Loans and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2018

Receivables [Abstract]

Loans and Allowance for Loan Losses

NOTE 4

Loans and Allowance for Loan Losses

The composition of the Corporation’s loan portfolio and the percentage of loans in each category to total loans at September 30, 2018 and December 31, 2017, were as follows:

	September 30, 2018					December 31, 2017
Commercial, financial and agricultural loans	$	87,717,667		23.9	%	$	73,146,397		22.2	%
Real estate:
Construction loans		30,799,672		8.4	%		22,287,012		6.8	%
Commercial mortgage loans		105,935,188		28.9	%		106,458,342		32.2	%
Residential loans		104,797,473		28.6	%		99,159,607		30.0	%
Agricultural loans		32,234,234		8.8	%		25,373,621		7.7	%
Consumer & other loans		5,177,979		1.4	%		3,766,332		1.1	%
Loans outstanding		366,662,213		100.0	%		330,191,311		100.0	%
Unearned interest and discount		(17,490	)				(17,921	)
Allowance for loan losses		(3,078,098	)				(3,043,632	)
Net loans	$	363,566,625				$	327,129,758

The Corporation’s only significant concentration of credit at September 30, 2018, occurred in real estate loans which totaled $273,766,567 compared with $253,278,582 at December 31, 2017. However, this amount was not concentrated in any specific segment within the market or geographic area.

Multifamily and 1-4 family mortgage loans are pledged to the Federal Home Loan Bank to secure outstanding advances. At September 30, 2018, $118,545,979 in loans were pledged in this capacity.

The following table shows maturities of the commercial, financial, agricultural, and construction loan portfolio at September 30, 2018.

	Commercial, Financial, Agricultural and Construction
Distribution of loans which are due:
In one year or less	$	32,541,661
After one year but within five years		57,128,967
After five years		28,846,711
Total	$	118,517,339

The following table shows, for such loans due after one year, the amounts which have predetermined interest rates and the amounts which have floating or adjustable interest rates at September 30, 2018.

	Loans With
	Predetermined		Loans With
	Rates		Floating Rates		Total
Commercial, financial, agricultural and construction	$	82,364,691	$	3,610,987	$	85,975,678

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 $2,123,416 and $1,674,656 at September 30, 2018, and December 31, 2017, respectively. There were no past due loans over ninety days and still accruing at September 30, 2018, or December 31, 2017. 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 $53,548 for September 30, 2018, and $41,496 for December 31, 2017.

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

	Age Analysis of Past Due Loans As of September 30, 2018
	30-89 Days Past Due		90 Days or Greater		Total Past Due Loans		Nonaccrual Loans		Current Loans		Total Loans
Commercial, financial and agricultural loans	$	517,622	$	0	$	517,622	$	225,511	$	86,974,534	$	87,717,667
Real estate:
Construction loans		314,468		0		314,468		189,830		30,295,374		30,799,672
Commercial mortgage loans		200,614		0		200,614		1,022,550		104,712,024		105,935,188
Residential loans		472,119		0		472,119		275,430		104,049,924		104,797,473
Agricultural loans		0		0		0		332,679		31,901,555		32,234,234
Consumer & other loans		21,776		0		21,776		77,416		5,078,787		5,177,979
Total loans	$	1,526,599	$	0	$	1,526,599	$	2,123,416	$	363,012,198	$	366,662,213

	Age Analysis of Past Due Loans As of December 31, 2017
	30-89 Days Past Due		90 Days or Greater		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

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 September 30, 2018, and December 31, 2017, impaired loans amounted to $5,225,237 and $4,895,730, respectively. A reserve amount of $628,452 and $331,779 was recorded in the allowance for loan losses for these impaired loans as of September 30, 2018, and December 31, 2017, respectively.

The following tables present impaired loans, segregated by class of loans as of September 30, 2018, and December 31, 2017:

	Unpaid		Recorded Investment								Year-to-date Average		Interest Income Received
September 30, 2018	Principal Balance		With No Allowance		With Allowance		Total		Related Allowance		Recorded Investment		During Impairment
Commercial, financial and agricultural loans	$	1,263,609	$	291,049	$	640,388	$	931,437	$	319,392	$	283,622	$	31,832
Real estate:
Construction loans		413,803		293,003		0		293,003		0		254,788		17,823
Commercial mortgage loans		1,791,395		1,279,924		335,669		1,615,593		53,632		1,348,557		37,349
Residential loans		2,046,205		520,694		1,504,599		2,025,293		253,824		1,888,312		100,152
Agricultural loans		345,405		345,405		0		345,405		0		13,454		5,260
Consumer & other loans		14,506		31		14,475		14,506		1,604		14,506		688
Total loans	$	5,874,923	$	2,730,106	$	2,495,131	$	5,225,237	$	628,452	$	3,803,239	$	193,104

	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	$	169,930	$	10,920
Real estate:
Construction loans		549,599		428,799		0		428,799		0		162,698		24,487
Commercial mortgage loans		1,615,811		1,107,654		339,440		1,447,094		57,403		1,071,663		54,582
Residential loans		2,476,728		316,230		2,079,823		2,396,053		224,916		2,233,562		108,472
Agricultural loans		142,966		142,966		0		142,966		0		142,966		8,198
Consumer & other loans		21,815		846		20,969		21,815		4,992		9,003		521
Total loans	$	5,265,922	$	2,204,527	$	2,691,203	$	4,895,730	$	331,779	$	3,789,822	$	207,180

At September 30, 2017, the year-to-date average recorded investment of impaired loans was $3,758,289 and the interest income received during impairment was $156,041.

At September 30, 2018, and December 31, 2017, included in impaired loans were $2,324 and $4,243, respectively, of troubled debt restructurings.

Troubled Debt Restructurings (TDR)

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 September 30, 2018, and December 31, 2017, as well as those currently paying under restructured terms and those that have defaulted under restructured terms as of September 30, 2018, and December 31, 2017. Loans modified in a troubled debt restructuring are considered to be in default once the loan becomes 30 or more days past due.

	September 30, 2018
					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		2,293		0		1		2,293		0		0
Agricultural loans		0		0		0		0		0		0
Consumer & other loans		31		0		1		31		0		0
Total TDR’s	$	2,324	$	0		2	$	2,324		0	$	0

	December 31, 2017
					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		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

The following table presents the amount of troubled debt restructurings by types of concessions made, classified separately as accrual and non-accrual at September 30, 2018, and December 31, 2017.

	September 30, 2018								December 31, 2017
	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		2,324		0		0		2		4,243		0		0
Forbearance of interest		0		0		0		0		0		0		0		0
Total		2	$	2,324		0	$	0		2	$	4,243		0	$	0

As of September 30, 2018, and December 31, 2017, the Corporation had a balance of $2,324 and $4,243, respectively, in troubled debt restructurings. The Corporation had no charge-offs on such loans at September 30, 2018, and December 31, 2017. The Corporation had no balance in the allowance for loan losses allocated to such troubled debt restructurings at September 30, 2018, or December 31, 2017. The Corporation had no unfunded commitments to lend to a customer that has a troubled debt restructured loan as of September 30, 2018.

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 September 30, 2018, all Grade 8 loans have been charged-off.

The following tables present internal loan grading by class of loans as of September 30, 2018, and December 31, 2017:

September 30, 2018	Commercial, Financial, and Agricultural		Construction Real Estate		Commercial Real Estate		Residential Real Estate		Agricultural Real Estate		Consumer and Other		Total
Rating:
Grade 1- Exceptional	$	1,154,573	$	0	$	0	$	23,162	$	0	$	224,196	$	1,401,931
Grade 2- Above Avg.		0		0		0		0		0		47,124		47,124
Grade 3- Acceptable		24,816,412		2,808,071		29,509,132		25,720,496		17,661,087		1,279,310		101,794,508
Grade 4- Fair		56,818,038		27,698,598		71,453,241		74,159,559		14,240,468		3,595,146		247,965,050
Grade 5a- Watch		439,329		0		349,677		943,656		0		16,242		1,748,904
Grade 5b- OAEM		3,120,647		0		467,918		1,312,638		0		31		4,901,234
Grade 6- Substandard		995,450		293,003		4,155,220		2,637,962		332,679		15,930		8,430,244
Grade 7- Doubtful		373,218		0		0		0		0		0		373,218
Total loans	$	87,717,667	$	30,799,672	$	105,935,188	$	104,797,473	$	32,234,234	$	5,177,979	$	366,662,213

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

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.

The following table details activity in the ALL and loans evaluated for impairment by class of loans for the three and nine month periods ended September 30, 2018. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. The annualized net charge-offs to average loans outstanding ratio was 0.22% for the nine months ended September 30, 2018, compared with 0.12% at December 31, 2017.

 Three months ended September 30, 2018:

	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, June 30, 2018	$     437,661	$     938,690	$  1,084,477	$     445,196	$       91,022	$   195,651	$    3,192,697
Charge-offs	315,792	0	43,349	0	0	6,843	365,984
Recoveries	2,184	0	0	0	0	201	2,385
Net charge-offs	313,608	0	43,349	0	0	6,642	363,599
Provisions charged to operations	225,030	342	18,936	3,018	(524)	2,198	249,000
Balance at end of period, September 30, 2018	$     349,083	$     939,032	$  1,060,064	$     448,214	$     90,498	$   191,207	$    3,078,098

Nine months ended September 30, 2018:

September 30, 2018	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, 2017	$	324,260	$	1,043,083		$	1,056,595	$	416,474	$	11,560		$	191,660	$	3,043,632
Charge-offs		524,620		783			43,349		6,909		0			6,844		582,505
Recoveries		9,460		0			0		0		1,200			1,811		12,471
Net charge-offs		515,160		783			43,349		6,909		(1,200	)		5,033		570,034
Provisions charged to operations		539,983		(103,268	)		46,818		38,649		77,738			4,580		604,500
Balance at end of period, September 30, 2018	$	349,083	$	939,032		$	1,060,064	$	448,214	$	90,498		$	191,207	$	3,078,098
Ending balance -
Individually evaluated for impairment	$	319,392	$	0		$	53,632	$	253,824	$	0		$	1,604	$	628,452
Collectively evaluated for impairment		29,691		939,032			1,006,432		194,390		90,498			189,603		2,449,646
Balance at end of period	$	349,083	$	939,032		$	1,060,064	$	448,214	$	90,498		$	191,207	$	3,078,098
Loans :
Ending balance -
Individually evaluated for impairment	$	931,437	$	293,003		$	1,615,593	$	2,159,147	$	345,405		$	14,506	$	5,359,091
Collectively evaluated for impairment		86,786,230		30,506,669			104,319,595		102,638,326		31,888,829			5,163,473		361,303,122
Balance at end of period	$	87,717,667	$	30,799,672		$	105,935,188	$	104,797,473	$	32,234,234		$	5,177,979	$	366,662,213

At September 30, 2018, of the $5,359,091 loans that were individually evaluated for impairment, only $5,225,237 were deemed impaired.

The following table details activity in the ALL and loans evaluated for impairment by class of loans for the year ended December 31, 2017.

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.