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Loans and Allowance for Loan Losses
 12 Months Ended
Dec. 31, 2012
Loans and Leases Receivable, Allowance [Abstract]  
Loans and Allowance for Loan Losses

3. LOANS AND ALLOWANCE FOR LOAN LOSSES

 

The composition of the Corporation’s loan portfolio at December 31, 2012 and 2011 was as follows:

 

    2012     2011  
Commercial, financial and agricultural loans   $ 40,506,802     $  36,677,906  
                 
Real estate:                
Construction loans     16,988,817       13,224,081  
Commercial mortgage loans     70,059,410       60,599,120  
Residential loans     62,433,339       59,177,824  
Agricultural loans     10,169,251       6,283,665  
Consumer & other loans     4,009,497       5,369,787  
Loans Outstanding     204,167,116       181,332,383  
Unearned interest and discount     (30,100 )     (30,069 )
Allowance for loan losses     (2,844,903 )     (3,100,000 )
Net loans   $ 201,292,113     $ 178,202,314  

 

The Corporation’s only significant concentration of credit at December 31, 2012, occurred in real estate loans which totaled approximately $160 million. However, this amount was not concentrated in any specific segment within the market or geographic area.

 

At December 31, 2012, $30,075,017 1-4 family mortgage loans were pledged to FHLB to secure outstanding advances.

 

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 $25,187 and $1,153,242 at December 31,2012 and 2011, respectively. There were no past due loans over ninety days and still accruing at December 31, 2012 or 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 $0 and $19,796 as of year-end 2012 and 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 Loan
As of December 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   $ 317,692     $ 0     $ 317,692     $ 0     $ 40,189,110     $ 40,506,802  
Real estate:                                                
Construction loans     306,673       0       306,673       0       16,682,144       16,988,817  
Commercial mortgage loans     568,127       0       568,127       0       69,491,283       70,059,410  
Residential loans     4,923,435       0       4,923,435       25,187       57,484,717       62,433,339  
Agricultural loans     0       0       0       0       10,169,251       10,169,251  
Consumer & other loans     52,963       0       52,963       0       3,956,534       4,009,497  
Total loans   $ 6,168,890     $ 0     $ 6,168,890      $  25,187     $ 197,973,039     $ 204,167,116  

 

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 December 31, 2012 and 2011, impaired loans amounted to $2,189,199 and $567,802, respectively. A reserve amount of $245,811 and $39,938, respectively, was recorded in the allowance for loan losses for these impaired loans as of December 31, 2012 and 2011.

 

 The following table presents impaired loans, segregated by class of loans as of December 31, 2012 and 2011:

 

December 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   $ 53,634     $ 0     $ 20,396     $ 20,396      $ 33,238     $ 29,551     $ 1,878  
Real estate:                                                        
Construction loans     0       0       0       0       0       0       0  
Commercial mortgage loans     588,776       182,253       336,483       518,736       70,040       341,311       29,708  
Residential loans     1,536,147       0       1,399,107       1,399,107       137,040       743,770       63,470  
Agricultural loans     0       0       0       0       0       0       0  
Consumer & other loans     10,642       5,149       0       5,149       5,493       3,884       225  
Total loans   $ 2,189,122     $ 187,402     $ 1,755,986     $ 1,943,388      $ 245,811     $ 1,118,516     $ 95,281  
                                                         
December 31, 2011   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   $ 97,533     $ 0     $ 66,283      $  66,283     $ 31,250     $ 24,851     $ 1,169  
Real estate:                                                        
Construction loans     98,961       98,961       0       98,961       0       542       0  
Commercial mortgage loans     117,997       117,997       0       117,997       0       4,457,342       149,875  
Residential loans     253,311       128,515       116,108       244,623       8,688       63,957       2,655  
Agricultural loans     0       0       0       0       0       0       0  
Consumer & other loans     0       0,       0       0       0       0       0  
Total loans   $ 567,802     $ 345,473     $ 182,391     $ 527,864     $ 39,938     $  4,546,692     $ 153,699  

 

At December 31, 2012 and 2011, included in impaired loans were $52,190 and $12,897, respectively, of troubled debt restructurings.

 

Troubled Debt Restructurings (TDR)

 

Loans are considered to have been modified in a TDR when due to a borrower’s financial difficulty; the Corporation makes certain concessions to the borrower that it would not otherwise consider for new debt with similar risk characteristics. Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of the collateral. Each potential loan modification is reviewed individually and the terms of the loan are modified to meet the borrower’s specific circumstances at a point in time. Not all loan modifications are TDRs. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period.

 

Loan modifications are reviewed and recommended by the Corporation’s senior credit officer, who determines whether the loan meets the criteria for a TDR. The Loan Committee either approves or denies such requests.

 

Generally, the types of concessions granted to borrowers that are evaluated in determining whether the loan is classified as a TDR include:

 

●   Interest rate reductions - Occur when the stated interest rate is reduced to a nonmarket rate or a rate the borrower would not be able to obtain elsewhere under similar circumstances.
     
●   Amortization or maturity date changes - Result when the amortization period of the loan is extended beyond what is considered a normal amortization period for loans of similar type with similar collateral.
     
●   Principal reductions - Arise when the Corporation charge’s off a portion of the principal that is not fully collateralized and collectability is uncertain; however, this portion of principal may be recovered in the future under certain circumstances.

 

The following tables present the amount of troubled debt restructuring by loan class, classified separately as accrual and non-accrual at December 31, 2012 and 2011 as well as those currently paying under restructured terms and those that have defaulted under restructured terms as December 31, 2012 and 2011. Loans modified in a troubled debt restructuring are considered to be in default once the loan becomes 90 days past due.

 

    December 31 ,2012  
                Under restructured terms  
    Accruing     Non-accruing     #     Current     #     Default  
Commercial, financial, and agricultural loans   $ 39,277     $ 0       1     $ 39,227       0     $ 0  
                                                 
Real estate:                                                
Construction loans     82,171       0       0       0       1       82,171  
Residential loans     0                       0       0       0  
Commercial mortgage loans     43,351       0       0       0       1       43,351  
Agricultural loans     0       0       0       0       0       0  
Consumer & other loans     33,995       0       2       12,913       3       21,082  
Total TDR’s   $ 198,794     $ 0       3     $ 52,190       5     $ 146,604  

 

    December 31 ,2011  
                Under restructured terms  
    Accruing     Non-accruing     #     Current     #     Default  
Commercial, financial, and agricultural loans   $ 0     $ 0       0     $ 0       0     $ 0  
                                                 
Real estate:                                                
Construction loans     0       0       0       0       0       0  
Residential loans     0                       0       0       0  
Commercial mortgage loans     0       0       0       0       0       0  
Agricultural loans     0       0       0       0       0       0  
Consumer & other loans     39,598       0       4       39,598       0       0  
Total TDR’s   $ 39,598     $ 0       4     $ 39,598       0     $ 0  

 

The following table presents the amount of troubled debt restructurings by types of concessions made, classified separately as accrual and non-accrual at December 31, 2012 and 2011.

  

    December 31, 2012     December 31, 2011  
    Accruing     Non-accruing     Accruing     Non-accruing  
    #     Balance     #     Balance     #     Balance     #     Balance  
Type of concession:                                                                
Payment modification     1     $ 39,277       0     $ 0       0     $ 0       0     $ 0  
Rate reduction     4       138,435       0       0       4       39,598       0       0  
Rate reduction, payment medication     3       21,082       0       0       0       0       0       0  
Total     8     $ 198,794       0     $ 0       4     $ 39,598       0     $ 0  

 

As of December 31,2012 and 2011, the Corporation had a balance of $198,794 and $39,598, respectively, in troubled debt restructurings. The Corporation has no previous charge-offs on such loans as of December 31, 2012 and 2011. The Corporation’s balance in the allowance for loan losses allocated to such troubled debt restructurings was $18,881 and $0 at December 31,2012 and 2011, respectively. The Corporation had no unfunded commitments to lend to a customer that has a troubled debt restructured loan as of December 31,

 

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 December 31, 2012, all Grade 8 loans have been charged-off.

 

The following table presents internal loan grading by class of loans as of December 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   $ 320,295     $ 0     $ 0     $ 29,588     $ 0     $ 292,305     $ 642,188  
Grade 2- Above Avg.     208,000       1,079,020       665       118,152       939,469       5,172       2,350,478  
Grade 3- Acceptable     31,149,578       5,135,542       28,992,688       36,791,734       5,661,101       2,731,528       110,462,171  
Grade 4- Fair     8,117,676       9,500,573       35,906,982       19,854,579       2,654,197       847,579       76,881,586  
Grade 5a- Watch     471,472       967,009       1,643,198       852,787       385,412       57,009       4,376,887  
Grade 5b- OAEM     13,415       0       1,685,218       681,156       454,991       35,889       2,870,669  
Grade 6- Substandard     226,366       306,673       1,830,659       4,070,488       74,081       40,015       6,548,282  
Grade 7- Doubtful     0       0       0       34,855       0       0       34.855  
Total loans   $ 40,506,802     $ 16,988,817     $ 70,059,410     $ 62,433,339     $ 10,169,251     $ 4,009,497     $ 204,167,116  

 

Allowance for Loan Losses Methodology

 

The allowance for loan losses (ALLL) 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 5, 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 ALLL is calculated by the addition of the estimated loss derived from each of the above categories. The impaired loans and nonaccrual loans over $50,000 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 ALLL until it is charged to the loan loss reserve. The calculation for loan risk graded 5, 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 ALLL is performed on a monthly basis and is presented to the Loan Committee and the Board of Directors.

 

Changes in the allowance for loan losses are as follows:

 

    2012     2011     2010  
Balance, January 1   $ 3,100,000     $ 2,754,614     $ 2,532,856  
                         
Provision, charged to operations     445,000       983,667       600,000  
                         
Loans charged off     (796,852 )     (807,045 )     (682,485 )
                         
Recoveries     96,755       168,764       304,243  
Balance, December 31   $ 2,844,903     $ 3,100,000     $ 2,754,614  

 

The following table details activity in the ALLL by class of loans for the year ended December 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.

 

    Commercial,                                      
    Financial,                                      
    and     Construction     Commercial     Residential     Agricultural     Consumer        
    Agricultural     Real Estate     Real Estate     Real Estate     Real Estate     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     285,710       248,637       9,439       241,176       0       11,890       796,852  
Recoveries     59,909       0       10,716       19,283       0       6,847       96,755  
Net charge-offs     225,801       248,637       (1,277 )     221,893       0       5,043       700,097  
Provisions charged to operations     143,525       158,040       (812 )     141,041       0       3,206       445,000  
Balance at end of period, December 31, 2012   $ 309,946     $ 1,032,053     $ 1,047,292     $ 284,603     $ 0     $ 171,009     $ 2,844,903  
                                                         
Ending balance - Individually evaluated for impairment   $ 33,238     $ 0     $ 70,040     $ 137,040     $ 0     $ 5,493     $ 245,811  
                                                         
Collectively evaluated for impairment     276,708       1,032,053       977,252       147,563       0       165,516       2,599,092  
Balance at end of period   $ 309,946     $ 1,032,053     $ 1,047,292     $ 284,603     $ 0       $ 171,009     $ ,2,844,903  
Loans:                                                        
Ending balance - Individually evaluated for impairment   $ 53,634     $ 224,502     $ 1,943,134     $ 3,778,183     $ 74,081     $ 10,642     $ 6,084,176  
                                                         
Collectively evaluated for impairment     40,453,168       16,764,315       68,116,276       58,655,156       10,095,170       3,998,855       198,082,940  
Balance at end of period   $ 40,506,802     $ 16,988,817     $ 70,059,410     $ 62,433,339     $ 10,169,251     $ 4,009,497     $ 204,167,116  

 

 

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

 

    Year Ended December 31,  
    2012     2011     2010  
Allowance for loss on impaired loans   $ 245,811     $ 39,938     $ 0  
Recorded balance of impaired loans   $ 2,189,199     $ 567,802     $ 4,500,000  

 

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 $912,927, $760,420 and $662,941 for the years ended December 31, 2012, 2011, and 2010, respectively.