Loans

9 Months Ended

Sep. 30, 2012

Loans

Note 6.  Loans

The composition of net loans at September 30, 2012 and December 31, 2011 is as follows:

	September 30, 2012			December 31, 2011
	(In Thousands)
Real Estate:
Land Development and Construction	$	11,280		$	13,480
Farmland		32,986			35,912
1-4 Family Mortgages		119,297			133,987
Commercial Real Estate		131,906			129,387
Total Real Estate Loans		295,469			312,766
Business Loans:
Commercial and Industrial Loans		50,802			36,581
Farm Production and Other Farm Loans		1,515			1,579
Total Business Loans		52,317			38,160
Consumer Loans:
Credit Cards		976			995
Other Consumer Loans		29,680			37,545
Total Consumer Loans		30,656			38,540
Total Gross Loans		378,442			389,466
Unearned income		(242	)		(204	)
Allowance for loan losses		(7,449	)		(6,681	)
Loans, net	$	370,751		$	382,581

Loans are considered to be past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status, when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether such loans are considered past due. When interest accruals are discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Period-end non-accrual loans, segregated by class of loans, were as follows:

	September 30, 2012		December 31, 2011
	(in thousands)
Real Estate:
Land Development and Construction	$	234	$	1,134
Farmland		843		641
1-4 Family Mortgages		2,525		1,966
Commercial Real Estate		10,471		6,818
Total Real Estate Loans		14,073		10,559
Business Loans:
Commercial and Industrial Loans		174		284
Farm Production and Other Farm Loans		5		21
Total Business Loans		179		305
Consumer Loans:
Other Consumer Loans		248		435
Total Consumer Loans		248		435
Total Non-Accrual Loans	$	14,500	$	11,299

An aging analysis of past due loans, segregated by class of loans, as of September 30, 2012, was as follows (in thousands):

	Loans 30-89 Days Past Due		Loans 90 or more Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or more Days Past Due
Real Estate:
Land Development and Construction	$	77	$	—	$	77	$	11,203	$	11,280	$	—
Farmland		552		347		899		32,087		32,986		—
1-4 Family Mortgages		4,625		897		5,522		113,775		119,297		49
Commercial Real Estate		3,030		4,672		7,702		124,204		131,906		—
Total Real Estate Loans		8,284		5,916		14,200		281,269		295,469		49
Business Loans:
Commercial and Industrial Loans		420		8		428		50,374		50,802		—
Farm Production and Other Farm Loans		23		—		23		1,492		1,515		—
Total Business Loans		443		8		451		51,866		52,317		—
Consumer Loans:
Credit Cards		51		28		79		897		976		28
Other Consumer Loans		1,300		58		1,358		28,322		29,680		43
Total Consumer Loans		1,351		86		1,437		29,219		30,656		71
Total Loans	$	10,078	$	6,010	$	16,088	$	362,354	$	378,442	$	120

An aging analysis of past due loans, segregated by class of loans, as of December 31, 2011 was as follows (in thousands):

	Loans 30-89 Days Past Due		Loans 90 or more Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or more Days Past Due
Real Estate:
Land Development and Construction	$	30	$	562	$	592	$	12,888	$	13,480	$	39
Farmland		1,061		139		1,200		34,712		35,912		—
1-4 Family Mortgages		5,774		822		6,596		127,391		133,987		80
Commercial Real Estate		4,941		4,855		9,796		119,591		129,387		109
Total Real Estate Loans		11,806		6,378		18,184		294,582		312,766		228
Business Loans:
Commercial and Industrial Loans		294		99		393		36,188		36,581		—
Farm Production and Other Farm Loans		13		6		19		1,560		1,579		—
Total Business Loans		307		105		412		37,748		38,160		—
Consumer Loans:
Credit Cards		20		17		37		958		995		17
Other Consumer Loans		1,858		252		2,110		35,435		37,545		24
Total Consumer Loans		1,878		269		2,147		36,393		38,540		41
Total Loans	$	13,991	$	6,752	$	20,743	$	368,723	$	389,466	$	269

Loans are considered impaired when, based on current information and events, it is probable the Corporation will be unable to collect all the amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. In determining which loans to evaluate for impairment, management looks at past due loans, bankruptcy filing and any situation that might lend itself to cause a borrower to be unable to repay the loan according to the original contract terms. If a loan is determined to be impaired and the collateral is deemed to be insufficient to fully repay the loan, a specific reserve will be established. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans or portions thereof, are charged-off when deemed uncollectible.

Impaired loans as of September 30, 2012 and December 31, 2011, by class of loans, are as follows (in thousands):

September 30, 2012	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Real Estate:
Land Development and Construction	$	234	$	106	$	128	$	234	$	117	$	356
Farmland		843		701		142		843		24		700
1-4 Family Mortgages		2,525		1,732		793		2,525		220		2,472
Commercial Real Estate		10,471		4,846		5,625		10,471		1,326		8,750
Total Real Estate Loans		14,073		7,385		6,688		14,073		1,687		12,278
Business Loans:
Commercial and Industrial Loans		174		76		98		174		57		206
Farm Production and Other Farm Loans		5		5		—		5		—		9
Total Business Loans		179		81		98		179		57		215
Consumer Loans:
Other Consumer Loans		248		248		—		248		—		277
Total Consumer Loans		248		248		—		248		—		277
Total Loans	$	14,500	$	7,714	$	6,786	$	14,500	$	1,744	$	12,770

December 31, 2011	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Real Estate:
Land Development and Construction	$	1,134	$	992	$	142	$	1,134	$	134	$	883
Farmland		641		492		149		641		24		588
1-4 Family Mortgages		2,066		1,297		769		2,066		216		1,933
Commercial Real Estate		6,818		5,042		1,776		6,818		736		6,896
Total Real Estate Loans		10,659		7,823		2,836		10,659		1,110		10,300
Business Loans:
Commercial and Industrial Loans		284		163		121		284		57		860
Farm Production and Other Farm Loans		21		21		—		21		—		19
Total Business Loans		305		184		121		305		57		879
Consumer Loans:
Other Consumer Loans		435		430		5		435		—		321
Total Consumer Loans		435		430		5		435		—		321
Total Loans	$	11,399	$	8,437	$	2,962	$	11,399	$	1,167	$	11,500

The Corporation utilizes a risk grading matrix to assign a risk grade to each of its loans when originated and is updated as factors related to the strength of the loan changes. Loans are graded on a scale of 1 to 9. A description of the general characteristics of the 9 risk grades is as follows.

Grade 1. MINIMAL RISK - These loans are without loss exposure to the Corporation. This classification is reserved for only the best, well secured loans to borrowers with significant capital strength, low leverage, stable earnings and growth and other readily available financing alternatives. This type of loan would also include loans secured by a program of the government.

Grade 2. MODEST RISK - These loans include borrowers with solid credit quality and moderate risk of loss. These loans may be fully secured by certificates of deposit with another reputable financial institution, or secured by readily marketable securities with acceptable margins.

Grade 3. AVERAGE RISK - This is the rating assigned to most of the loans held by the Corporation. This includes loans with average loss exposure and average overall quality. These loans should liquidate through possessing adequate collateral and adequate earnings of the borrower. In addition, these loans are properly documented and are in accordance with all aspects of the current loan policy.

Grade 4. ACCEPTABLE RISK - Borrower generates sufficient cash flow to fund debt service but most working asset and capital expansion needs are provided from external sources. Profitability and key balance sheet ratios are usually close to peers but one or more may be higher than peers.

Grade 5. MANAGEMENT ATTENTION - Borrower has significant weaknesses resulting from performance trends or management concerns. The financial condition of the borrower has taken a negative turn and may be temporarily strained. Cash flow is weak but cash reserves remain adequate to meet debt service. Management weakness is evident.

Grade 6. OTHER LOANS ESPECIALLY MENTIONED (OLEM) - Loans in this category are fundamentally sound but possess some weaknesses. OLEM loans have potential weaknesses which may, if not checked or corrected, weaken the asset or inadequately protect the bank’s credit position at some future date. These loans have an identifiable weakness in credit, collateral, or repayment ability but there is no expectation of loss.

Grade 7. SUBSTANDARD ASSETS - Assets classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets classified as substandard must have a well-defined weakness based upon objective evidence. Assets classified as substandard are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. The possibility that liquidation would not be timely requires a substandard classification even if there is little likelihood of total loss.

Grade 8. DOUBTFUL - A loan classified as doubtful has all the weaknesses of a substandard classification and the added characteristic that the weakness makes collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable or improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors which may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. A doubtful classification could reflect the fact that the primary source of repayment is gone and serious doubt exists as to the quality of a secondary source of repayment.

Grade 9. LOSS - Loans classified loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may occur in the future. Also included in this classification is the defined loss portion of loans rated substandard assets and doubtful assets.

These internally assigned grades are updated on a continual basis throughout the course of the year and represent management’s most updated judgment regarding grades at September 30, 2012.

The following table details the amount of gross loans by loan grade and class as of September 30, 2012 (in thousands):

Grades	Satisfactory 1, 2, 3, 4		Special Mention 5,6		Substandard 7		Doubtful 8		Loss 9		Total Loans
Real Estate:
Land Development and Construction	$	8,946	$	1,906	$	428	$	—	$	—	$	11,280
Farmland		28,574		2,797		1,615		—		—		32,986
1-4 Family Mortgages		100,826		5,783		12,688		—		—		119,297
Commercial Real Estate		108,248		6,865		16,793		—		—		131,906
Total Real Estate Loans		246,594		17,351		31,524		—		—		295,469
Business Loans:
Commercial and Industrial Loans		36,686		1,108		675		30		—		38,499
Farm Production and Other Farm Loans		1,433		29		53		—		—		1,515
Total Business Loans		38,119		1,137		728		30		—		40,014
Consumer Loans:
Credit Cards		948		—		28		—		—		976
Other Consumer Loans		40,528		314		1,112		29		—		41,983
Total Consumer Loans		41,476		314		1,140		29		—		42,959
Total Loans	$	324,869	$	18,802	$	33,392	$	59	$	—	$	378,442

The following table details the amount of gross loans by loan grade and class as of December 31, 2011 (in thousands):

Grades	Satisfactory 1, 2, 3,4		Mention 5,6		Substandard 7		Doubtful 8		Loss 9		Total Loans
Real Estate:
Land Development and Construction	$	9,647	$	2,290	$	1,481	$	—	$	62	$	13,480
Farmland		31,405		3,043		1,464		—		—		35,912
1-4 Family Mortgages		115,365		5,784		12,811		27		—		133,987
Commercial Real Estate		108,347		7,188		13,852		—		—		129,387
Total Real Estate Loans		264,764		18,305		29,608		27		62		312,766
Business Loans:
Commercial and Industrial Loans		27,970		7,712		863		36		—		36,581
Farm Production and Other Farm Loans		1,481		8		90		—		—		1,579
Total Business Loans		29,451		7,720		953		36		—		38,160
Consumer Loans:
Credit Cards		978		—		17		—		—		995
Other Consumer Loans		35,859		325		1,304		53		4		37,545
Total Consumer Loans		36,837		325		1,321		53		4		38,540
Total Loans	$	331,052	$	26,350	$	31,882	$	116	$	66	$	389,466

The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio.

The allowance on the majority of the loan portfolio is calculated using a historical chargeoff percentage applied to the current loan balances by loan segment. This historical period is the average of the previous 5 years with the most current years weighted to show the effect of the most recent chargeoff activity. This percentage is also adjusted for economic factors such as local unemployment and general business conditions, both local and nationwide.

The group of loans that are considered to be impaired are individually evaluated for possible loss and a specific reserve is established to cover any loss contingency. Loans that are determined to be a loss with no benefit of remaining in the portfolio are charged off to the allowance. These specific reserves are reviewed periodically for continued impairment and adequacy of the specific reserve and adjusted when necessary.

The following table details activity in the allowance for possible loan losses by portfolio segment for the nine months ended September 30, 2012:

September 30, 2012	Real Estate		Business Loans		Consumer		Total
Beginning Balance, January 1, 2012	$	4,176,475	$	1,672,467	$	832,470	$	6,681,412
Provision for possible loan losses		1,204,314		15,456		108,691		1,328,461
Chargeoffs		511,610		55,260		200,144		767,014
Recoveries		49,440		50,332		106,801		206,573
Net Chargeoffs		462,170		4,928		93,343		560,441
Ending Balance	$	4,918,619	$	1,682,995	$	847,818	$	7,449,432
Period end allowance allocated to:
Loans individually evaluated for impairment	$	1,686,862	$	57,325	$	—	$	1,744,187
Loans collectively evaluated for impairment		3,231,757		1,625,670		847,818		5,705,245
Ending Balance, September 30, 2012	$	4,918,619	$	1,682,995	$	847,818	$	7,449,432

Activity in the allowance for possible loan losses for the nine months ended September 30, 2011 was as follows:

	September 30, 2011
Balance, beginning of period	$	6,379,070
Provision for possible loan losses		2,586,707
Chargeoffs		(1,658,080	)
Recoveries		96,721
Balance, end of period	$	7,404,418

The Corporation’s recorded investment in loans as of September 30, 2012 and December 31, 2011 related to each balance in the allowance for possible loan losses by portfolio segment and disaggregated on the basis of the Corporation’s impairment methodology was as follows (in thousands):

September 30, 2012	Real Estate		Business Loans		Consumer		Total
Loans individually evaluated for specific impairment	$	14,073	$	179	$	248	$	14,500
Loans collectively evaluated for general impairment		281,396		39,835		42,711		363,942
	$	295,469	$	40,014	$	42,959	$	378,442
December 31, 2011	Real Estate		Business Loans		Consumer		Total
Loans individually evaluated for specific impairment	$	10,659	$	305	$	435	$	11,399
Loans collectively evaluated for general impairment		302,107		37,855		38,105		378,067
	$	312,766	$	38,160	$	38,540	$	389,466