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Loans and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2019

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 March 31, 2019 and December 31, 2018, were as follows:


	March 31, 2019		December 31, 2018

Commercial, financial and agricultural loans	$ 88,999,975	23.6%	$ 88,403,215	23.5%
Real estate:
Construction loans	26,092,085	6.9%	24,890,536	6.6%
Commercial mortgage loans	121,855,453	32.3%	123,477,369	32.8%
Residential loans	103,995,725	27.5%	103,347,898	27.4%
Agricultural loans	31,505,959	8.3%	31,561,686	8.4%
Consumer & other loans	5,262,568	1.4%	5,086,984	1.3%

Loans outstanding	377,711,765	100.0%	376,767,688	100.0%

Unearned interest and discount	( 17,390)		( 17,451)
Allowance for loan losses	( 3,366,927)		( 3,428,869)
Net loans	$ 374,327,448		$ 373,321,368

The Corporation’s only significant concentration of credit at March 31, 2019, occurred in real estate loans which totaled $283,449,222 compared with $283,277,489 at December 31, 2018. However, this amount was not concentrated in any specific segment within the market or geographic area.

At March 31, 2019, the lendable collateral value of the 1 – 4 family and multifamily mortgage loans that were pledged to FHLB to secure outstanding advances was $66,722,482. FHLB has a blanket lien on the 1 – 4 family and multifamily portfolios, which totaled $115,773,588.

The following table shows maturities as well as interest sensitivity of the commercial, financial, agricultural, and construction loan portfolio at March 31, 2019.

		Commercial, Financial, Agricultural and Construction

Distribution of loans which are due:
In one year or less	$	35,327,184
After one year but within five years		54,757,452
After five years		25,007,424

Total	$	115,092,060

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 March 31, 2019.

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 $905,068 and $1,204,861 at March 31, 2019, and December 31, 2018, respectively. There were no past due loans over ninety days and still accruing at March 31, 2019, or December 31, 2018. 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 $9,896 for March 31, 2019, and $64,015 for December 31, 2018.

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 March 31, 2019
	30-89 Days Past Due	90 Days or Greater	Total Past Due Loans	Nonaccrual Loans	Current Loans	Total Loans

Commercial, financial and agricultural loans	$ 556,388	$ 0	$ 556,388	$ 0	$ 88,443,587	$ 88,999,975
Real estate:
Construction loans	536,090	0	536,090	0	25,555,995	26,092,085
Commercial mortgage loans	204,250	0	204,250	839,854	120,811,349	121,855,453
Residential loans	1,638,063	0	1,638,063	65,214	102,292,448	103,995,725
Agricultural loans	193,800	0	193,800	0	31,312,159	31,505,959
Consumer & other loans	31,862	0	31,862	0	5,230,706	5,262,568

Total loans	$3,160,453	$ 0	$3,160,453	$ 905,068	$373,646,244	$377,711,765

	Age Analysis of Past Due Loans As of December 31, 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	$ 247,397	$ 0	$ 247,397	$ 36,157	$ 88,119,661	$ 88,403,215
Real estate:
Construction loans	0	0	0	0	24,890,536	24,890,536
Commercial mortgage loans	0	0	0	1,022,550	122,454,819	123,477,369
Residential loans	1,560,913	0	1,560,913	146,154	101,640,831	103,347,898
Agricultural loans	321,319	0	321,319	0	31,240,367	31,561,686
Consumer & other loans	36,654	0	36,654	0	5,050,330	5,086,984

Total loans	$ 2,166,283	$ 0	$ 2,166,283	$ 1,204,861	$ 373,396,544	$ 376,767,688

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 March 31, 2019, and December 31, 2018, impaired loans amounted to $4,332,409 and $4,356,381, respectively. A reserve amount of $827,717 and $518,230 was recorded in the allowance for loan losses for these impaired loans as of March 31, 2019, and December 31, 2018, respectively.

The following tables present impaired loans, segregated by class of loans as of March 31, 2019, and December 31, 2018:

	Unpaid	Recorded Investment				Year-to-date Average	Interest Income Received
March 31, 2019	Principal Balance	With No Allowance	With Allowance	Total	Related Allowance	Recorded Investment	During Impairment

Commercial, financial and agricultural loans	$1,420,052	$ 78,507	$1,254,891	$1,333,398	$ 562,925	$ 461,763	$ 8,225
Real estate:
Construction loans	393,898	273,098	0	273,098	0	273,098	5,253
Commercial mortgage loans	1,661,727	346,979	954,250	1,301,229	38,678	1,097,539	9,701
Residential loans	1,432,181	327,454	1,083,815	1,411,269	225,215	1,318,080	28,979
Agricultural loans	0	0	0	0	0	0	0
Consumer & other loans	13,415	0	13,415	13,415	899	13,415	346

Total loans	$4,921,273	$1,026,038	$3,306,371	$4,332,409	$827,717	$ 3,163,895	$52,504
	Unpaid	Recorded Investment				Year-to-date Average	Interest Income Received
December 31, 2018	Principal Balance	With No Allowance	With Allowance	Total	Related Allowance	Recorded Investment	During Impairment

Commercial, financial and agricultural loans	$ 184,899	$ 87,525	$ 568,816	$ 656,341	$ 276,392	$ 370,038	$ 52,411
Real estate:
Construction loans	402,234	281,434	0	281,434	0	281,434	25,364
Commercial mortgage loans	1,787,305	1,277,611	333,892	1,611,503	51,854	1,544,299	45,403
Residential loans	1,801,002	1,027,647	752,443	1,780,090	188,368	1,594,390	127,806
Agricultural loans	12,526	12,526	0	12,526	0	12,526	5,530
Consumer & other loans	0	0	14,487	14,487	1,616	14,487	820

Total loans	$4,187,966	$2,686,743	$1,669,638	$4,356,381	$518,230	$3,817,174	$257,334

At March 31, 2018, the year-to-date average recorded investment of impaired loans was $3,803,413 and the interest income received during impairment was $59,744.

At March 31, 2019, and December 31, 2018, included in impaired loans were $4,275 and $7,458, 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 March 31, 2019, and December 31, 2018, as well as those currently paying under restructured terms and those that have defaulted under restructured terms as of March 31, 2019, and December 31, 2018. Loans modified in a troubled debt restructuring are considered to be in default once the loan becomes 30 or more days past due.

	March 31, 2019
					Under restructured terms
		Accruing		Non-accruing	#		Current	#		Default
Commercial, financial, and agricultural loans	$	4,275	$	0	1	$	4,275	0	$	0
Real estate:
Construction loans		0		0	0		0	0		0
Commercial mortgage loans		0		0	0		0	0		0
Residential loans		0		0	0		0	0		0
Agricultural loans		0		0	0		0	0		0
Consumer & other loans		0		0	0		0	0		0
Total TDR’s	$	4,275	$	0	1	$	4,275	0	$	0

	December 31, 2018
					Under restructured terms
		Accruing		Non-accruing	#		Current	#		Default
Commercial, financial, and agricultural loans	$	5,570	$	0	1	$	5,570	0	$	0
Real estate:
Construction loans		0		0	0		0	0		0
Commercial mortgage loans		0		0	0		0	0		0
Residential loans		1,888		0	1		1,888	0		0
Agricultural loans		0		0	0		0	0		0
Consumer & other loans		0		0	0		0	0		0
Total TDR’s	$	7,458	$	0	2	$	7,458	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 March 31, 2019, and December 31, 2018.

	March 31, 2019						December 31, 2018
	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	1		4,275	0		0	1		1,888	0		0
Forbearance of interest	0		0	0		0	1		5,570	0		0
Total	1	$	4,275	0	$	0	2	$	7,458	0	$	0

As of March 31, 2019, and December 31, 2018, the Corporation had a balance of $4,275 and $7,458, respectively, in troubled debt restructurings. The Corporation had no charge-offs on such loans at March 31, 2019, and December 31, 2018. The Corporation had $4,275 in the allowance for loan losses allocated to such troubled debt restructurings at March 31, 2019, and no balance allocated at December 31, 2018. The Corporation had no unfunded commitments to lend to a customer that has a troubled debt restructured loan as of March 31, 2019.

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 March 31, 2018, all Grade 8 loans have been charged-off.

The following tables present internal loan grading by class of loans as of March 31, 2019, and December 31, 2018:

March 31, 2019	Commercial, Financial, and Agricultural	Construction Real Estate	Commercial Real Estate	Residential Real Estate	Agricultural Real Estate	Consumer and Other	Total
Rating:
Grade 1- Exceptional	$ 1,389,477	$ 0	$ 0	$ 22,656	$ 0	$ 199,257	$ 1,611,390
Grade 2- Above Avg.	0	0	0	0	0	43,134	43,134
Grade 3- Acceptable	23,896,901	2,140,022	28,634,023	26,258,915	17,060,292	1,815,446	99,805,599
Grade 4- Fair	62,003,261	23,429,965	88,485,618	73,773,119	14,445,667	3,184,099	265,321,729
Grade 5a- Watch	758,902	273,098	1,908,525	2,006,308	0	14,950	4,961,783
Grade 5b- OAEM	244,637	0	0	0	0	0	244,637
Grade 6- Substandard	702,441	249,000	2,400,340	712,620	0	4,397	4,068,798
Grade 7- Doubtful	4,356	0	426,947	1,222,107	0	1,285	1,654,695
Total loans	$88,999,975	$26,092,085	$121,855,453	$103,995,725	$31,505,959	$5,262,568	$377,711,765

December 31, 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	$ 1,237,602	$ 0	$ 0	$ 22,905	$ 0	$ 210,045	$ 1,470,552
Grade 2- Above Avg.	0	0	0	0	0	43,711	43,711
Grade 3- Acceptable	23,821,846	1,860,003	30,398,565	25,839,646	16,863,356	1,151,239	99,934,655
Grade 4- Fair	58,753,931	22,749,099	88,122,957	73,114,310	14,698,330	3,657,108	261,095,735
Grade 5a- Watch	473,616	0	2,411,710	722,441	0	6,206	3,613,973
Grade 5b- OAEM	3,079,098	0	446,841	1,299,587	0	2,168	4,827,694
Grade 6- Substandard	787,309	281,434	2,097,296	2,349,009	0	16,507	5,531,555
Grade 7- Doubtful	249,813	0	0	0	0	0	249,813
Total loans	$88,403,215	$24,890,536	$123,477,369	$103,347,898	$31,561,686	$5,086,984	$376,767,688

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-month period ended March 31, 2019. 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 0.19% for the three months ended March 31, 2019, compared with 0.13% at December 31, 2018.

Three months ended March 31, 2019:

March 31, 2019	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, 2018	$ 402,251	$ 1,043,027	$ 1,210,302	$ 458,871	$ 108,878	$ 205,540	$ 3,428,869

Charge-offs	0	0	184,696	0	0	0	184,696
Recoveries	2,696	0	3,368	0	0	782	6,846
Net charge-offs	(2,696)	0	181,328	0	0	(782)	177,850
Provisions charged to operations	98,375	0	48,695	0	(31,998)	836	115,908
Balance at end of period, March 31, 2019	$ 503,322	$ 1,043,027	$ 1,077,669	$ 458,871	$ 76,880	$ 207,158	$ 3,366,927

Ending balance -
Individually evaluated for impairment	$ 562,925	$ 0	$ 38,678	$ 225,215	$ 0	$ 899	$ 827,717
Collectively evaluated for impairment	(59,603)	1,043,027	1,038,991	233,656	76,880	206,259	2,539,210
Balance at end of period	$ 503,322	$ 1,043,027	$ 1,077,669	$ 458,871	$ 76,880	$ 207,158	$ 3,366,927

Loans :
Ending balance -
Individually evaluated for impairment	$ 1,333,398	$ 273,098	$ 1,301,229	$ 1,411,269	$ 0	$ 13,415	$ 4,332,409
Collectively evaluated for impairment	87,666,577	25,818,987	120,554,224	102,584,456	31,505,959	5,249,153	373,379,356
Balance at end of period	$88,999,975	$26,092,085	$121,855,453	$103,995,725	$31,505,959	$5,262,568	$377,711,765

At March 31, 2019, of the $4,381,133 loans that were individually evaluated for impairment, only $4,332,409 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, 2018.

December 31, 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	548,460	783	43,349	6,909	0	6,844	606,345
Recoveries	12,025	0	590	0	147,252	2,215	162,082
Net charge-offs	536,435	783	42,759	6,909	(147,252)	4,629	444,263
Provisions charged to operations	614,426	727	196,466	49,306	(49,934)	18,509	829,500
Balance at end of period, December 31, 2018	$ 402,251	$ 1,043,027	$ 1,210,302	$ 458,871	$ 108,878	$ 205,540	$ 3,428,869

Ending balance -
Individually evaluated for impairment	$ 276,392	$ 0	$ 51,854	$ 188,368	$ 0	$ 1,616	$ 518,230
Collectively evaluated for impairment	125,859	1,043,027	1,158,448	270,503	108,878	203,924	2,910,639
Balance at end of period	$ 402,251	$ 1,043,027	$ 1,210,302	$ 458,871	$ 108,878	$ 205,540	$ 3,428,869

Loans :
Ending balance -
Individually evaluated for impairment	$ 656,341	$ 281,434	$ 1,611,503	$ 1,929,214	$ 12,526	$ 14,487	$ 4,505,505
Collectively evaluated for impairment	87,746,874	24,609,102	121,865,866	101,418,684	31,549,160	5,072,497	372,262,183
Balance at end of period	$88,403,215	$24,890,536	$123,477,369	$103,347,898	$31,561,686	$5,086,984	$376,767,688

At December 31, 2018, of the $4,505,505 loans that were individually evaluated for impairment, only $4,356,381 were deemed impaired.

Loans With

Predetermined

Loans With

Floating Rates

Commercial, financial,

agricultural and construction

$ 76,439,177

$ 3,325,699

$ 79,764,876