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Loans and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2012

NOTE 4

Loans and Allowance for Loan Losses

The composition of the Corporation’s loan portfolio and the percentage of loans in each category to total loans at March 31, 2012 and December 31, 2011, was as follows:


	March 31, 2012					December 31, 2011

Commercial, financial and agricultural loans	$	36,356,719		19.8	%	$	36,677,906		20.2	%
Real estate:
Construction loans		15,560,460		8.4	%		13,224,081		7.3	%
Commercial mortgage loans		62,264,526		33.8	%		60,599,120		33.4	%
Residential loans		58,653,188		31.8	%		59,177,824		32.6	%
Agricultural loans		7,256,882		3.9	%		6,283,665		3.5	%
Consumer & other loans		4,244,965		2.3	%		5,369,787		3.0	%

Loans Outstanding		184,336,740		100.0	%		181,332,383		100.0	%

Unearned interest and discount		(29,411	)				(30,069	)
Allowance for loan losses		(3,244,001	)				(3,100,000	)
Net loans	$	181,063,328				$	178,202,314

The Corporation’s only significant concentration of credit at March 31, 2012, occurred in real estate loans which totaled approximately $144 million. However, this amount was not concentrated in any specific segment within the market or geographic area. Average loans outstanding were $180,796,479 for the three months ended March 31, 2012.

Beginning in 2009, certain 1-4 family mortgage loans were pledged to Federal Home Loan Bank to secure outstanding advances. At March 31, 2012, $27,295,076 loans were pledged in this capacity.

The following table shows maturities as well as interest sensitivity of the commercial, financial, agricultural, and construction loan portfolio at March 31, 2012.

		Commercial, Financial, Agricultural and Construction

Distribution of loans which are due:
In one year or less	$	15,158,553
After one year but within five years		32,281,510
After five years		4,477,116

Total	$	51,917,179

The following table shows, for such loans due after one year, the amounts which have predetermined interest rates and the amounts which have floating or adjustable interest rates at March 31, 2012.

	Loans With
	Predetermined			Loans With
	Rates			Floating Rates	Total

Commercial, financial,
agricultural and construction	$	29,595,207	$	7,163,419	$	36,758,626

The following table presents information concerning outstanding balances of nonaccrual, past-due, renegotiated and potential problem loans as well as foreclosed assets for the indicated period.

	Nonaccrual Loans		Past-Due Loans		Renegotiated Loans		Potential Problem Loans		Total		Foreclosed Assets

March 31, 2012	$	650,924	$	0	$	0	$	1,475,755	$	2,126,679	$	2,326,695
December 31, 2011	$	1,153,242	$	0	$	0	$	933,962	$	2,087,204	$	2,357,695

Appraisal Policy

When a loan is first identified as a problem loan, the appraisal is reviewed to determine if the appraised value is still appropriate for the collateral. For the duration that a loan is considered a problem loan, the appraised value of the collateral is monitored on a quarterly basis. If significant changes occur in market conditions or in the condition of the collateral, a new appraisal will be obtained.

Nonaccrual Policy

The Corporation does not accrue interest on any loan (1) that is maintained on a cash basis due to the deteriorated financial condition of the borrower, (2) for which payment in full of principal or interest is not expected, or (3) upon which principal or interest has been past due for ninety days or more unless the loan is well secured and in the process of collection.

A loan subsequently placed on nonaccrual status may be returned to accrual status if (1) all past due interest and principal is paid with expectations of any remaining contractual principal and interest being repaid or (2) the loan becomes well secured and in the process of collection.

Loans placed on nonaccrual status amounted to $650,924 and $1,153,242 at March 31, 2012 and December 31, 2011, respectively. There were no past due loans over ninety days and still accruing at March 31, 2012 or December 31, 2011. The accrual of interest is discontinued when the loan is placed on nonaccrual. Interest income that would have been recorded on these nonaccrual loans in accordance with their original terms totaled $5,736 and $19,796 as of March 31, 2012, and December 31, 2011, respectively.

The following table presents an age analysis of past due loans and nonaccrual loans segregated by class of loans. We do not have any accruing loans that are 90 days or more past due.

	Age Analysis of Past Due Loans As of March 31, 2012
		30-89 Days Past Due		Greater than 90 Days		Total Past Due Loans		Nonaccrual Loans		Current Loans		Total Loans

Commercial, financial and agricultural loans	$	97,329	$	0	$	97,329	$	288,490	$	35,970,900	$	36,356,719
Real estate:
Construction loans		2,657,149		0		2,657,149		50,000		12,853,311		15,560,460
Commercial mortgage loans		957,247		0		957,247		302,342		61,004,937		62,264,526
Residential loans		2,166,052		0		2,166,052		0		56,487,136		58,653,188
Agricultural loans		0		0		0		0		7,256,882		7,256,882
Consumer & other loans		52,387		0		52,387		10,092		4,182,486		4,244,965

Total loans	$	5,930,164	$	0	$	5,930,164	$	650,924	$	177,755,652	$	184,336,740

Impaired Loans

A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

At March 31, 2012, and December 31, 2011, impaired loans amounted to $1,755,598 and $567,802, respectively. A reserve amount of $426,476 and $39,938 were recorded in the allowance for loan losses for these impaired loans as of March 31, 2012, and December 31, 2011, respectively.

The following table presents impaired loans, segregated by class of loans as of March 31, 2012:

March 31, 2012		Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Year-to-date Average Recorded Investment		Interest Income Received During Impairment

Commercial, financial and agricultural loans	$	288,490	$	15,410	$	0	$	15,410	$	273,080	$	3,915	$	0
Real estate:
Construction loans		50,000		50,000		0		50,000		0		137		0
Commercial mortgage loans		302,341		302,341		0		302,341		0		29,841		0
Residential loans		1,104,676		559,736		391,544		951,280		153,396		171,261		9,093
Agricultural loans		0		0		0		0		0		0		0
Consumer & other loans		10,091		10.091		0		10,091		0		28		0

Total loans	$	1,755,598	$	937,578	$	391,544	$	1,329,122	$	426,476	$	205,182	$	9,093

Credit Risk Monitoring and Loan Grading

The Corporation employs several means to monitor the risk in the loan portfolio including volume and severity of loan delinquencies, nonaccrual loans, internal grading of loans, historical loss experience and economic conditions.

Loans are subject to an internal risk grading system which indicates the risk and acceptability of that loan. The loan grades used by the Corporation are for internal risk identification purposes and do not directly correlate to regulatory classification categories or any financial reporting definitions.

The general characteristics of the risk grades are as follows:

Grade 1 – Exceptional – Loans graded 1 are characterized as having a very high credit quality, exhibit minimum risk to the Corporation and have low administrative cost. These loans are usually secured by highly liquid and marketable collateral and a strong primary and secondary source of repayment is available.

Grade 2 – Above Average – Loans graded 2 are basically sound credits secured by sound assets and/or backed by the financial strength of borrowers of integrity with a history of satisfactory payments of credit obligations.

Grade 3 – Acceptable – Loans graded 3 are secured by sound assets of sufficient value and/or supported by the sufficient financial strength of the borrower. The borrower will have experience in their business area or employed a reasonable amount of time at their current employment. The borrower will have a sound primary source of repayment, and preferably a secondary source, which will allow repayment in a prompt and reasonable period of time.

Grade 4 – Fair – Loans graded 4 are those which exhibit some weakness or downward trend in financial condition and although the repayment history is satisfactory, it requires supervision by bank personnel. The borrower may have little experience in their business area or employed only a short amount of time at their current employment. The loan may be secured by good collateral; however, it may require close supervision as to value and/or quality and may not have sufficient liquidation value to completely cover the loan.

Grade 5a – Watch – Loans graded 5a contain a discernible weakness; however, the weakness is not sufficiently pronounced so as to cause concern for the possible loss of interest or principal. Loans in this category may exhibit outward signs of stress, such as slowness in financial disclosures or recent payments. However, such signs are not of long duration or of sufficient severity that default appears imminent. Loans in this category are not so deficient as to cause alarm, but do require close monitoring for further deterioration and possible downgrade.

Grade 5b – Other Assets Especially Mentioned (OAEM) – Loans graded 5b may otherwise be classified more severely except that the loan is well secured by properly margined collateral, it is generally performing in accordance with the original contract or modification thereof and such performance has seasoned for a period of 90 days, or the ultimate collection of all principal and interest is reasonably expected. Loans in this grade are unsupported by sufficient evidence of the borrower’s sound net worth or repayment capacity or may be subject to third party action that would cause concern for future prompt repayment.

Grade 6 – Substandard – Loans graded 6 contain clearly pronounced credit weaknesses that are below acceptable credit standards for the Corporation. Such weaknesses may be due to either collateral deficiencies or inherent financial weakness of the borrower, but in either case represents less than acceptable credit risk. Loans in this grade are unsupported by sufficient evidence of the borrower’s sound net worth, repayment capacity or acceptable collateral.

Grade 7 – Doubtful – Loans graded 7 have such a pronounced credit weaknesses that the Corporation is clearly exposed to a significant degree of potential loss of principal or interest. Theses loan generally have a defined weakness which jeopardizes the ultimate repayment of the debt.

Grade 8 – Loss – Loans graded 8 are of such deteriorated credit quality that repayment of principal and interest can no longer be considered. These loans are of such little value that their continuance as an active bank asset is not warranted. As of March 31, 2012, all Grade 8 loans have been charged-off.

The following table presents internal loan grading by class of loans as of March 31, 2012:

		Commercial, Financial, and Agricultural		Construction Real Estate		Commercial Real Estate		Residential Real Estate		Agricultural Real Estate		Consumer and Other		Total
Rating:
Grade 1- Exceptional	$	343,430	$	0	$	0	$	30,244	$	0	$	382,766	$	756,440
Grade 2- Above Avg.		77,500		1,132,774		6,456		124,163		970,239		9,631		2,320,763
Grade 3- Acceptable		26,018,704		8,149,641		34,805,153		37,712,360		4,491,981		2,862,434		114,040,273
Grade 4- Fair		7,688,580		3,403,764		25,454,997		14,227,828		762,369		827,415		52,364,953
Grade 5a- Watch		1,890,169		16,466		34,128		1,905,514		503,435		20,785		4,370,497
Grade 5b- OAEM		21,371		6,960		4,380		738,299		465,340		21,778		1,258,128
Grade 6- Substandard		280,794		2,850,855		1,959,412		3,914,780		63,518		110,064		9,179,423
Grade 7- Doubtful		36,171		0		0		0		0		10,092		46,263

Total loans	$	36,356,719	$	15,560,460	$	62,264,526	$	58,653,188	$	7,256,882	$	4,244,965	$	184,336,740

Allowance for Loan Losses Methodology

The allowance for loan losses (ALL) is determined by a calculation based on segmenting the loans into the following categories: (1) impaired loans and nonaccrual loans, (2) loans with a credit risk rating of 5b, 6, 7 or 8, (3) other outstanding loans, and (4) other commitments to lend. In addition, unallocated general reserves are estimated based on migration and economic analysis of the loan portfolio.

The ALL is calculated by the addition of the estimated loss derived from each of the above categories. All nonaccrual loans regardless of size, all watch list loans greater than $50,000 that are also past-due, and all watch list loans greater than $500,000 are analyzed on an individual basis to determine if the future collateral value is sufficient to support the outstanding debt of the loan. If an estimated loss is calculated, it is included in the estimated ALL until it is charged to the loan loss reserve. The calculation for loan risk graded 5b, 6, 7 or 8, other outstanding loans and other commitments to lend is based on assigning an estimated loss factor based on a twelve quarter rolling historical net loss rate. The estimated requirement for unallocated general reserves from migration and economic analysis is determined by considering (1) trends in asset quality, (2) level and trends in charge-off experience, (3) macro-economic trends and conditions, (4) micro economic trends and conditions and (5) risk profile of lending activities. Within each of these categories, a high risk factor percentage and a low risk factor percentage from a rating of excessive, high, moderate or low will be determined by management and applied to the loan portfolio. This results in a high and low range of the estimated reserves required. By adding the estimated high and low value from the migration and economic analysis to the estimated reserve from the loan portfolio, a high and low range of total estimated loss reserves is obtained. This amount is then compared to the actual amount in the loan loss reserve.

The calculation of ALL is performed on a monthly basis and is presented to the Loan Committee and the Board of Directors.

The following table details activity in the ALL and loans evaluated for impairment by class of loans for the three month period ended March 31, 2012. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. The annualized net recoveries to average loans outstanding ratio was 0.09% for the three months ended March 31, 2012.

Three months ended March 31, 2012:

		Commercial, Financial, and Agricultural			Construction Real Estate		Commercial Real Estate			Residential Real Estate		Agricultural Real Estate		Consumer and Other		Total
Allowance for loan losses:
Beginning balance, December 31, 2011	$	392,222		$	1,122,650	$	1,046,827		$	365,455	$	0	$	172,846	$	3,100,000

Charge-offs		4,202			0		6,348			12,555		0		9,557		32,662
Recoveries		53,419			0		10,000			3,260		0		4,984		71,663
Net charge-offs		(49,217	)		0		(3,652	)		9,295		0		4,573		(39,001	)
Provisions charged to operations		(145,177	)		93,371		78,137			53,115		0		25,554		105,000
Balance at end of period, March 31, 2012	$	296,262		$	1,216,021	$	1,128,616		$	409,275	$	0	$	193,827	$	3,244,001

Ending balance -
Individually evaluated for impairment	$	273,080		$	0	$	0		$	153,396	$	0	$	0	$	426,476
Collectively evaluated for impairment		23,182			1,216,021		1,128,616			255,879		0		193,827		2,817,525
Balance at end of period	$	296,262		$	1,216,021	$	1,128,616		$	409,275	$	0	$	193,827	$	3,244,001

Loans :
Ending balance -
Individually evaluated for impairment	$	288,490		$	2,548,637	$	2,291,767		$	3,796,865	$	0	$	10,092	$	8,935,851
Collectively evaluated for impairment		36,068,229			13,011,823		59,972,759			54,856,323		7,256,882		4,234,873		175,400,889
Balance at end of period	$	36,356,719		$	15,560,460	$	62,264,526		$	58,653,188	$	7,256,882	$	4,244,965	$	184,336,740

The following table details activity in the ALL and loans evaluated for impairment by class of loans for the year ended December 31, 2011.

		Commercial, Financial, and Agricultural		Construction Real Estate			Commercial Real Estate		Residential Real Estate		Agricultural Real Estate		Consumer and Other			Total
Allowance for loan losses:
Beginning balance, December 31, 2010	$	133,636	$	1,395,722		$	685,994	$	301,902	$	0	$	237,360		$	2,754,614

Charge-offs		235,776		0			445,583		112,869		0		12,817			807,045
Recoveries		62,993		0			74,330		20,912		0		10,529			168,764
Net charge-offs		172,783		0			371,253		91,957		0		2,288			638,281
Provisions charged to operations		431,369		(273,072	)		732,086		155,510		0		(62,226	)		983,667
Balance at end of period, December 31, 2011	$	392,222	$	1,122,650		$	1,046,827	$	365,455	$	0	$	172,846		$	3,100,000

Ending balance -
Individually evaluated for impairment	$	31,250	$	0		$	0	$	8,688	$	0	$	0		$	39,938
Collectively evaluated for impairment		360,972		1,122,650			1,046,827		356,767		0		172,846			3,060,062
Balance at end of period	$	392,222	$	1,122,650		$	1,046,827	$	365,455	$	0	$	172,846		$	3,100,000

Loans :
Ending balance -
Individually evaluated for impairment	$	212,367	$	2,597,598		$	5,906,030	$	1,319,683	$	622,387	$	0		$	10,658,065
Collectively evaluated for impairment		36,465,539		10,626,483			54,693,090		57,858,141		5,661,278		5,369,787			170,674,318
Balance at end of period	$	36,677,906	$	13,224,081		$	60,599,120	$	59,177,824	$	6,283,665	$	5,369,787		$	181,332,383

The following table is a summary of amounts included in the ALL for the impaired loans with specific reserves and the recorded balance of the related loans.

		March 31,		December 31,
		2012		2011

Allowance for loss on impaired loans	$	426,476	$	39,938
Recorded balance of impaired loans	$	1,755,598	$	567,802

Transfers from Loans

Transfers from loans to other real estate owned and repossessed assets are non-cash transactions, and are not included in the statements of cash flow. Such transfers totaled $306,000 and $0 for the periods ended March 31, 2012, and 2011, respectively.

- Definition

Disclosure of accounting policy for estimating the allowance for losses on loans and lease receivables. The disclosure may include (a) how the entity determines each element of the allowance, (b) which loans are evaluated individually and which loans are evaluated as a group, (c) how the entity determines both the allocated and unallocated portions of the allowance, (d) how the entity determines the loss factors applied to graded loans in order to develop a general allowance, and (e) what self-correcting mechanism the entity uses to reduce differences between estimated and actual losses.

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