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Loans and Allowance for Loan Losses
 12 Months Ended
Dec. 31, 2016
Receivables [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, 2016 and 2015 was as follows:

 

    2016   2015
         
Commercial, financial and agricultural loans   $ 70,999,423     $ 58,173,187  
Real estate                
Construction loans     25,999,295       19,831,070  
Commercial mortgage loans     91,732,812       85,777,359  
Residential loans     83,270,983       67,969,119  
Agricultural loans     16,580,126       15,620,266  
Consumer & other loans     3,960,492       3,434,380  
                 
         Loans outstanding     292,543,131       250,805,381  
                 
Unearned interest and discount     (18,895 )     (19,046 )
Allowance for loan losses     (3,124,611 )     (3,032,242 )
       Net loans   $ 289,399,625     $ 247,754,093  

 

The Corporation’s only significant concentration of credit at December 31, 2016, occurred in real estate loans which totaled approximately $218 million. However, this amount was not concentrated in any specific segment within the market or geographic area.

 

At December 31, 2016, $57,611,388 1-4 family and multifamily 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 $246,320 and $1,545,599 at December 31, 2016 and 2015, respectively. There were no past due loans over 90 days and still accruing at December 31, 2016 and one past due loan over ninety days and still accruing in the amount of $521 at December 31, 2015. 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 $476 and $40,346 as of year-end 2016 and 2015, respectively.

 

The following tables present an age analysis of past due loans and nonaccrual loans segregated by class of loans.

 

   

Age Analysis of Past Due Loans

As of December 31, 2016

    30-89 Days Past Due   Greater than 90 Days   Total Past Due Loans   Nonaccrual Loans   Current Loans   Total Loans
                         
Commercial, financial and agricultural loans   $ 1,264,998     $ 0     $ 1,264,998     $ 38,798     $ 69,695,627     $ 70,999,423  
Real estate:                                                
Construction loans     66,931       0       66,931       207,522       25,724,842       25,999,295  
Commercial mortgage loans     1,268,405       0       1,268,405       0       90,464,407       91,732,812  
Residential loans     1,376,671       0       1,376,671       0       81,894,312       83,270,983  
Agricultural loans     0       0       0       0       16,580,126       16,580,126  
Consumer & other loans     65,127       0       65,127       0       3,895,365       3,960,492  
                                                 
         Total loans   $ 4,042,132     $ 0     $ 4,042,132     $ 246,320     $ 288,254,679     $ 292,543,131  

 

 

   

Age Analysis of Past Due Loans

As of December 31, 2015

    30-89 Days Past Due   Greater than 90 Days   Total Past Due Loans   Nonaccrual Loans   Current Loans   Total Loans
                         

Commercial, financial and

agricultural loans

   $ 449,618     $ 521     $ 450,139     $ 0     $ 57,723,048     $ 58,173,187  
Real estate:                                                
Construction loans     121,694       0       121,694       0       19,709,376       19,831,070  
Commercial mortgage loans     810,515       0       810,515       0       84,966,844       85,777,359  
Residential loans     2,238,684       0       2,238,684       639,094       65,091,341       67,969,119  
Agricultural loans     148,761       0       148,761       906,505       14,565,000       15,620,266  
Consumer & other loans     84,342       0       84,342       0       3,350,038       3,434,380  
                                                 
         Total loans   $ 3,853,614     $ 521     $ 3,854,135     $ 1,545,599     $ 245,405,647     $ 250,805,381  

 

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, 2016 and 2015, impaired loans amounted to $3,560,901 and $5,558,615, respectively. A reserve amount of $549,429 and $304,114, respectively, was recorded in the allowance for loan losses for these impaired loans as of December 31, 2016 and 2015.

 

The following tables present impaired loans, segregated by class of loans as of December 31, 2016 and 2015:

 

    Unpaid   Recorded Investment      

Year-to-date

Average

  

Interest

Income Received

December 31, 2016   Principal Balance   With No Allowance   With Allowance   Total   Related Allowance   Recorded Investment   During Impairment
                             
Commercial, financial and agricultural loans   $ 102,086     $ 4,798     $ 97,288     $ 102,086     $ 12,021     $ 21,154     $ 2,464  
Real estate:                                                        
Construction loans     247,015       126,215       0       126,215       0       168,432       12,691  
Commercial mortgage loans     880,670       0       880,670       880,670       245,472       4,005,175       46,195  
Residential loans     2,223,421       230,610       1,971,899       2,202,509       291,936       3,272,528       122,370  
Agricultural loans     246,175       246,175       0       246,175       0       851,740       8,150  
Consumer & other loans     3,246       3,246       0       3,246       0       6,501       201  
                                                         
         Total loans   $ 3,702,613     $ 611,044     $ 2,949,857     $ 3,560,901     $ 549,429     $ 8,325,530     $ 192,071  

 

    Unpaid   Recorded Investment      

Year-to-date

Average

  

Interest

Income Received

December 31, 2015   Principal Balance   With No Allowance   With Allowance   Total   Related Allowance   Recorded Investment   During Impairment
                             
Commercial, financial and agricultural loans   $ 0     $ 0     $ 0     $ 0     $ 0     $ 0     $ 0  
Real estate:                                                        
Construction loans     193,524       72,724       0       72,724       0       133,693       15,049  
Commercial mortgage loans     3,256,589       496,159       2,760,430       3,256,589       212,283       2,096,082       89,947  
Residential loans     1,988,434       662,523       1,304,999       1,967,522       91,831       3,832,546       107,070  
Agricultural loans     257,211       257,211       0       257,211       0       422,099       25,823  
Consumer & other loans     4,569       4,569       0       4,569       0       0       0  
                                                         
         Total loans   $ 5,700,327     $ 1,493,186     $ 4,065,429     $ 5,558,615     $ 304,114     $ 6,484,420     $ 237,889  

 

For the period ending December 31, 2014, the average recorded investment for impaired loans was $4,279,301 and the interest income received during impairment was $251,495.

 

At December 31, 2016 and 2015, included in impaired loans were $914,378 and $2,290,411, respectively, of troubled debt restructurings.

 

Troubled Debt Restructurings

 

Loans are considered to have been modified in a troubled debt restructuring, or 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. 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 charges 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 nonaccrual at December 31, 2016 and 2015, as well as those currently paying under restructured terms and those that have defaulted under restructured terms as of December 31, 2016 and 2015. Loans modified in a troubled debt restructuring are considered to be in default once the loan becomes 30 or more days past due.

 

    December 31, 2016
            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  
   Commercial mortgage loans     0       0       0       0       0       0  
   Residential loans     4,853       0       1       4,853       0       0  
   Agricultural loans     906,279       0       3       906,279       0       0  
Consumer & other loans     3,246       0       1       3,246       0       0  
Total TDR’s   $ 914,378     $ 0       5     $ 914,378       0     $ 0  

 

    December 31, 2015
            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  
   Commercial mortgage loans     2,280,466       0       1       2,280,466       0       0  
   Residential loans     5,376       0       1       5,376       0       0  
   Agricultural loans     0       0       0       0       0       0  
Consumer & other loans     4,569       0       1       4,569       0       0  
Total TDR’s   $ 2,290,411     $ 0       3     $ 2,290,411       0     $ 0  

 

The following table presents the amount of troubled debt restructurings by types of concessions made, classified separately as accrual and nonaccrual at December 31, 2016 and 2015.

 

    December 31, 2016   December 31, 2015
    Accruing   Nonaccruing   Accruing   Nonaccruing
    #   Balance   #   Balance   #   Balance   #   Balance
Type of concession:                                                                
Payment modification     0     $ 0       0     $ 0       0     $ 0       0     $ 0  
Rate reduction     0       0       0       0       0       0       0       0  
Rate reduction, payment modification     5       914,378       0       0       3       2,290,411       0       0  
Forbearance of interest     0       0       0       0       0       0       0       0  
Total     5     $ 914,378       0     $ 0       3     $ 2,290,411       0     $ 0  

 

As of December 31, 2016 and 2015, the Corporation had a balance of $914,378 and $2,290,411, respectively, in troubled debt restructurings. The Corporation had no charge-offs on such loans as of December 31, 2016, and no charge-offs as of December 31, 2015. The Corporation’s balance in the allowance for loan losses allocated to such troubled debt restructurings was $0 and $130,441 at December 31, 2016 and 2015, respectively. The Corporation had no unfunded commitment to lend to a customer that has a troubled debt restructured loan as of December 31, 2016.

 

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, 2016, all Grade 8 loans have been charged-off.

  

The following tables present internal loan grading by class of loans at December 31, 2016 and 2015:

 

December 31, 2016   Commercial, Financial, and Agricultural   Construction Real Estate   Commercial Real Estate   Residential Real Estate   Agricultural Real Estate   Consumer and Other   Total
Rating:                                                        
Grade 1- Exceptional   $ 615,535     $ 0     $ 0     $ 24,963     $ 0     $ 395,765     $ 1,036,263  
Grade 2- Above Avg.     0       0       0       7,172       289,561       10,195       306,928  
Grade 3- Acceptable     28,049,484       7,456,101       24,383,326       29,654,781       8,899,344       1,343,547       99,786,583  
Grade 4- Fair     40,358,471       18,402,769       62,023,892       48,747,687       6,306,754       2,182,145       178,021,718  
Grade 5a- Watch     111,488       0       1,071,667       832,624       22,642       16,002       2,054,423  
Grade 5b- OAEM     1,561,359       14,210       2,883,133       1,260,719       0       3,247       5,722,668  
Grade 6- Substandard     214,862       126,215       1,370,794       2,743,037       1,061,825       9,591       5,526,324  
Grade 7- Doubtful     88,224       0       0       0       0       0       88,224  
       Total loans   $ 70,999,423     $ 25,999,295     $ 91,732,812     $ 83,270,983     $ 16,580,126     $ 3,960,492     $ 292,543,131  

 

  

December 31, 2015   Commercial, Financial, and Agricultural   Construction Real Estate   Commercial Real Estate   Residential Real Estate   Agricultural Real Estate   Consumer and Other   Total
Rating:                                                        
Grade 1- Exceptional   $ 731,270     $ 0     $ 0     $ 25,988     $ 0     $ 416,250     $ 1,173,508  
Grade 2- Above Avg.     0       0       0       10,011       329,069       0       339,080  
Grade 3- Acceptable     30,581,968       7,569,566       26,285,799       31,303,029       9,648,983       1,756,139       107,145,484  
Grade 4- Fair     26,075,703       11,022,826       53,296,973       30,946,390       3,930,746       1,230,515       126,503,153  
Grade 5a- Watch     217,295       1,097,222       4,791,317       1,263,077       638,402       5,999       8,013,312  
Grade 5b- OAEM     560,678       0       523,596       1,233,611       0       13,802       2,331,687  
Grade 6- Substandard     6,273       141,456       879,674       3,155,625       1,073,066       11,675       5,267,769  
Grade 7- Doubtful     0       0       0       31,388       0       0       31,388  
       Total loans   $ 58,173,187     $ 19,831,070     $ 85,777,359     $ 67,969,119     $ 15,620,266     $ 3,434,380     $ 250,805,381  

 

 

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. The impaired loans and nonaccrual loans 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 weighted average 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) macroeconomic trends and conditions, (4) microeconomic 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:

    2016   2015   2014
             
Balance, January 1   $ 3,032,242     $ 3,114,151     $ 3,077,561  
Provision charged to operations     160,000       141,300       330,000  
Loans charged off     (116,006 )     (319,200 )     (341,377 )
Recoveries     48,375       95,991       47,967  
                         
Balance, December 31   $ 3,124,611     $ 3,032,242     $ 3,114,151  

  

The following tables detail activity in the ALL by class of loans for the years ended December 31, 2016 and 2015. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

 

December 31, 2016   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, 2015   $ 144,781     $ 1,043,083     $ 1,192,098     $ 381,891     $ 86,656     $ 183,733     $ 3,032,242  
                                                         
Charge-offs     103,387       0       0       3,394       0       9,225       116,006  
Recoveries     28,303       0       0       16,994       0       3,078       48,375  
Net charge-offs     75,084       0       0       (13,600 )     0       6,147       67,631  
Provisions charged to operations     121,570       0       0       24,698       0       13,732       160,000  
Balance at end of period, December 31, 2016   $ 191,267     $ 1,043,083     $ 1,192,098     $ 420,189     $ 86,656     $ 191,318     $ 3,124,611  
                                                         
Ending balance -                                                        

Individually evaluated

for impairment

   $ 12,021     $ 0     $ 245,472     $ 291,936     $ 0     $ 0     $ 549,429  
Collectively evaluated for impairment     179,246       1,043,083       946,626       128,253       86,656       191,318       2,575,182  
Balance at end of period   $ 191,267     $ 1,043,083     $ 1,192,098     $ 420,189     $ 86,656     $ 191,318     $ 3,124,611  
                                                         
Loans :                                                        
Ending balance -                                                        

Individually evaluated

for impairment

   $ 102,086     $ 126,215     $ 4,496,700     $ 2,281,439     $ 1,061,826     $ 3,246     $ 8,071,512  
Collectively evaluated for impairment     70,897,337       25,873,080       87,236,112       80,989,544       15,518,300       3,957,246       284,471,619  
Balance at end of period   $ 70,999,423     $ 25,999,295     $ 91,732,812     $ 83,270,983     $ 16,580,126     $ 3,960,492     $ 292,543,131  

 

 

 

  

December 31, 2015   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, 2014   $ 299,850     $ 1,043,083     $ 1,192,098     $ 312,822     $ 86,656     $ 179,642     $ 3,114,151  
                                                         
Charge-offs     263,809       0       0       33,238       0       22,153       319,200  
Recoveries     42,253       0       0       22,047       0       31,691       95,991  
Net charge-offs     221,556       0       0       11,191       0       (9,538 )     223,209  
Provisions charged to operations     66,487       0       0       80,260       0       (5,447 )     141,300  
Balance at end of period, December 31, 2015   $ 144,781     $ 1,043,083     $ 1,192,098     $ 381,891     $ 86,656     $ 183,733     $ 3,032,242  
                                                         
Ending balance -                                                        

Individually evaluated

for impairment

   $ 0     $ 0     $ 212,283     $ 91,831     $ 0     $ 0     $ 304,114  
Collectively evaluated for impairment     144,781       1,043,083       979,815       290,060       86,656       183,733       2,728,128  
Balance at end of period   $ 144,781     $ 1,043,083     $ 1,192,098     $ 381,891     $ 86,656     $ 183,733     $ 3,032,242  
                                                         
Loans :                                                        
Ending balance -                                                        

Individually evaluated

for impairment

   $ 0     $ 1,012,831     $ 5,414,491     $ 2,896,953     $ 1,682,207     $ 4,569     $ 11,011,051  
Collectively evaluated for impairment     58,173,187       18,818,239       80,362,868       65,072,166       13,938,059       3,429,811       239,794,330  
Balance at end of period   $ 58,173,187     $ 19,831,070     $ 85,777,359     $ 67,969,119     $ 15,620,266     $ 3,434,380     $ 250,805,381  

 

 

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,
    2016   2015   2014
             
Allowance for loss on impaired loans   $ 549,429     $ 304,114     $ 478,814  
Recorded balance of impaired loans   $ 3,560,901     $ 5,558,615     $ 4,126,957