Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2017

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, 2017 and 2016 was as follows:

	2017			2016
Commercial, financial and agricultural loans	$	73,146,397		$	70,999,423
Real estate
Construction loans		22,287,012			25,999,295
Commercial mortgage loans		106,458,342			91,732,812
Residential loans		99,159,607			83,270,983
Agricultural loans		25,373,621			16,580,126
Consumer & other loans		3,766,332			3,960,492
Loans outstanding		330,191,311			292,543,131
Unearned interest and discount		(17,921	)		(18,895	)
Allowance for loan losses		(3,043,632	)		(3,124,611	)
Net loans	$	327,129,758		$	289,399,625

The Corporation’s only significant concentration of credit at December 31, 2017, occurred in real estate loans which totaled approximately $253 million. However, this amount was not concentrated in any specific segment within the market or geographic area.

At December 31, 2017, $58,684,267 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 $1,674,656 and $246,320 at December 31, 2017 and 2016, respectively. There were no past due loans over 90 days and still accruing at December 31, 2017 or 2016. 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 $41,496 and $476 as of December 31, 2017 and 2016, 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, 2017
	30-89 Days Past Due		Greater than 90 Days		Total Past Due Loans		Nonaccrual Loans		Current Loans		Total Loans
Commercial, financial and agricultural loans	$	364,527	$	0	$	364,527	$	394,455	$	72,387,415	$	73,146,397
Real estate:
Construction loans		198,861		0		198,861		0		22,088,151		22,287,012
Commercial mortgage loans		645,214		0		645,214		757,085		105,056,043		106,458,342
Residential loans		2,023,517		0		2,023,517		518,301		96,617,789		99,159,607
Agricultural loans		0		0		0		0		25,373,621		25,373,621
Consumer & other loans		30,033		0		30,033		4,815		3,731,484		3,766,332
Total loans	$	3,262,152	$	0	$	3,262,152	$	1,674,656	$	325,254,503	$	330,191,311

	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

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, 2017 and 2016, impaired loans amounted to $4,895,730 and $3,560,901, respectively. A reserve amount of $331,779 and $549,429, respectively, was recorded in the allowance for loan losses for these impaired loans as of December 31, 2017 and 2016.

The following tables present impaired loans, segregated by class of loans as of December 31, 2017 and 2016:

	Unpaid		Recorded Investment								Year-to-date Average		Interest Income Received
December 31, 2017	Principal Balance		With No Allowance		With Allowance		Total		Related Allowance		Recorded Investment		During Impairment
Commercial, financial and agricultural loans	$	459,003	$	208,032	$	250,971	$	459,003	$	44,468	$	190,994	$	10,920
Real estate:
Construction loans		549,599		428,799		0		428,799		0		299,609		24,487
Commercial mortgage loans		1,615,811		1,107,654		339,440		1,447,094		57,403		4,130,250		54,582
Residential loans		2,476,728		316,230		2,079,823		2,396,053		224,916		5,277,602		108,472
Agricultural loans		142,966		142,966		0		142,966		0		703,079		8,198
Consumer & other loans		21,815		846		20,969		21,815		4,992		10,684		521
Total loans	$	5,265,922	$	2,204,527	$	2,691,203	$	4,895,730	$	331,779	$	10,612,218	$	207,180

	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

For the period ending December 31, 2015, the average recorded investment for impaired loans was $6,484,420 and the interest income received during impairment was $237,889.

At December 31, 2017 and 2016, included in impaired loans were $4,243 and $914,378, 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, 2017 and 2016, as well as those currently paying under restructured terms and those that have defaulted under restructured terms as of December 31, 2017 and 2016. 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, 2017
					Under restructured terms
	Accruing		Nonaccruing		#		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		3,397		0		1		3,397		0		0
Agricultural loans		0		0		0		0		0		0
Consumer & other loans		846		0		1		846		0		0
Total TDR’s	$	4,243	$	0		2	$	4,243		0	$	0

	December 31, 2016
					Under restructured terms
	Accruing		Nonaccruing		#		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

The following table presents the amount of troubled debt restructurings by types of concessions made, classified separately as accrual and nonaccrual at December 31, 2017 and 2016.

	December 31, 2017								December 31, 2016
	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		2		4,243		0		0		5		914,378		0		0
Forbearance of interest		0		0		0		0		0		0		0		0
Total		2	$	4,243		0	$	0		5	$	914,378		0	$	0

As of December 31, 2017 and 2016, the Corporation had a balance of $4,243 and $914,378, respectively, in troubled debt restructurings. The Corporation had no charge-offs on such loans as of December 31, 2017, and no charge-offs as of December 31, 2016. The Corporation’s balance in the allowance for loan losses allocated to such troubled debt restructurings was $0 at both December 31, 2017 and 2016. The Corporation had no unfunded commitment to lend to a customer that has a troubled debt restructured loan as of December 31, 2017.

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, 2017, all Grade 8 loans have been charged-off.

The following tables present internal loan grading by class of loans at December 31, 2017 and 2016:

December 31, 2017	Commercial, Financial, and Agricultural		Construction Real Estate		Commercial Real Estate		Residential Real Estate		Agricultural Real Estate		Consumer and Other		Total
Rating:
Grade 1- Exceptional	$	1,371,135	$	0	$	0	$	23,919	$	0	$	325,236	$	1,720,290
Grade 2- Above Avg.		0		0		0		0		0		51,421		51,421
Grade 3- Acceptable		27,024,359		2,085,620		30,090,030		26,304,640		11,071,244		866,455		97,442,348
Grade 4- Fair		42,821,117		19,772,593		70,518,545		68,103,351		13,781,326		2,494,509		217,491,441
Grade 5a- Watch		120,626		0		1,027,581		757,628		39,344		7,572		1,952,751
Grade 5b- OAEM		557,070		0		3,073,051		1,226,841		338,741		1,357		5,197,060
Grade 6- Substandard		945,238		428,799		1,749,135		2,743,228		142,966		19,782		6,029,148
Grade 7- Doubtful		306,852		0		0		0		0		0		306,852
Total loans	$	73,146,397	$	22,287,012	$	106,458,342	$	99,159,607	$	25,373,621	$	3,766,332	$	330,191,311

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

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 risk factor percentage from a rating of excessive, high, moderate or low will be determined by management and applied to the loan portfolio. By adding the estimated value from the migration and economic analysis to the estimated reserve from the loan portfolio, a 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:

	2017			2016			2015
Balance, January 1	$	3,124,611		$	3,032,242		$	3,114,151
Provision charged to operations		300,000			160,000			141,300
Loans charged off		(447,747	)		(116,006	)		(319,200	)
Recoveries		66,768			48,375			95,991
Balance, December 31	$	3,043,632		$	3,124,611		$	3,032,242

The following tables detail activity in the ALL by class of loans for the years ended December 31, 2017 and 2016. 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, 2017	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, 2016	$	191,267	$	1,043,083	$	1,192,098	$	420,189	$	86,656	$	191,318	$	3,124,611
Charge-offs		113,334		0		168,717		59,764		93,503		12,429		447,747
Recoveries		63,486		0		0		0		0		3,282		66,768
Net charge-offs		49,848		0		168,717		59,764		93,503		9,147		380,979
Provisions charged to operations		182,841		0		33,214		56,049		18,407		9,489		300,000
Balance at end of period, December 31, 2017	$	324,260	$	1,043,083	$	1,056,595	$	416,474	$	11,560	$	191,660	$	3,043,632
Ending balance -
Individually evaluated for impairment	$	44,468	$	0	$	57,403	$	224,916	$	0	$	4,992	$	331,779
Collectively evaluated for impairment		279,792		1,043,083		999,192		191,558		11,560		186,668		2,711,853
Balance at end of period	$	324,260	$	1,043,083	$	1,056,595	$	416,474	$	11,560	$	191,660	$	3,043,632
Loans :
Ending balance -
Individually evaluated for impairment	$	459,003	$	428,799	$	4,561,198	$	2,448,531	$	142,966	$	21,815	$	8,062,312
Collectively evaluated for impairment		72,687,394		21,858,213		101,897,144		96,711,076		25,230,655		3,744,517		322,128,999
Balance at end of period	$	73,146,397	$	22,287,012	$	106,458,342	$	99,159,607	$	25,373,621	$	3,766,332	$	330,191,311

At December 31, 2017, of the $8,062,312 loans that were individually evaluated for impairment, only $4,895,730 were deemed impaired.

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

At December 31, 2016, of the $8,071,512 loans that were individually evaluated for impairment, only $3,560,901 were deemed impaired.

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,
	2017		2016		2015
Allowance for loss on impaired loans	$	331,779	$	549,429	$	304,114
Recorded balance of impaired loans	$	4,895,730	$	3,560,901	$	5,558,615