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Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2019

3. LOANS AND ALLOWANCE FOR LOAN LOSSES

The composition of the Corporation’s loan portfolio at December 31, 2019 and 2018 was as follows:

	2019			2018
Commercial, financial and agricultural loans	$	87,441,489		$	88,403,215
Real estate
Construction loans		28,826,099			24,890,536
Commercial mortgage loans		143,022,080			123,477,369
Residential loans		102,239,917			103,347,898
Agricultural loans		31,459,274			31,561,686
Consumer & other loans		5,093,661			5,086,984
Loans outstanding		398,082,520			376,767,688
Unearned interest and discount		(17,345	)		(17,451	)
Allowance for loan losses		(3,604,348	)		(3,428,869	)
Net loans	$	394,460,827		$	373,321,368

The Corporation’s only significant concentration of credit at December 31, 2019, occurred in real estate loans which totaled approximately $306 million. However, this amount was not concentrated in any specific segment within the market or geographic area.

At December 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 $67,746,577. FHLB has a blanket lien on the 1-4 family and multifamily portfolios, which totaled $121,550,567.

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 $241,078 and $1,204,861 at December 31, 2019 and 2018, respectively. There was one past due credit card loan in the amount of $2,571 over 90 days and still accruing at December 31, 2019. There were no past due loans over 90 days and still accruing at 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 $9,158 and $64,015 as of December 31, 2019 and 2018, 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, 2019
	Current and < 30 Days Past Due		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due Loans		Total Past Due Loans		Total Loans
Commercial, financial and agricultural loans	$	84,952,610	$	675,714	$	1,685,289	$	127,876	$	2,488,879	$	87,441,489
Real estate:
Construction loans		28,548,384		227,383		0		0		227,383		28,775,767
Commercial mortgage loans		138,646,493		3,962,070		209,234		1		4,171,305		142,817,798
Residential loans		100,302,023		1,404,806		248,516		115,772		1,769,094		102,071,117
Agricultural loans		30,877,028		457,246		125,000		0		582,246		31,459,274
Consumer & other loans		4,887,890		61,404		34,265		0		95,669		4,983,559
Total loans	$	388,214,428	$	6,788,622	$	2,302,304	$	243,649	$	9,334,576	$	397,549,004
Overdrafts, in-process, and suspense												533,516
											$	398,082,520

	Age Analysis of Past Due Loans As of December 31, 2018
	Current and < 30 Days Past Due		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due Loans		Total Loans
Commercial, financial and agricultural loans	$	88,119,660	$	222,516	$	247,397	$	36,157	$	283,555	$	88,403,215
Real estate:
Construction loans		24,837,229		0		0		0		0		24,837,229
Commercial mortgage loans		122,454,819		0		0		1,022,550		1,022,550		123,477,369
Residential loans		101,630,920		1,424,282		1,560,913		146,154		146,153		103,337,986
Agricultural loans		31,240,367		321,319		321,319		0		0		31,561,686
Consumer & other loans		5,050,331		14,238		36,654		0		0		5,086,984
Total loans	$	373,333,325	$	1,982,355	$	2,166,283	$	1,204,861	$	3,371,144	$	376,704,469
Overdrafts, in-process, and suspense												63,219
											$	376,767,688

The following table presents nonaccrual loans segregated by class of loans.

	2019				2018
	Nonaccrual		90 Days or More Still Accruing		Nonaccrual		90 Days or More Still Accruing
Commercial, financial and agricultural loans	$	125,305	$	2,571	$	36,157	$	0
Real estate:
Construction loans		0		0		0		0
Commercial mortgage loans		1		0		1,022,550		0
Residential loans		115,772		0		146,154		0
Agricultural loans		0		0		0		0
Consumer & other loans		0		0		0		0
Total loans	$	241,078	$	2,571	$	1,204,861	$	0

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, 2019 and 2018, impaired loans amounted to $2,195,151 and $4,356,381, respectively. A reserve amount of $478,153 and $518,230, respectively, was recorded in the allowance for loan losses for these impaired loans as of December 31, 2019 and 2018.

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

	Unpaid		Recorded Investment								Year-to-date Average		Interest Income Received
December 31, 2019	Principal Balance		With No Allowance		With Allowance		Total		Related Allowance		Recorded Investment		During Impairment
Commercial, financial and agricultural loans	$	1,247,947	$	62,475	$	1,098,818	$	1,161,293	$	430,318	$	939,937	$	83,335
Real estate:
Construction loans		63,708		63,708		0		63,708		0		63,708		4,533
Commercial mortgage loans		847,287		249,582		154,439		404,021		47,690		365,940		47,663
Residential loans		581,217		553,468		0		553,468		0		525,698		34,193
Agricultural loans		0		0		0		0		0		0		0
Consumer & other loans		12,661		0		12,661		12,661		145		12,661		936
Total loans	$	2,752,820	$	929,233	$	1,265,918	$	2,195,151	$	478,153	$	1,907,944	$	170,660

	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

For the period ending December 31, 2017, the average recorded investment for impaired loans was $3,789,822 and the interest income received during impairment was $207,180.

At December 31, 2019 and 2018, included in impaired loans were $3,384 and $7,458, 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, 2019 and 2018, as well as those currently paying under restructured terms and those that have defaulted under restructured terms as of December 31, 2019 and 2018. 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, 2019
					Under restructured terms
	Accruing		Non-accruing		#		Current		#		Default
Commercial, financial, and agricultural loans	$	3,384	$	0		1	$	3,384		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		1		0		0		0
Agricultural loans		0		0		0		0		0		0
Consumer & other loans		0		0		0		0		0		0
Total TDR’s	$	3,384	$	0		1	$	3,384		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 nonaccrual at December 31, 2019 and 2018.

	December 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		0		0		0		0		1		1,888		0		0
Forbearance of interest		1		3,384		0		0		1		5,570		0		0
Total		1	$	3,384		0	$	0		2	$	7,458		0	$	0

As of December 31, 2019 and 2018, the Corporation had a balance of $3,384 and $7,458, respectively, in troubled debt restructurings. The Corporation had no charge-offs on such loans as of December 31, 2019, and no charge-offs as of December 31, 2018. The Corporation’s balance in the allowance for loan losses allocated to such troubled debt restructurings was $0 at both December 31, 2019 and 2018. The Corporation had no unfunded commitment to lend to a customer that has a troubled debt restructured loan as of December 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 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, 2019 and 2018, all Grade 8 loans have been charged-off.

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

December 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	$	1,337,601	$	0	$	0	$	21,932	$	0	$	335,663	$	1,695,196
Grade 2- Above Avg.		1,000		485,000		892,053		184,901		1,352,739		29,220		2,944,913
Grade 3- Acceptable		23,863,615		4,863,194		36,268,643		27,923,193		16,118,982		1,307,088		110,344,716
Grade 4- Fair		59,884,319		23,272,247		102,519,640		68,280,386		13,535,352		3,393,268		270,885,212
Grade 5a- Watch		394,551		15,979		2,360,912		1,399,320		0		578		4,171,340
Grade 5b- OAEM		1,532		125,971		327,831		3,110,121		452,200		11,327		4,028,982
Grade 6- Substandard		1,730,710		63,708		653,001		1,293,986		0		16,517		3,757,922
Grade 7- Doubtful		228,161		0		0		26,078		0		0		254,239
Total loans	$	87,441,489	$	28,826,099	$	143,022,080	$	102,239,917	$	31,459,274	$	5,093,661	$	398,082,520

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.

Changes in the allowance for loan losses are as follows:

	2019			2018			2017
Balance, January 1	$	3,428,869		$	3,043,632		$	3,124,611
Provision charged to operations		856,677			829,500			300,000
Loans charged off		(750,757	)		(606,345	)		(447,747	)
Recoveries		69,559			162,082			66,768
Balance, December 31	$	3,604,348		$	3,428,869		$	3,043,632

The following tables detail activity in the ALL by class of loans for the years ended December 31, 2019 and 2018. 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, 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		179,241		56,220		274,550		226,540		0			14,206		750,757
Recoveries		20,029		0		3,368		39,812		0			6,350		69,559
Net charge-offs		159,212		56,220		271,182		186,728		0			7,856		681,198
Provisions charged to operations		258,307		48,417		420,195		147,666		(31,998	)		14,090		856,677
Balance at end of period, December 31, 2019	$	501,346	$	1,035,224	$	1,359,315	$	419,809		$ 76 880		$	211,774	$	3,604,348
Individually evaluated for impairment	$	430,318	$	0	$	47,690	$	0	$	0		$	145	$	478,153
Collectively evaluated for impairment		71,028		1,035,224		1,311,625		419,809		76,880			211,629		3,126,195
Balance at end of period	$	501,346	$	1,035,224	$	1,359,315	$	419,809	$	76,880		$	211,774	$	3,604,348

Loans :
Ending balance -
Individually evaluated for impairment	$	1,161,293	$	63,708	$	404,021	$	553,468	$	0		$	12,661	$	2,195,151
Collectively evaluated for impairment		86,280,196		28,762,391		142,618,059		101,686,449		31,459,274			5,081,000		395,887,369
Balance at end of period	$	87,441,489	$	28,826,099	$	143,022,080	$	102,239,917	$	31,459,274		$	5,093,661	$	398,082,520

At December 31, 2019, of the $2,195,151 loans that were individually evaluated for impairment, $2,195,151 were

deemed impaired.

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
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.

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,
	2019		2018		2017
Allowance for loss on impaired loans	$	478,153	$	518,230	$	331,779
Recorded balance of impaired loans	$	2,195,151	$	4,356,381	$	4,895,730