Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2013

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, 2013 and 2012 was as follows:

	2013			2012
Commercial, financial and agricultural loans	$	43,674,774		$	40,506,802
Real estate:
Construction loans		15,858,863			16,988,817
Commercial mortgage loans		78,722,646			70,059,410
Residential loans		64,382,656			62,433,339
Agricultural loans		12,605,851			10,169,251
Consumer & other loans		3,469,059			4,009,497
Loans outstanding		218,713,849			204,167,116
Unearned interest and discount		(25,941	)		(30,100	)
Allowance for loan losses		(3,077,561	)		(2,844,903	)
Net loans	$	215,610,347		$	201,292,113

The Corporation’s only significant concentration of credit at December 31, 2013, occurred in real estate loans which totaled approximately $172 million. However, this amount was not concentrated in any specific segment within the market or geographic area.

At December 31, 2013, $31,035,371 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 $912,785 and $25,187 at December 31, 2013 and 2012, respectively. There were no past due loans over ninety days and still accruing at December 31, 2013 or 2012. 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 $6,195 and $0 as of year-end 2013 and 2012, 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 December 31, 2013
	30-89 Days Past Due		Greater than 90 Days		Total Past Due Loans		Nonaccrual Loans		Current Loans		Total Loans
Commercial, financial and agricultural loans	$171,713		$0		$171,713		$36,893		$43,466,168		$43,674,774
Real estate:
Construction loans	3,383,103		0		3,383,103		215,804		12,259,956		15,858,863
Commercial mortgage loans	199,323		0		199,323		484,222		78,039,101		78,722,646
Residential loans		2,959,263		0		2,959,263		167,614		61,255,779		64,382,656
Agricultural loans		38,166		0		38,166		0		12,567,685		12,605,851
Consumer & other loans		35,303		0		35,303		8,252		3,425,504		3,469,059
Total loans	$	6,786,871	$	0	$	6,786,871	$	912,785	$	211,014,193	$	218,713,849

Age Analysis of Past Due Loans As of December 31, 2012
	30-89 Days Past Due		Greater than 90 Days		Total Accruing 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.

For the period ending December 31, 2011, the average recorded investment for impaired loans was $4,546,692 and the interest income received during impairment was $153,699.

At December 31, 2013 and 2012, impaired loans amounted to $2,997,359 and $2,189,199, respectively. A reserve amount of $469,302 and $245,811, respectively, was recorded in the allowance for loan losses for these impaired loans as of December 31, 2013 and 2012.

The following table presents impaired loans, segregated by class of loans as of December 31, 2013 and 2012:

December 31, 2013	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	$56,429		$0		$56,429		$56,429		$38,219		$63,317		$2,301
Real estate:
Construction loans	0		0		0		0		0		0		0
Commercial mortgage loans	894,722		118,537		712,829		831,366		221,512		454,169		19,285
Residential loans		1,940,949		167,614		1,722,330		1,889,944		132,703		1,982,756		81,454
Agricultural loans		197,398		0		197,398		197,398		76,868		148,725		9,198
Consumer & other loans		22,222		22,222		0		22,222		0		17,473		1,451
Total loans	$	3,111,720	$	308,373	$	2,688,986	$	2,997,359	$	469,302	$	2,666,440	$	113,689

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	$	2,189,199	$	187,402	$	1,755,986	$	1,943,388	$	245,811	$	1,118,516	$	95,281

At December 31, 2013 and 2012, included in impaired loans were $374,236 and $198,794, 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, 2013 and 2012 as well as those currently paying under restructured terms and those that have defaulted under restructured terms as December 31, 2013 and 2012. Loans modified in a troubled debt restructuring are considered to be in default once the loan becomes 30 days past due.

	December 31, 2013
					Under restructured terms
	Accruing		Non-accruing		#		Current		#		Default
Commercial, financial, and agricultural loans	$36,079		$0		1		$36,079		0		$0
Real estate:
Construction loans		0		0		0		0		0		0
Commercial mortgage loans		0		118,537		0		0		1		118,537
Residential loans		0		0		0		0		0		0
Agricultural loans		197,398		0		1		197,398		0		0
Consumer & other loans		22,222		0		5		22,222		0		0
Total TDR’s	$	255,699	$	118,537		7	$	255,699		1	$	118,537

	December 31, 2012
					Under restructured terms
	Accruing		Non-accruing		#		Current		#		Default
Commercial, financial, and agricultural loans	$39,277		$0		1		$39,277		0		$0
Real estate:
Construction loans		82,171		0		0		0		1		82,171
Commercial mortgage loans		0		0		0		0		0		0
Residential 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

 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, 2013 and 2012.

	December 31, 2013								December 31, 2012
	Accruing				Non-accruing				Accruing				Non-accruing
	#		Balance		#		Balance		#		Balance		#		Balance
Type of concession:
Payment modification		1	$	36,079		0	$	0		1	$	39,277		0	$	0
Rate reduction		1		4,131		0		0		4		138,435		0		0
Rate reduction, payment modification		5		215,489		0		0		3		21,082		0		0
Total		7	$	255,699		0	$	0		8	$	198,794		0	$	0

 As of December 31, 2013 and 2012, the Corporation had a balance of $374,236 and $198,794, respectively, in troubled debt restructurings. The Corporation had $211,829 in charge-offs on such loans as of December 31, 2013 and no charge-offs as of December 31, 2012. The Corporation’s balance in the allowance for loan losses allocated to such troubled debt restructurings was $94,737 and $18,881 at December 31, 2013 and 2012, respectively. The Corporation had no unfunded commitments to lend to a customer that has a troubled debt restructured loan as of December 31, 2013.

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, 2013, all Grade 8 loans have been charged-off.

The following table presents internal loan grading by class of loans as of December 31, 2013 and 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	$377,030		$0		$0		$28,675		$0		$367,222		$772,927
Grade 2- Above Avg.	14,500		635,975		0		96,613		383,104		408		1,130,600
Grade 3- Acceptable	31,122,794		4,835,273		33,044,849		34,569,435		7,175,714		2,183,886		112,931,951
Grade 4- Fair		11,800,838		8,866,362		40,678,393		23,093,070		4,017,325		844,609		89,300,597
Grade 5a- Watch		127,359		936,550		2,060,701		1,091,573		164,132		13,523		4,393,838
Grade 5b- OAEM		39,994		248,497		1,702,801		598,666		668,181		20,108		3,278,247
Grade 6- Substandard		192,259		336,206		1,235,902		4,869,802		197,397		39,303		6,870,869
Grade 7- Doubtful		0		0		0		34,820		0		0		34,820
Total loans	$	43,674,774	$	15,858,863	$	78,722,646	$	64,382,656	$	12,605,851	$	3,469,059	$	218,713,849

	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 (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 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 ALL 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 ALL 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 ALL 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:

	2013			2012			2011
Balance, January 1	$	2,844,903		$	3,100,000		$	2,754,614
Provision charged to operations		420,000			445,000			983,667
Loans charged off		(233,842	)		(796,852	)		(807,045	)
Recoveries		46,500			96,755			168,764
Balance, December 31	$	3,077,561		$	2,844,903		$	3,100,000

The following table details activity in the ALL by class of loans for the years ended December 31, 2013 and 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 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, 2012	$309,946		$1,032,053		$1,047,292		$284,603		$0		$171,009		$2,844,903
Charge-offs	17,746		0		160,824		46,093		0		9,179		233,842
Recoveries	23,187		0		4,497		13,154		0		5,662		46,500
Net charge-offs	(5,441)		0		156,327		32,939		0		3,517		187,342
Provisions charged to operations	(17,841)		0		301,133		49,505		76,868		10,335		420,000
Balance at end of period, December 31, 2013	$     297,546		$  1,032,053		$   1,192,098		$     301,169		$      76,868		$   177,827		$    3,077,561
Ending balance -
Individually evaluated for impairment	$	38,219	$	0	$	221,512	$	132,703	$	76,868	$	0	$	469,302
Collectively evaluated for impairment		259,327		1,032,053		970,586		168,466		0		177,827		2,608,259
Balance at end of period	$	297,546	$	1,032,053	$	1,192,098	$	301,169	$	76,868	$	177,827	$	3,077,561
Loans :
Ending balance -
Individually evaluated for impairment	$	72,971	$	944,387	$	4,372,425	$	4,256,508	$	380,931	$	30,474	$	10,057,696
Collectively evaluated for impairment		43,601,803		14,914,476		74,350,221		60,126,148		12,224,920		3,438,585		208,656,153
Balance at end of period	$	43,674,774	$	15,858,863	$	78,722,646	$	64,382,656	$	12,605,851	$	3,469,059	$	218,713,849

The following table details activity in the ALL and loans evaluated for impairment by class of loans for the year ended December 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		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 ALL for the impaired loans with specific reserves and the recorded balance of the related loans.

	Year Ended December 31,
	2013		2012		2011
Allowance for loss on impaired loans	$	469,302	$	245,811	$	39,938
Recorded balance of impaired loans	$	2,997,359	$	1,943,308	$	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 $206,518, $912,927 and $760,420 for the years ended December 31, 2013, 2012, and 2011, respectively.