LOANS, NET

12 Months Ended

Dec. 31, 2016

Note 3

LOANS, NET

Loan Portfolio Composition. The composition of the loan portfolio at December 31 was as follows:

(Dollars in Thousands)		2016		2015
Commercial, Financial and Agricultural		$	216,404	$	179,816
Real Estate – Construction			58,443		46,484
Real Estate – Commercial Mortgage			503,978		499,813
Real Estate – Residential⁽¹⁾			281,509		290,585
Real Estate – Home Equity			236,512		233,901
Consumer			264,443		241,676
	Loans, Net of Unearned Income	$	1,561,289	$	1,492,275

⁽¹⁾ Includes loans in process with outstanding balances of $9.6 million and $8.5 million for 2016 and 2015, respectively.

Net deferred costs included in loans were $0.5 million at December 31, 2016 and net deferred fees included in loans were $0.5 million at December 31, 2015.

The Company has pledged a blanket floating lien on all 1-4 family residential mortgage loans, commercial real estate mortgage loans, and home equity loans to support available borrowing capacity at the FHLB of Atlanta and has pledged a blanket floating lien on all consumer loans, commercial loans, and construction loans to support available borrowing capacity at the Federal Reserve Bank of Atlanta.

Nonaccrual Loans. Loans are generally placed on nonaccrual status if principal or interest payments become 90 days past due and/or management deems the collectability of the principal and/or interest to be doubtful. Loans are returned to accrual status when the principal and interest amounts contractually due are brought current or when future payments are reasonably assured.

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days and still on accrual by class of loans at December 31:

	2016				2015
(Dollars in Thousands)	Nonaccrual		90 + Days		Nonaccrual		90 + Days
Commercial, Financial and Agricultural	$	468	$	-	$	96	$	-
Real Estate – Construction		311		-		97		-
Real Estate – Commercial Mortgage		3,410		-		4,191		-
Real Estate – Residential		2,330		-		4,739		-
Real Estate – Home Equity		1,774		-		1,017		-
Consumer		240		-		165		-
Total Nonaccrual Loans	$	8,533	$	-	$	10,305	$	-

Loan Portfolio Aging. A loan is defined as a past due loan when one full payment is past due or a contractual maturity is over 30 days past due (“DPD”).

The following table presents the aging of the recorded investment in past due loans by class of loans at December 31,

	30-59		60-89		90 +		Total		Total		Total
(Dollars in Thousands)	DPD		DPD		DPD		Past Due		Current		Loans
2016
Commercial, Financial and Agricultural	$	209	$	48	$	-	$	257	$	215,679	$	216,404
Real Estate – Construction		949		282		-		1,231		56,901		58,443
Real Estate – Commercial Mortgage		835		1		-		836		499,732		503,978
Real Estate – Residential		1,199		490		-		1,689		277,490		281,509
Real Estate – Home Equity		577		51		-		628		234,110		236,512
Consumer		1,516		281		-		1,797		262,406		264,443
Total Past Due Loans	$	5,285	$	1,153	$	-	$	6,438	$	1,546,318	$	1,561,289

2015
Commercial, Financial and Agricultural	$	153	$	18	$	-	$	171	$	179,549	$	179,816
Real Estate – Construction		690		-		-		690		45,697		46,484
Real Estate – Commercial Mortgage		754		1,229		-		1,983		493,639		499,813
Real Estate – Residential		567		347		-		914		284,932		290,585
Real Estate – Home Equity		787		97		-		884		232,000		233,901
Consumer		735		398		-		1,133		240,378		241,676
Total Past Due Loans	$	3,686	$	2,089	$	-	$	5,775	$	1,476,195	$	1,492,275

Allowance for Loan Losses. The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses within the existing portfolio of loans. Loans are charged-off to the allowance when losses are deemed to be probable and reasonably quantifiable.

The following table details the activity in the allowance for loan losses by portfolio class for the years ended December 31. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

		Commercial,				Real Estate
		Financial,		Real Estate		Commercial		Real Estate		Real Estate
(Dollars in Thousands)		Agricultural		Construction		Mortgage		Residential		Home Equity		Consumer		Total
2016
Beginning Balance		$	905	$	101	$	4,498	$	4,409	$	2,473	$	1,567	$	13,953
	Provision for Loan Losses		817		67		(242)		(1,296)		(135)		1,608		819
	Charge-Offs		(861)		-		(349)		(899)		(450)		(2,127)		(4,686)
	Recoveries		337		-		408		1,231		409		960		3,345
	Net Charge-Offs		(524)		-		59		332		(41)		(1,167)		(1,341)
Ending Balance		$	1,198	$	168	$	4,315	$	3,445	$	2,297	$	2,008	$	13,431

2015
Beginning Balance		$	784	$	843	$	5,287	$	6,520	$	2,882	$	1,223	$	17,539
	Provision for Loan Losses		911		(742)		278		(964)		858		1,253		1,594
	Charge-Offs		(1,029)		-		(1,250)		(1,852)		(1,403)		(1,901)		(7,435)
	Recoveries		239		-		183		705		136		992		2,255
	Net Charge-Offs		(790)		-		(1,067)		(1,147)		(1,267)		(909)		(5,180)
Ending Balance		$	905	$	101	$	4,498	$	4,409	$	2,473	$	1,567	$	13,953

2014
Beginning Balance		$	699	$	1,580	$	7,710	$	9,073	$	3,051	$	982	$	23,095
	Provision for Loan Losses		742		(718)		897		(1,145)		1,069		1,060		1,905
	Charge-Offs		(871)		(28)		(3,788)		(2,160)		(1,379)		(1,820)		(10,046)
	Recoveries		214		9		468		752		141		1,001		2,585
	Net Charge-Offs		(657)		(19)		(3,320)		(1,408)		(1,238)		(819)		(7,461)
Ending Balance		$	784	$	843	$	5,287	$	6,520	$	2,882	$	1,223	$	17,539

The following table details the amount of the allowance for loan losses by portfolio class at December 31, disaggregated on the basis of the Company’s impairment methodology.

		Commercial,				Real Estate
		Financial,		Real Estate		Commercial		Real Estate		Real Estate
(Dollars in Thousands)		Agricultural		Construction		Mortgage		Residential		Home Equity		Consumer		Total
2016
Period-end amount
Allocated to:
	Loans Individually
	Evaluated for Impairment	$	80	$	-	$	2,038	$	1,561	$	335	$	6	$	4,020
	Loans Collectively
	Evaluated for Impairment		1,118		168		2,277		1,884		1,962		2,002		9,411
Ending Balance		$	1,198	$	168	$	4,315	$	3,445	$	2,297	$	2,008	$	13,431

2015
Period-end amount
Allocated to:
	Loans Individually
	Evaluated for Impairment	$	77	$	-	$	2,049	$	2,118	$	384	$	18	$	4,646
	Loans Collectively
	Evaluated for Impairment		828		101		2,449		2,291		2,089		1,549		9,307
Ending Balance		$	905	$	101	$	4,498	$	4,409	$	2,473	$	1,567	$	13,953

2014
Period-end amount
Allocated to:
	Loans Individually
	Evaluated for Impairment	$	293	$	-	$	2,733	$	2,113	$	638	$	5	$	5,782
	Loans Collectively
	Evaluated for Impairment		491		843		2,554		4,407		2,244		1,218		11,757
Ending Balance		$	784	$	843	$	5,287	$	6,520	$	2,882	$	1,223	$	17,539

The Company’s recorded investment in loans as of December 31 related to each balance in the allowance for loan losses by portfolio class and disaggregated on the basis of the Company’s impairment methodology was as follows:

	Commercial,				Real Estate
	Financial,		Real Estate		Commercial		Real Estate		Real Estate
(Dollars in Thousands)	Agricultural		Construction		Mortgage		Residential		Home Equity		Consumer		Total
2016
Individually Evaluated for
Impairment	$	1,042	$	247	$	23,855	$	15,596	$	3,375	$	174	$	44,289
Collectively Evaluated for
Impairment		215,362		58,196		480,123		265,913		233,137		264,269		1,517,000
Total	$	216,404	$	58,443	$	503,978	$	281,509	$	236,512	$	264,443	$	1,561,289

2015
Individually Evaluated for
Impairment	$	834	$	97	$	20,847	$	18,569	$	3,144	$	261	$	43,752
Collectively Evaluated for
Impairment		178,982		46,387		478,966		272,016		230,757		241,415		1,448,523
Total	$	179,816	$	46,484	$	499,813	$	290,585	$	233,901	$	241,676	$	1,492,275

2014
Individually Evaluated for
Impairment	$	1,040	$	401	$	32,242	$	20,120	$	3,074	$	216	$	57,093
Collectively Evaluated for
Impairment		135,885		41,195		477,878		275,849		226,498		216,976		1,374,281
Total	$	136,925	$	41,596	$	510,120	$	295,969	$	229,572	$	217,192	$	1,431,374

Impaired Loans. Loans are deemed to be impaired when, based on current information and events, it is probable that the Company will not be able to collect all amounts due (principal and interest payments), according to the contractual terms of the loan agreement. Loans, for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.

The following table presents loans individually evaluated for impairment by class of loans at December 31:

	Unpaid		Recorded		Recorded
	Principal		Investment		Investment		Related
(Dollars in Thousands)	Balance		With No Allowance		With Allowance		Allowance
2016
Commercial, Financial and Agricultural	$	1,042	$	565	$	477	$	80
Real Estate – Construction		247		-		247		-
Real Estate – Commercial Mortgage		23,855		8,954		14,901		2,038
Real Estate – Residential		15,596		2,509		13,087		1,561
Real Estate – Home Equity		3,375		1,871		1,504		335
Consumer		174		65		109		6
Total	$	44,289	$	13,964	$	30,325	$	4,020

2015
Commercial, Financial and Agricultural	$	834	$	279	$	555	$	77
Real Estate – Construction		97		97		-		-
Real Estate – Commercial Mortgage		20,847		3,265		17,582		2,049
Real Estate – Residential		18,569		2,941		15,628		2,118
Real Estate – Home Equity		3,144		1,101		2,043		384
Consumer		261		79		182		18
Total	$	43,752	$	7,762	$	35,990	$	4,646

Nonaccrual loans include both smaller balance homogenous loans that are collectively evaluated for impairment and individually classified impaired loans. Therefore, the sum of nonaccrual loans and accruing troubled debt restructurings will differ from the total impaired amount.

The following table summarizes the average recorded investment and interest income recognized for each of the last three years by class of impaired loans:

	2016				2015				2014
	Average		Total		Average		Total		Average		Total
	Recorded		Interest		Recorded		Interest		Recorded		Interest
(Dollars in Thousands)	Investment		Income		Investment		Income		Investment		Income
Commercial, Financial and Agricultural	$	886	$	49	$	1,002	$	46	$	1,440	$	62
Real Estate – Construction		69		1		335		-		637		4
Real Estate – Commercial Mortgage		21,376		920		27,644		1,093		41,435		1,725
Real Estate – Residential		17,314		786		19,105		842		21,122		1,070
Real Estate – Home Equity		3,076		115		3,001		86		3,000		72
Consumer		207		9		201		7		294		9
Total	$	42,928	$	1,880	$	51,288	$	2,074	$	67,928	$	2,942

Credit Risk Management. The Company has adopted comprehensive lending policies, underwriting standards and loan review procedures designed to maximize loan income within an acceptable level of risk. Management and the Board of Directors review and approve these policies and procedures on a regular basis (at least annually).

Reporting systems have been implemented to monitor loan originations, loan quality, concentrations of credit, loan delinquencies and nonperforming loans and potential problem loans. Management and the Credit Risk Oversight Committee periodically review our lines of business to monitor asset quality trends and the appropriateness of credit policies. In addition, total borrower exposure limits are established and concentration risk is monitored. As part of this process, the overall composition of the portfolio is reviewed to gauge diversification of risk, client concentrations, industry group, loan type, geographic area, or other relevant classifications of loans. Specific segments of the loan portfolio are monitored and reported to the Board on a quarterly basis and have strategic plans in place to supplement Board approved credit policies governing exposure limits and underwriting standards. Detailed below are the types of loans within the Company’s loan portfolio and risk characteristics unique to each.

Commercial, Financial, and Agricultural – Loans in this category are primarily made based on identified cash flows of the borrower with consideration given to underlying collateral and personal or other guarantees. Lending policy establishes debt service coverage ratio limits that require a borrower’s cash flow to be sufficient to cover principal and interest payments on all new and existing debt. The majority of these loans are secured by the assets being financed or other business assets such as accounts receivable, inventory, or equipment. Collateral values are determined based upon third party appraisals and evaluations. Loan to value ratios at origination are governed by established policy guidelines.

Real Estate Construction – Loans in this category consist of short-term construction loans, revolving and non-revolving credit lines and construction/permanent loans made to individuals and investors to finance the acquisition, development, construction or rehabilitation of real property. These loans are primarily made based on identified cash flows of the borrower or project and generally secured by the property being financed, including 1-4 family residential properties and commercial properties that are either owner-occupied or investment in nature. These properties may include either vacant or improved property. Construction loans are generally based upon estimates of costs and value associated with the completed project. Collateral values are determined based upon third party appraisals and evaluations. Loan to value ratios at origination are governed by established policy guidelines. The disbursement of funds for construction loans is made in relation to the progress of the project and as such these loans are closely monitored by on-site inspections.

Real Estate Commercial Mortgage – Loans in this category consists of commercial mortgage loans secured by property that is either owner-occupied or investment in nature. These loans are primarily made based on identified cash flows of the borrower or project with consideration given to underlying real estate collateral and personal guarantees. Lending policy establishes debt service coverage ratios and loan to value ratios specific to the property type. Collateral values are determined based upon third party appraisals and evaluations.

Real Estate Residential – Residential mortgage loans held in the Company’s loan portfolio are made to borrowers that demonstrate the ability to make scheduled payments with full consideration to underwriting factors such as current income, employment status, current assets, and other financial resources, credit history, and the value of the collateral. Collateral consists of mortgage liens on 1-4 family residential properties. Collateral values are determined based upon third party appraisals and evaluations. The Company does not originate sub-prime loans.

Real Estate Home Equity – Home equity loans and lines are made to qualified individuals for legitimate purposes generally secured by senior or junior mortgage liens on owner-occupied 1-4 family homes or vacation homes. Borrower qualifications include favorable credit history combined with supportive income and debt ratio requirements and combined loan to value ratios within established policy guidelines. Collateral values are determined based upon third party appraisals and evaluations.

Consumer Loans – This loan portfolio includes personal installment loans, direct and indirect automobile financing, and overdraft lines of credit. The majority of the consumer loan portfolio consists of indirect and direct automobile loans. Lending policy establishes maximum debt to income ratios, minimum credit scores, and includes guidelines for verification of applicants’ income and receipt of credit reports.

Credit Quality Indicators. As part of the ongoing monitoring of the Company’s loan portfolio quality, management categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment performance, credit documentation, and current economic/market trends, among other factors. Risk ratings are assigned to each loan and revised as needed through established monitoring procedures for individual loan relationships over a predetermined amount and review of smaller balance homogenous loan pools. The Company uses the definitions noted below for categorizing and managing its criticized loans. Loans categorized as “Pass” do not meet the criteria set forth for the Special Mention, Substandard, or Doubtful categories and are not considered criticized.

Special Mention – Loans in this category are presently protected from loss, but weaknesses are apparent which, if not corrected, could cause future problems. Loans in this category may not meet required underwriting criteria and have no mitigating factors. More than the ordinary amount of attention is warranted for these loans.

Substandard – Loans in this category exhibit well-defined weaknesses that would typically bring normal repayment into jeopardy. These loans are no longer adequately protected due to well-defined weaknesses that affect the repayment capacity of the borrower. The possibility of loss is much more evident and above average supervision is required for these loans.

Doubtful – Loans in this category have all the weaknesses inherent in a loan categorized as Substandard, with the characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

The following table presents the risk category of loans by segment at December 31:

	Commercial,						Total
	Financial,						Criticized
(Dollars in Thousands)	Agriculture		Real Estate		Consumer		Loans
2016
Special Mention	$	3,300	$	23,183	$	216	$	26,699
Substandard		1,158		39,800		549		41,507
Doubtful		-		-		-		-
Total Criticized Loans	$	4,458	$	62,983	$	765	$	68,206

2015
Special Mention	$	5,938	$	27,838	$	69	$	33,845
Substandard		1,307		51,425		819		53,551
Doubtful		-		-		-		-
Total Criticized Loans	$	7,245	$	79,263	$	888	$	87,396

Troubled Debt Restructurings (“TDRs”). TDRs are loans in which the borrower is experiencing financial difficulty and the Company has granted an economic concession to the borrower that it would not otherwise consider. In these instances, as part of a work-out alternative, the Company will make concessions including the extension of the loan term, a principal moratorium, a reduction in the interest rate, or a combination thereof. The impact of the TDR modifications and defaults are factored into the allowance for loan losses on a loan-by-loan basis as all TDRs are, by definition, impaired loans. Thus, specific reserves are established based upon the results of either a discounted cash flow analysis or the underlying collateral value, if the loan is deemed to be collateral dependent. A TDR classification can be removed if the borrower’s financial condition improves such that the borrower is no longer in financial difficulty, the loan has not had any forgiveness of principal or interest, and the loan is subsequently refinanced or restructured at market terms and qualifies as a new loan.

The following table presents loans classified as TDRs at December 31:

	2016				2015
(Dollars in Thousands)	Accruing		Nonaccruing		Accruing		Nonaccruing
Commercial, Financial and Agricultural	$	772	$	40	$	897	$	-
Real Estate – Construction		-		-		-		-
Real Estate – Commercial Mortgage		20,673		1,259		16,621		1,070
Real Estate – Residential		13,969		444		14,979		1,582
Real Estate – Home Equity		2,647		-		2,914		-
Consumer		172		-		223		35
Total TDRs	$	38,233	$	1,743	$	35,634	$	2,687

Loans classified as TDRs during 2016, 2015, and 2014 are presented in the table below. The modifications made during the reporting period involved either an extension of the loan term, a principal moratorium, a reduction in the interest rate, or a combination thereof. The financial impact of these modifications was not material.

	2016			2015			2014
	Number			Number			Number
	of	Recorded		of	Recorded		of	Recorded
(Dollars in Thousands)	Contracts	Investment⁽¹⁾		Contracts	Investment⁽¹⁾		Contracts	Investment⁽¹⁾
Commercial, Financial and Agricultural	-	$	-	1	$	40	3	$	320
Real Estate – Construction	-		-	-		-	-		-
Real Estate – Commercial Mortgage	3		5,012	4		631	3		1,769
Real Estate – Residential	6		590	14		1,531	11		1,972
Real Estate – Home Equity	5		206	21		1,005	10		883
Consumer	-		-	3		110	1		34
Total TDRs	14	$	5,808	43	$	3,317	28	$	4,978

⁽¹⁾ Recorded investment reflects charge-offs and additional funds advanced at time of restructure, if applicable.

The following table provides information on how TDRs were modified during the periods included.

	2016			2015			2014
	Number	Post-Modified		Number	Post-Modified		Number	Post-Modified
	of	Recorded		of	Recorded		of	Recorded
(Dollars in Thousands)	Contracts	Investment		Contracts	Investment		Contracts	Investment
Extended amortization	3	$	4,703	16	$	973	10	$	1,894
Interest rate adjustment	-		-	5		284	1		156
Extended amortization and
Interest rate adjustment	11		1,105	22		2,060	8		1,179
Other	-		-	-		-	9		1,749
Total TDRs	14	$	5,808	43	$	3,317	28	$	4,978

The following table presents loans classified as TDRs for which there was a payment default during the years presented and the loans were modified within the twelve months prior to default.

	2016			2015			2014
	Number			Number			Number
	of	Recorded		of	Recorded		of	Recorded
(Dollars in Thousands)	Contracts	Investment⁽¹⁾		Contracts	Investment⁽¹⁾		Contracts	Investment⁽¹⁾
Commercial, Financial and Agricultural	-	$	-	-	$	-	-	$	-
Real Estate – Construction	-		-	-		-	-		-
Real Estate – Commercial Mortgage	-		-	-		-	1		60
Real Estate – Residential	-		-	-		-	2		177
Real Estate – Home Equity	-		-	-		-	1		153
Total TDRs	-	$	-	-	$	-	4	$	390

⁽¹⁾ Recorded investment reflects charge-offs and additional funds advanced at time of restructure, if applicable.

- Definition

The entire disclosure for claims held for amounts due a entity, excluding financing receivables. Examples include, but are not limited to, trade accounts receivables, notes receivables, loans receivables. Includes disclosure for allowance for credit losses.

+ References + Details