factor in concluding whether a credit loss exists, as is currently permitted. In addition, an entity will recognize an allowance for credit losses on available-for-sale debt securities as a contra-account to the amortized cost basis rather than as a direct reduction of the amortized cost basis of the investment, as is currently required. As a result, entities will recognize improvements to credit losses on available-for-sale debt securities immediately in earnings rather than as interest income over time under current practice.

 

New disclosures required by ASU 2016-13 include: (a) for financial assets measured at amortized cost, an entity will be required to disclose information about how it developed its allowance, including changes in the factors that influenced management’s estimate of expected credit losses and the reasons for those changes, (b) for financial receivables and net investments in leases measured at amortized cost, an entity will be required to further disaggregate the information it currently discloses about the credit quality of these assets by year of the asset’s origination or vintage for as many as five annual periods, and (c) for available-for-sale debt securities, an entity will be required to provide a roll-forward of the allowance for credit losses and an aging analysis for securities that are past due.

 

Upon adoption of ASU 2016-13, a cumulative-effect adjustment to retained earnings will be recorded as of the beginning of the first reporting period in which the guidance is effective. ASU 2016-13 is effective for public companies for interim and annual periods beginning after December 15, 2019, with early adoption permitted for annual periods beginning after December 15, 2018. The Corporation is currently evaluating the provisions of ASU 2016-13 to determine the potential impact on the Corporation's consolidated financial condition and results of operations.

 

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3. STOCK BASED COMPENSATION

Stock Only Stock Appreciation Rights (SOSARs) - On February 25, 2016, 105,500 Stock Only Stock Appreciation Rights (SOSARs) were awarded to certain officers in accordance with the MBT 2008 Stock Incentive Plan that was approved by shareholders on May 1, 2008 and amended by shareholders on May 7, 2015. The SOSARs have a term of ten years and vest in three equal annual installments beginning on December 31, 2016. The fair value of $3.08 for the SOSARs was estimated at the date of the grant, using the Black-Scholes option pricing model, with the following assumptions: expected option lives of 7 years, expected volatility of 41.21%, a risk free interest rate of 1.47% and dividend yield of 1.50%. The fair value of the Company’s common stock was $8.26 on the grant date.

 

SOSARs granted under the plan are structured as fixed grants with the base price equal to the market value of the underlying stock on the date of the grant. 

 

The following table summarizes the SOSARs that have been granted:

   

		SOSARs				Weighted Average Base Price
SOSARs Outstanding, January 1, 2016			609,275			$	4.02
Granted			105,500				8.26
Exercised			(197,723	)			2.65
Forfeited			(4,503	)			4.93
Expired			-				-
SOSARs Outstanding, June 30, 2016			512,549			$	5.41
SOSARs Exercisable, June 30, 2016			227,633			$	3.30

 

The exercise of a SOSAR results in the issuance of a number of shares of common stock of the Company based on the appreciation of the market price of the stock over the base price of the SOSAR. The market value of the Company’s common stock on June 30, 2016 was $8.00. The value of the exercisable SOSARs that are in-the-money as of June 30, 2016 was $1,100,000, and exercise of those SOSARs on that date would have resulted in the issuance of 133,734 shares of common stock. The plan allows participants to elect to withhold shares from the exercise of SOSARs to cover their tax liability. This may affect the number of shares issued and the value of the common stock account on the balance sheet and the statement of changes in equity.

 

 

Restricted Stock Unit Awards – On February 25, 2016, 35,000 performance restricted stock units were awarded to certain key executive officers in accordance with the MBT 2008 Stock Incentive Plan that was approved by shareholders on May 1, 2008 and amended by shareholders on May 7, 2015. Each Restricted Stock Unit (RSU) is equivalent to one share of MBT Financial Corp. common stock. Stock will be issued to the participants following a two year performance period that ends on December 31, 2017 if the defined performance targets are achieved. Earned RSUs vest on December 15, 2018 and as of June 30, 2016 none of the RSUs were vested.

 

Restricted Stock Awards – On February 25, 2016, 5,000 restricted shares were awarded to certain non-executive members of the board of directors in accordance with the MBT 2008 Stock Incentive Plan that was approved by shareholders on May 1, 2008 and amended by shareholders on May 7, 2015. The restricted shares vest on December 31, 2016. The expense for the restricted stock is based on the grant date value of $8.26 and is recognized over the vesting period. The unrecognized cost related to the non-vested restricted stock awards was $28,000 as of June 30, 2016.

 

The total expense for equity based compensation was $162,000 in the second quarter of 2016 and $94,000 in the second quarter of 2015. The total expense for equity based compensation was $276,000 in the first six months of 2016 and $177,000 in the first six months of 2015.

 

4. LOANS

The Bank makes commercial, consumer, and mortgage loans primarily to customers in Monroe County, Michigan, southern and western Wayne County, Michigan, Lenawee County, Michigan, and surrounding areas. Although the Bank has a diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent on the automotive, manufacturing, and real estate development economic sectors.

 

 

 

Loans consist of the following (000s omitted):

 

		June 30, 2016				December 31, 2015
Residential real estate loans		$	215,236			$	213,989
Commercial and Construction real estate loans			264,126				259,139
Agriculture and agricultural real estate loans			21,164				19,243
Commercial and industrial loans			86,726				84,438
Loans to individuals for household, family, and other personal expenditures			51,028				40,499
Total loans, gross		$	638,280			$	617,308
Less: Allowance for loan losses			9,903				10,896
Net Loans		$	628,377			$	606,412

 

Loans are placed in a nonaccrual status when, in the opinion of Management, the collection of additional interest is doubtful. All loan relationships over $250,000 that are classified by Management as nonperforming as well as selected performing accounts and all renegotiated loans are reviewed for impairment each quarter. Allowances for loans determined to be impaired are included in the allowance for loan losses. All cash received on nonaccrual loans is applied to the principal balance. Nonperforming assets consist of nonaccrual loans, loans 90 days or more past due, restructured loans, nonaccrual investment securities, other real estate owned, and other repossessed assets. Other real estate owned includes real estate that has been acquired in full or partial satisfaction of loan obligations or upon foreclosure.

 

 

The following table summarizes nonperforming assets (000s omitted):

 

 

		June30, 2016				December 31, 2015
Nonaccrual loans		$	7,522			$	8,633
Loans 90 days past due and accruing			41				4
Restructured loans			16,701				18,910
Total nonperforming loans		$	24,264			$	27,547
Other real estate owned			1,808				2,383
Other assets			10				-
Total nonperforming assets		$	26,082			$	29,930
Nonperforming assets to total assets			1.97	%			2.23	%
Allowance for loan losses to nonperforming loans			40.81	%			39.55	%

 

5. ALLOWANCE FOR LOAN LOSSES

The Company separates its loan portfolio into segments to perform the calculation and analysis of the allowance for loan losses. The six segments analyzed are Agriculture and Agricultural Real Estate, Commercial, Commercial Real Estate, Construction Real Estate, Residential Real Estate, and Consumer and Other. The Agriculture and Agricultural Real Estate segment includes all loans to finance agricultural production and all loans secured by agricultural real estate. This segment does not include loans to finance agriculture that are secured by residential real estate, which are included in the Residential Real Estate segment. The Commercial segment includes loans to finance commercial and industrial businesses that are not secured by real estate. The Commercial Real Estate segment includes loans secured by non-farm, non-residential real estate. The Construction Real Estate segment includes loans to finance construction and land development. This includes residential and commercial construction and land development. The Residential Real Estate segment includes all loans, other than construction loans, that are secured by single family and multi family residential real estate properties. The Consumer and Other segment includes all loans not included in any other segment. These are primarily loans to consumers for household, family, and other personal expenditures. The majority of this segment is student loans, and it also includes loans for autos, boats, and recreational vehicles.

   

 

Activity in the allowance for loan losses during the three and six months ended June 30, 2016 was as follows (000s omitted):

 

		Agriculture and Agricultural Real Estate				Commercial				Commercial Real Estate				Construction Real Estate				Residential Real Estate				Consumer and Other				Total
Allowance for loan losses: For the three months ended June 30, 2016
Beginning Balance		$	487			$	1,597			$	5,018			$	475			$	1,920			$	1,040			$	10,537
Charge-offs			(221	)			(12	)			(296	)			-				(65	)			(24	)			(618	)
Recoveries			-				44				46				14				45				35				184
Provision			(66	)			(103	)			(298	)			(29	)			(109	)			405				(200	)
Ending balance		$	200			$	1,526			$	4,470			$	460			$	1,791			$	1,456			$	9,903
Allowance for loan losses: For the six months ended June 30, 2016
Beginning Balance		$	389			$	2,279			$	4,350			$	420			$	2,235			$	1,223			$	10,896
Charge-offs			(221	)			(12	)			(352	)			-				(156	)			(86	)			(827	)
Recoveries			-				77				69				27				103				58				334
Provision			32				(818	)			403				13				(391	)			261				(500	)
Ending balance		$	200			$	1,526			$	4,470			$	460			$	1,791			$	1,456			$	9,903
Allowance for loan losses as of June 30, 2016
Ending balance individually evaluated for impairment		$	1			$	468			$	447			$	262			$	309			$	188			$	1,675
Ending balance collectively evaluated for impairment			199				1,058				4,023				198				1,482				1,268				8,228
Ending balance		$	200			$	1,526			$	4,470			$	460			$	1,791			$	1,456			$	9,903
Loans as of June 30, 2016
Ending balance individually evaluated for impairment		$	1,366			$	823			$	10,805			$	1,779			$	7,212			$	496			$	22,481
Ending balance collectively evaluated for impairment			19,798				85,903				236,551				14,991				208,024				50,532				615,799
Ending balance		$	21,164			$	86,726			$	247,356			$	16,770			$	215,236			$	51,028			$	638,280

 

 

Activity in the allowance for loan losses during the three and six months ended June 30, 2015 was as follows (000s omitted):

 

		Agriculture and Agricultural Real Estate				Commercial				Commercial Real Estate				Construction Real Estate				Residential Real Estate				Consumer and Other				Total
Allowance for loan losses: For the three months ended June 30, 2015
Beginning Balance		$	255			$	1,380			$	5,678			$	810			$	3,073			$	1,995			$	13,191
Charge-offs			(75	)			(58	)			(120	)			-				(57	)			(97	)			(407	)
Recoveries			3				97				21				12				133				29				295
Provision			242				62				(142	)			(199	)			(79	)			116				-
Ending balance		$	425			$	1,481			$	5,437			$	623			$	3,070			$	2,043			$	13,079
Allowance for loan losses: For the six months ended June 30, 2015
Beginning Balance		$	216			$	1,361			$	6,179			$	803			$	3,226			$	1,423			$	13,208
Charge-offs			(75	)			(164	)			(120	)			-				(253	)			(117	)			(729	)
Recoveries			10				171				182				621				356				60				1,400
Provision			274				113				(804	)			(801	)			(259	)			677				(800	)
Ending balance		$	425			$	1,481			$	5,437			$	623			$	3,070			$	2,043			$	13,079
Allowance for loan losses as of June 30, 2015
Ending balance individually evaluated for impairment		$	80			$	473			$	913			$	478			$	630			$	208			$	2,782
Ending balance collectively evaluated for impairment			345				1,008				4,524				145				2,440				1,835				10,297
Ending balance		$	425			$	1,481			$	5,437			$	623			$	3,070			$	2,043			$	13,079
Loans as of June 30, 2015
Ending balance individually evaluated for impairment		$	892			$	1,276			$	16,827			$	1,819			$	12,117			$	514			$	33,445
Ending balance collectively evaluated for impairment			18,084				82,349				233,178				11,344				205,421				39,749				590,125
Ending balance		$	18,976			$	83,625			$	250,005			$	13,163			$	217,538			$	40,263			$	623,570

 

Each period the provision for loan losses in the income statement results from the combination of an estimate by Management of loan losses that occurred during the current period and the ongoing adjustment of prior estimates of losses occurring in prior periods.

 

The provision for loan losses increases the allowance for loan losses, a valuation account which appears on the consolidated balance sheets. As the specific customer and amount of a loan loss is confirmed by gathering additional information, taking collateral in full or partial settlement of the loan, bankruptcy of the borrower, etc., the loan is charged off, reducing the allowance for loan losses. If, subsequent to a charge off, the Bank is able to collect additional amounts from the customer or sell collateral worth more than earlier estimated, a recovery is recorded.

 

To serve as a basis for making this provision, the Bank maintains an extensive credit risk monitoring process that considers several factors including: current economic conditions affecting the Bank’s customers, the payment performance of individual loans and pools of homogeneous loans, portfolio seasoning, changes in collateral values, and detailed reviews of specific loan relationships.

 

The Company utilizes an internal loan grading system to assign a risk grade to all commercial loans, all renegotiated loans, and each commercial credit relationship. Grades 10 through 45 are considered “pass” credits and grades 50 through 65 are considered “watch” credits and are subject to greater scrutiny. Loans with grades 70 through 95 and considered “doubtful” or “loss” and have generally been charged off. A description of the general characteristics of each grade is as follows:

•

Grade 10– Excellent – Loans secured by marketable collateral, with adequate margin, or supported by strong financial statements, including substantial levels of tangible net worth. Probability of serious financial deterioration is unlikely. Possess a sound repayment source and a secondary source. This classification will also include individual loans backed by liquid personal assets, established history and unquestionable character. High liquidity, minimum risk, strong ratios, and low handling costs are common to these loans.

   

 

•

Grade 20– Above Average – Loans that exhibit less than average risk and clearly demonstrate debt service coverage that is consistently above average as well as a strong capital base. These loans may have some deficiency or vulnerability, but with offsetting features and are considered to be fully collectable.

•

Grade 30– Satisfactory – Loans that have an acceptable amount of risk but may exhibit vulnerability to deterioration if adverse circumstances are encountered. These loans should demonstrate adequate debt service coverage and adequate levels of capital support but warrant periodic monitoring to ensure that weaknesses do not materialize or advance.

•

Grades 40 and 45 – Pass – Loans that are considered “pass credits” and typically demonstrate adequate debt service coverage. The level of risk is considered acceptable but these loans warrant ongoing monitoring to ensure that adverse trends or other credit deficiencies have not materialized or advanced. The level of risk is considered acceptable so long as the loan is given adequate and ongoing management supervision.

•	Grades 50 and 55 – Watch – Loans that possess some credit deficiency or potential weakness that deserves close attention. The primary source of loan repayment is sufficient but may be considered inadequate by the Bank’s standards.

•

Grade 60– Substandard – Loans that exhibit one or more of the following characteristics: (1) a defined credit weakness, financial deterioration is underway, and uncertainty about the likelihood that the loan will be paid from the primary source of repayment; (2) inadequately protected by the current net worth and paying capacity of the obligor; (3) reliance on secondary source of repayment such as collateral liquidation or guarantees; (4) distinct possibility the Bank will sustain loss if deficiencies are not corrected; (5) unusual courses of action are needed to maintain a high probability of repayment; (6) insufficient cash flow to repay principal but continuing to pay interest; (7) the Bank is subordinated or unsecured due to flaws in documentation; (8) loans are restructured or are on nonaccrual status due to concessions to the borrower when compared to normal loan terms; (9) the Bank is contemplating foreclosure or legal action due to the apparent deterioration in the loan; or (10) there is deterioration in the market conditions and the borrower is highly vulnerable to these conditions.

•

Grade 70– Doubtful – Loans that exhibit one or more of the following characteristics: (1) loans with all the weaknesses of Substandard loans and collection or liquidation is not probable to result in payment in full; (2) the primary source of repayment is gone and there is considerable doubt as to the quality of the secondary source of repayment; or (3) the possibility of loss is high, but certain important pending factors may strengthen the loan and loss classification is deferred.

•	Grades 80 and 90 - Loss – Loans are considered uncollectible and of such little value that continuing to carry them on the Bank’s financial statements is not feasible.

 

The assessment of compensating factors may result in a rating plus or minus one grade from those listed above. These factors include, but are not limited to collateral, guarantors, environmental conditions, history, plan/projection reasonableness, quality of information, and payment delinquency.

 

 

The portfolio segments in each credit risk grade as of June 30, 2016 are as follows (000s omitted):

 

Credit Quality Indicators as of June 30, 2016                                                        

Credit Risk by Internally Assigned Grade

 

		Agriculture and Agricultural Real Estate				Commercial				Commercial Real Estate				Construction Real Estate				Residential Real Estate				Consumer and Other				Total
Not Rated		$	55			$	1,403			$	245			$	7,834			$	133,729			$	43,667			$	186,933
10			-				5,350				-				-				-				-				5,350
20			551				337				488				-				-				146				1,522
30			609				11,770				9,525				-				228				-				22,132
40			14,786				61,020				186,572				4,956				65,994				7,042				340,370
45			2,301				2,584				11,541				1,453				4,064				-				21,943
50			1,315				2,573				21,143				2,182				3,889				15				31,117
55			180				243				4,094				-				31				-				4,548
60			1,367				1,446				13,748				345				7,301				158				24,365
70			-				-				-				-				-				-				-
80			-				-				-				-				-				-				-
90			-				-				-				-				-				-				-
Total		$	21,164			$	86,726			$	247,356			$	16,770			$	215,236			$	51,028			$	638,280
Performing		$	20,340			$	85,744			$	235,130			$	14,902			$	207,502			$	50,398			$	614,016
Nonperforming			824				982				12,226				1,868				7,734				630				24,264
Total		$	21,164			$	86,726			$	247,356			$	16,770			$	215,236			$	51,028			$	638,280

 

The portfolio segments in each credit risk grade as of December 31, 2015 are as follows (000s omitted):

 

Credit Quality Indicators as of December 31, 2015

Credit Risk by Internally Assigned Grade

 

		Agriculture and Agricultural Real Estate				Commercial				Commercial Real Estate				Construction Real Estate				Residential Real Estate				Consumer and Other				Total
Not Rated		$	102			$	2,173			$	310			$	6,789			$	136,049			$	32,461			$	177,884
10			-				2,717				-				-				60				-				2,777
20			306				359				533				-				-				366				1,564
30			432				17,024				7,620				-				373				-				25,449
40			14,413				55,204				184,504				6,548				62,347				7,453				330,469
45			840				1,094				6,506				74				2,957				-				11,471
50			1,340				3,428				23,678				2,163				3,948				18				34,575
55			929				-				3,700				-				-				-				4,629
60			881				2,439				16,369				345				8,255				201				28,490
70			-				-				-				-				-				-				-
80			-				-				-				-				-				-				-
90			-				-				-				-				-				-				-
Total		$	19,243			$	84,438			$	243,220			$	15,919			$	213,989			$	40,499			$	617,308
Performing		$	18,362			$	83,372			$	228,624			$	14,104			$	205,430			$	39,869			$	589,761
Nonperforming			881				1,066				14,596				1,815				8,559				630				27,547
Total		$	19,243			$	84,438			$	243,220			$	15,919			$	213,989			$	40,499			$	617,308

 

 

Loans are considered past due when contractually required payment of interest or principal has not been received. The amount classified as past due is the entire principal balance outstanding of the loan, not just the amount of payments that are past due. The following is a summary of past due loans as of June 30, 2016 and December 31, 2015 (000s omitted):

 

June 30, 2016		30-59 Days Past Due				60-89 Days Past Due				>90 Days Past Due				Total Past Due				Current				Total Loans				Recorded Investment >90 Days Past Due and Accruing
Agriculture and Agricultural Real Estate		$	-			$	-			$	213			$	213			$	20,951			$	21,164			$	-
Commercial			39				1				69				109				86,617				86,726				41
Commercial Real Estate			696				323				1,613				2,632				244,724				247,356				-
Construction Real Estate			-				242				-				242				16,528				16,770				-
Residential Real Estate			1,581				543				909				3,033				212,203				215,236				-
Consumer and Other			140				1				59				200				50,828				51,028				-
Total		$	2,456			$	1,110			$	2,863			$	6,429			$	631,851			$	638,280			$	41

 

 

December 31, 2015		30-59 Days Past Due				60-89 Days Past Due				>90 Days Past Due				Total Past Due				Current				Total Loans				Recorded Investment >90 Days Past Due and Accruing
Agriculture and Agricultural Real Estate		$	136			$	213			$	44			$	393			$	18,850			$	19,243			$	-
Commercial			10				75				76				161				84,277				84,438				4
Commercial Real Estate			2,194				230				2,123				4,547				238,673				243,220				-
Construction Real Estate			-				-				-				-				15,919				15,919				-
Residential Real Estate			2,252				227				464				2,943				211,046				213,989				-
Consumer and Other			130				81				52				263				40,236				40,499				-
Total		$	4,722			$	826			$	2,759			$	8,307			$	609,001			$	617,308			$	4

 

Loans are placed on non-accrual status when, in the opinion of Management, the collection of additional interest is doubtful. Loans are automatically placed on non-accrual status upon becoming ninety days past due, however, loans may be placed on non-accrual status regardless of whether or not they are past due. All cash received on non-accrual loans is applied to the principal balance. Loans are considered for return to accrual status on an individual basis when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

The following is a summary of non-accrual loans as of June 30, 2016 and December 31, 2015 (000s omitted):

 

 

		June 30, 2016				December 31, 2015
Agriculture and Agricultural Real Estate		$	213			$	565
Commercial			159				148
Commercial Real Estate			4,286				4,823
Construction Real Estate			124				46
Residential Real Estate			2,606				2,915
Consumer and Other			134				136
Total		$	7,522			$	8,633

 

For loans deemed to be impaired due to an expectation that all contractual payments will probably not be received, impairment is measured by comparing the Bank’s recorded investment in the loan to the present value of expected cash flows discounted at the loan’s effective interest rate, the fair value of the collateral, or the loan’s observable market price.

 

 

The following is a summary of impaired loans as of June 30, 2016 and 2015 (000s omitted):

 

June 30, 2016		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment for the Three Months Ended				Interest Income Recognized in the Three Months Ended				Average Recorded Investment for the Six Months Ended				Interest Income Recognized in the Six Months Ended
With no related allowance recorded:
Agriculture and Agricultural Real Estate		$	1,017			$	1,216			$	-			$	1,026			$	10			$	1,028			$	25
Commercial			142				192				-				146				3				148				5
Commercial Real Estate			6,970				7,555				-				7,217				70				7,255				133
Construction Real Estate			107				139				-				127				2				130				4
Residential Real Estate			4,022				4,367				-				4,292				47				4,335				98
Consumer and Other			33				33				-				34				1				35				1
With an allowance recorded:
Agriculture and Agricultural Real Estate			349				379				1				352				3				417				3
Commercial			681				756				468				726				8				754				17
Commercial Real Estate			3,835				4,100				447				4,140				44				4,272				98
Construction Real Estate			1,672				1,671				262				1,676				19				1,681				38
Residential Real Estate			3,190				3,238				309				3,269				26				3,292				63
Consumer and Other			463				485				188				467				6				471				11
Total:
Agriculture and Agricultural Real Estate		$	1,366			$	1,595			$	1			$	1,378			$	13			$	1,445			$	28
Commercial			823				948				468				872				11				902				22
Commercial Real Estate			10,805				11,655				447				11,357				114				11,527				231
Construction Real Estate			1,779				1,810				262				1,803				21				1,811				42
Residential Real Estate			7,212				7,605				309				7,561				73				7,627				161
Consumer and Other			496				518				188				501				7				506				12

 

 

 

		Recorded Investment as of December 31, 2015				Unpaid Principal Balance as of December 31, 2015				Related Allowance as of December 31, 2015				Average Recorded Investment for the Three Months Ended June 30, 2015				Interest Income Recognized in the Three Months Ended June 30, 2015				Average Recorded Investment for the Six Months Ended June 30, 2015				Interest Income Recognized in the Six Months Ended June 30, 2015
With no related allowance recorded:
Agriculture and Agricultural Real Estate		$	-			$	-			$	-			$	-			$	-			$	-			$	-
Commercial			63				113				-				170				3				174				6
Commercial Real Estate			7,701				8,107				-				8,380				83				8,430				175
Construction Real Estate			200				233				-				211				1				247				3
Residential Real Estate			4,137				4,359				-				7,782				93				7,830				187
Consumer and Other			26				26				-				35				1				36				1
With an allowance recorded:
Agriculture and Agricultural Real Estate			882				885				240				904				12				911				24
Commercial			895				916				672				1,199				15				1,227				28
Commercial Real Estate			5,697				6,183				634				10,843				105				10,900				207
Construction Real Estate			1,609				1,609				277				1,823				21				1,828				42
Residential Real Estate			3,206				3,310				506				4,985				45				4,988				97
Consumer and Other			470				468				223				483				5				487				11
Total:
Agriculture and Agricultural Real Estate		$	882			$	885			$	240			$	904			$	12			$	911			$	24
Commercial			958				1,029				672				1,369				18				1,401				34
Commercial Real Estate			13,398				14,290				634				19,223				188				19,330				382
Construction Real Estate			1,809				1,842				277				2,034				22				2,075				45
Residential Real Estate			7,343				7,669				506				12,767				138				12,818				284
Consumer and Other			496				494				223				518				6				523				12

 

The Bank may agree to modify the terms of a loan in order to improve the Bank’s ability to collect amounts due. These modifications may include reduction of the interest rate, extension of the loan term, or in some cases, reduction of the principal balance. Modifications that are performed due to the debtor’s financial difficulties are considered Troubled Debt Restructurings (“TDRs”).

 

 

Loans that have been classified as TDRs during the three and six month periods ended June 30, 2016 and June 30, 2015 are as follows (000s omitted from dollar amounts):

 

		Three months ended June 30, 2016												Six months ended June 30, 2016
		Number of Contracts				Pre- Modification Recorded Principal Balance				Post- Modification Recorded Principal Balance				Number of Contracts				Pre- Modification Recorded Principal Balance				Post- Modification Recorded Principal Balance
Agriculture and Agricultural Real Estate			1			$	362			$	362				1			$	362			$	362
Commercial			-				-				-				-				-				-
Commercial Real Estate			-				-				-				-				-				-
Construction Real Estate			-				-				-				-				-				-
Residential Real Estate			6				251				250				7				451				447
Consumer and Other			1				57				57				1				57				57
Total			8			$	670			$	669				9			$	870			$	866

 

 

		Three months ended June 30, 2015												Six months ended June 30, 2015
		Number of Contracts				Pre- Modification Recorded Principal Balance				Post- Modification Recorded Principal Balance				Number of Contracts				Pre- Modification Recorded Principal Balance				Post- Modification Recorded Principal Balance
Agriculture and Agricultural Real Estate			-			$	-			$	-				-			$	-			$	-
Commercial			1				66				64				1				66				64
Commercial Real Estate			2				352				304				3				684				636
Construction Real Estate			-				-				-				-				-				-
Residential Real Estate			7				581				533				7				581				533
Consumer and Other			-				-				-				-				-				-
Total			10			$	999			$	901				11			$	1,331			$	1,233

 

The Bank considers TDRs that become past due under the modified terms as defaulted. There were no loans that became TDRs during the six month periods ended June 30, 2016 and June 30, 2015 that subsequently defaulted during the six month periods ended June 30, 2016 and June 30, 2015, respectively.

 

The Company has allocated $1,644,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings at June 30, 2016. In addition, there were no commitments to lend additional amounts to borrowers that are classified as troubled debt restructurings as of June 30, 2016 and June 30, 2015.