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Loans and Allowance for Loan Losses
 6 Months Ended
Jun. 30, 2012
Loans and Leases Receivable, Allowance [Abstract]  
Loans And Allowance For Loan Losses

 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 June 30, 2012 and December 31, 2011, was as follows:

                 
    June 30, 2012   December 31, 2011
                 
Commercial, financial and agricultural loans   $ 37,815,280       19.5 %   $ 36,677,906       20.2 %
Real estate:                                
Construction loans     19,336,261       9.9 %     13,224,081       7.3 %
Commercial mortgage loans     65,967,004       33.9 %     60,599,120       33.4 %
Residential loans     59,246,425       30.5 %     59,177,824       32.6 %
Agricultural loans     7,376,881       3.8 %     6,283,665       3.5 %
Consumer & other loans     4,627,463       2.4 %     5,369,787       3.0 %
        Loans Outstanding     194,369,314       100.0 %     181,332,383       100.0 %
                                 
Unearned interest and discount     (29,659 )             (30,069 )        
Allowance for loan losses     (2,910,218 )             (3,100,000 )        
      Net loans   $ 191,429,437             $ 178,202,314          

 

The Corporation’s only significant concentration of credit at June 30, 2012, occurred in real estate loans which totaled approximately $152 million. However, this amount was not concentrated in any specific segment within the market or geographic area. Average loans outstanding were $190,171,407 for the three months and $185,498,946 for the six months ended June 30, 2012.

 

Beginning in 2009, certain 1-4 family mortgage loans were pledged to Federal Home Loan Bank to secure outstanding advances. At June 30, 2012, $28,782,103 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 June 30, 2012.

 

   

Commercial,

Financial,

Agricultural and

Construction

     
Distribution of loans which are due:        
    In one year or less   $ 16,342,107  
    After one year but within five years     34,418,113  
    After five years     6,391,321  
         
         Total   $ 57,151,541  

 

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 June 30, 2012.

 

    Loans With        
    Predetermined   Loans With    
    Rates   Floating Rates   Total
             
Commercial, financial,            
agricultural and construction   $ 33,545,427   $ 7,264,007   $ 40,809,434

 

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
                                                     
  June 30, 2012     $ 3,201,802     $ 0     $ 0     $ 1,834,012     $ 5,035,814     $ 2,009,595  
  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 $3,201,802 and $1,153,242 at June 30, 2012 and December 31, 2011, respectively. There were no past due loans over ninety days and still accruing at June 30, 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 $35,559 and $19,796 as of June 30, 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 June 30, 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		   $ 108,714     $ 0     $ 108,714     $ 262,634     $ 37,443,932     $ 37,815,280  
Real estate:                                                
Construction loans     119,794       0       119,794       2,287,766       16,928,701       19,336,261  
Commercial mortgage loans     2,495,498       0       2,495,498       233,142       63,238,364       65,967,004  
Residential loans     1,110,597       0       1,110,597       412,271       57,723,557       59,246,425  
Agricultural loans     0       0       0       0       7,376,881       7,376,881  
Consumer & other loans     23,088       0       23,088       5,989       4,598,386       4,627,463  
                                                 
        Total loans   $ 3,857,691     $ 0     $ 3,857,691     $ 3,201,802     $ 187,309,821     $ 194,369,314  

 

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 June 30, 2012, and December 31, 2011, impaired loans amounted to $2,194,930 and $567,802, respectively. A reserve amount of $447,284 and $39,938 were recorded in the allowance for loan losses for these impaired loans as of June 30, 2012, and December 31, 2011, respectively.

 

The following table presents impaired loans, segregated by class of loans as of June 30, 2012:

 

June 30, 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		   $ 300,352     $ 0     $ 21,136     $ 21,136     $ 279,216     $ 74,678     $ 3,776  
Real estate:                                                        
Construction loans     157,570       0       74,099       74,099       83,471       29,888       2,059  
Commercial mortgage loans     823,931       184,895       562,582       747,477       76,454       107,295       11,327  
Residential loans     907,088       782,838       116,107       898,945       8,143       395,123       22,702  
Agricultural loans     0       0       0       0       0       0       0  
Consumer & other loans     5,989       5,989       0       5,989       0       16       0  
                                                         
        Total loans   $ 2,194,930     $ 973,722     $ 773,924     $ 1,747,646     $ 447,284     $ 607,000     $ 39,864  

  

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 June 30, 2012, all Grade 8 loans have been charged-off.

 

The following table presents internal loan grading by class of loans as of June 30, 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   $ 412,668     $ 0     $ 0     $ 30,029     $ 0     $ 374,931     $ 817,628  
Grade 2- Above Avg.     0       1,115,061       4,560       122,207       970,239       8,069       2,220,136  
Grade 3- Acceptable     26,776,177       6,106,276       31,116,667       37,727,863       4,611,571       3,109,901       109,448,455  
Grade 4- Fair     9,664,386       9,375,344       31,643,547       15,539,043       769,694       995,028       67,987,042  
Grade 5a- Watch     374,349       15,840       1,265,420       1,518,523       497,321       15,422       3,686,875  
Grade 5b- OAEM     18,794       6,066       97       621,029       465,340       66,778       1,178,104  
Grade 6- Substandard     568,906       2,717,674       1,936,713       3,632,045       62,716       57,334       8,975,388  
Grade 7- Doubtful     0       0       0       55,686       0       0       55,686  
                                                         
      Total loans   $ 37,815,280     $ 19,336,261     $ 65,967,004     $ 59,246,425     $ 7,376,881     $ 4,627,463     $ 194,369,314  

 

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 June 30, 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 charge-offs to average loans outstanding ratio was 0.93% for the three months and 0.43% for the six months ended June 30, 2012.

 

Three months ended June 30, 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,
March 31, 2012		   $ 296,262     $ 1,216,021     $ 1,128,616     $ 409,275     $ 0     $ 193,827     $ 3,244,001  
                                                         
Charge-offs     0       248,637       0       195,490       0       0       444,127  
Recoveries     799       0       716       3,206       0       623       5,344  
Net charge-offs     (799 )     248,637       (716 )     192,284       0       (623 )     438,783  
Provisions charged to operations     118,906       37,228       (80,426 )     52,767       0       (23,475 )     105,000  
Balance at end of period, June 30, 2012   $ 415,967     $ 1,004,612     $ 1,048,906     $ 269,758     $ 0     $ 170,975     $ 2,910,218  

 

Six months ended June 30, 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       248,637       6,348       208,045       0       9,557       476,789  
Recoveries     54,218       0       10,716       6,466       0       5,607       77,007  
Net charge-offs     (50,016 )     248,637       (4,368 )     201,579       0       3,950       399,782  
Provisions charged to operations     (26,271 )     130,599       (2,289 )     105,882       0       2,079       210,000  
Balance at end of period, June 30, 2012   $ 415,967     $ 1,004,612     $ 1,048,906     $ 269,758     $ 0     $ 170,975     $ 2,910,218  
                                                         
Ending balance -                                                        
Individually evaluated
for impairment		   $ 279,216     $ 83,471     $ 76,454     $ 8,143     $ 0     $ 0     $ 447,284  
Collectively evaluated for impairment     136,751       921,141       972,452       261,615       0       170,975       2,462,934  
Balance at end of period   $ 415,967     $ 1,004,612     $ 1,048,906     $ 269,758     $ 0     $ 170,975     $ 2,910,218  
                                                         
Loans :                                                        
Ending balance -                                                        
Individually evaluated
for impairment		   $ 303,622     $ 2,407,560     $ 3,038,575     $ 3,639,473     $ 0     $ 5,989     $ 9,395,219  
Collectively evaluated for impairment     37,511,658       16,928,701       62,928,429       55,606,952       7,376,881       4,621,474       184,974,095  
Balance at end of period   $ 37,815,280     $ 19,336,261     $ 65,967,004     $ 59,246,425     $ 7,376,881     $ 4,627,463     $ 194,369,314  

 

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.

 

    June 30,   December 31,
    2012   2011
                 
Allowance for loss on impaired loans   $ 447,284     $ 39,938  
Recorded balance of impaired loans   $ 2,194,930     $ 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 $97,000 for the periods ended June 30, 2012, and 2011, respectively.