Note 7 - Credit Quality of Loans

6 Months Ended

Jun. 30, 2012

Loan Credit Quality [Text Block]

Note 7 – Credit Quality of Loans

Aging Analysis of Loans.  The Company considers a loan to be past due when the terms of the contractual obligation are not met by the borrower.  The following table presents an aging analysis of the Company’s loans not covered by FDIC loss-share agreements, loans covered by FDIC loss-share agreements and total loans summarizing current loans, past due loans, and nonaccrual loans by category at June 30, 2012 and December 31, 2011.

June 30, 2012	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or More Past Due and Accruing		Nonaccrual		Total Past Due		Current		Total Loans		Recorded Investment 90 Days or More and Accruing
	(Dollars in thousands)
Not covered by FDIC loss-share agreements
Real estate:
One-to-four family residential	$	489	$	88	$	-	$	4,230	$	4,807	$	109,514	$	114,321	$	-
Multifamily residential		-		-		-		-		-		17,074		17,074		-
Construction		-		-		-		-		-		27,114		27,114		-
Commercial land		-		-		151		3,018		3,169		19,716		22,885		154
Residential development		-		-		-		3,000		3,000		7,068		10,068		-
Other commercial real estate		235		682		-		8,489		9,406		238,869		248,275		-
Consumer real estate		255		-		-		961		1,216		97,946		99,162		-
Total real estate		979		770		151		19,698		21,598		517,301		538,899		154
Commercial business		24		-		-		945		969		42,666		43,635		-
Other consumer		32		7		-		15		54		4,910		4,964		-
Total	$	1,035	$	777	$	151	$	20,658	$	22,621	$	564,877	$	587,498	$	154
Covered by FDIC loss-share agreements
Real estate:
One-to-four family residential	$	759	$	135	$	61	$	7,566	$	8,521	$	20,505	$	29,026	$	63
Multifamily residential		-		-		-		380		380		2,502		2,882		-
Construction		-		-		-		-		-		33		33		-
Commercial land		-		106		-		3,944		4,050		4,732		8,782		-
Residential development		-		-		-		3,759		3,759		2,267		6,026		-
Other commercial real estate		29		206		-		17,785		18,020		47,196		65,216		-
Consumer real estate		229		-		-		967		1,196		8,261		9,457		-
Total real estate		1,017		447		61		34,401		35,926		85,496		121,422		63
Commercial business		8		-		163		1,422		1,593		3,202		4,795		169
Other consumer		23		-		-		413		436		2,221		2,657		-
Total	$	1,048	$	447	$	224	$	36,236	$	37,955	$	90,919	$	128,874	$	232
Total at June 30, 2012
Real estate:
One-to-four family residential	$	1,248	$	223	$	61	$	11,796	$	13,328	$	130,019	$	143,347	$	63
Multifamily residential		-		-		-		380		380		19,576		19,956		-
Construction		-		-		-		-		-		27,147		27,147		-
Commercial land		-		106		151		6,962		7,219		24,448		31,667		154
Residential development		-		-		-		6,759		6,759		9,335		16,094		-
Other commercial real estate		264		888		-		26,274		27,426		286,065		313,491		-
Consumer real estate		484		-		-		1,928		2,412		106,207		108,619		-
Total real estate		1,996		1,217		212		54,099		57,524		602,797		660,321		217
Commercial business		32		-		163		2,367		2,562		45,868		48,430		169
Other consumer		55		7		-		428		490		7,131		7,621		-
Total	$	2,083	$	1,224	$	375	$	56,894	$	60,576	$	655,796	$	716,372	$	386

December 31, 2011	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or More Past Due and Accruing		Nonaccrual		Total Past Due		Current		Total Loans		Recorded Investment 90 Days or More and Accruing
	(Dollars in thousands)
Not covered by FDIC loss-share agreements
Real estate:
One-to-four family residential	$	80	$	1,634	$	-	$	2,407	$	4,121	$	112,738	$	116,859	$	-
Multifamily residential		-		-		-		-		-		16,759		16,759		-
Construction		-		93		-		-		93		19,509		19,602		-
Commercial land		-		-		-		2,631		2,631		25,491		28,122		-
Residential development		-		-		-		6,474		6,474		9,970		16,444		-
Other commercial real estate		81		1,873		-		4,173		6,127		219,856		225,983		-
Consumer real estate		761		388		335		2,543		4,027		99,494		103,521		338
Total real estate		922		3,988		335		18,228		23,473		503,817		527,290		338
Commercial business		7		-		-		168		175		40,986		41,161		-
Other consumer		13		3		-		80		96		5,553		5,649		-
Total	$	942	$	3,991	$	335	$	18,476	$	23,744	$	550,356	$	574,100	$	338
Covered by FDIC loss-share agreements
Real estate:
One-to-four family residential	$	1,530	$	2,220	$	215	$	8,441	$	12,406	$	22,235	$	34,641	$	219
Multifamily residential		-		-		-		216		216		2,710		2,926		-
Construction		-		-		-		1,191		1,191		64		1,255		-
Commercial land		140		11		10		6,704		6,865		6,805		13,670		11
Residential development		-		-		-		4,578		4,578		3,517		8,095		-
Other commercial real estate		351		466		495		17,454		18,766		57,546		76,312		511
Consumer real estate		236		15		-		634		885		10,263		11,148		-
Total real estate		2,257		2,712		720		39,218		44,907		103,140		148,047		741
Commercial business		90		39		23		3,484		3,636		4,230		7,866		24
Other consumer		141		133		57		554		885		2,890		3,775		58
Total	$	2,488	$	2,884	$	800	$	43,256	$	49,428	$	110,260	$	159,688	$	823
Total at December 31, 2011
Real estate:
One-to-four family residential	$	1,610	$	3,854	$	215	$	10,848	$	16,527	$	134,973	$	151,500	$	219
Multifamily residential		-		-		-		216		216		19,469		19,685		-
Construction		-		93		-		1,191		1,284		19,573		20,857		-
Commercial land		140		11		10		9,335		9,496		32,296		41,792		11
Residential development		-		-		-		11,052		11,052		13,487		24,539		-
Other commercial real estate		432		2,339		495		21,627		24,893		277,402		302,295		511
Consumer real estate		997		403		335		3,177		4,912		109,757		114,669		338
Total real estate		3,179		6,700		1,055		57,446		68,380		606,957		675,337		1,079
Commercial business		97		39		23		3,652		3,811		45,216		49,027		24
Other consumer		154		136		57		634		981		8,443		9,424		58
Total	$	3,430	$	6,875	$	1,135	$	61,732	$	73,172	$	660,616	$	733,788	$	1,161

Troubled Debt Restructurings.  The Company adopted the amendments in Accounting Standards Update (“ASU”) No. 2011-02 Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring, during the quarter ended September 30, 2011, and has reassessed all restructurings that occurred on or after the beginning of the 2011 fiscal year for identification as troubled debt restructurings (“TDRs”). The Company identified as TDRs certain receivables for which the allowance for credit losses had previously been measured under a general allowance for credit losses methodology (ASC 450-20). Upon identifying the reassessed receivables as TDRs, the Company also identified them as impaired under the new guidance in ASC 310-10-35. The amendments in ASU No. 2011-02 require prospective application of the impairment measurement guidance in Section 310-10-35 for those receivables newly identified as impaired. At the end of the second interim period of adoption for the Company, the recorded investment in the receivables for which the allowance for credit losses was previously measured under a general allowance for credit losses methodology and are now impaired under Section 310-10-35 was $1.3 million (310-40-65-1(b)), and there was no allowance for credit losses associated with those receivables, on the basis of a current evaluation of loss (310-40-65-1(b)).

The modification or restructuring of a debt constitutes a TDR if we, for economic or legal reasons related to the borrower’s financial difficulties, grant a concession to the borrowers that we would not otherwise consider. Some examples of modifications are described below:

Rate modification –  A modification in which only the interest rate is changed.

Term modification – A modification in which the maturity date, timing of payments, or frequency of payments is changed.

Interest only modification – A modification in which the loan is converted to interest only payments for a period of time.

Debt Reduction Modification – A modification in which a portion of the debt is reduced.

Payment Modification – A modification in which the dollar amount of the payment is changed, other than an interest only modification described above.

Transfer of Assets Modification– A modification in which a transfer of assets has occurred to partially satisfy debt, including foreclosure and repossession.

Combination Modification – Any other type of modification, including the use of multiple categories above.

The following table presents the Bank’s loans classified as TDRs by loan type as of June 30, 2012 and December 31, 2011:

	Accrual Status		Non-accrual Status		Total Contracts		Total TDRs
	(Dollars in thousands)
June 30, 2012
One-to-four family residential	$	220	$	-	$	2	$	220
Commercial land		875		678		3		1,553
Residential development		-		141		1		141
Other commercial real estate		4,450		4,936		23		9,386
Commercial business		-		885		1		885
Total	$	5,545	$	6,640	$	30	$	12,185
December 31, 2011
One-to-four family residential	$	12	$	-		1	$	12
Commercial land		195		89		2		284
Residential development		633		-		2		633
Other commercial real estate		6,955		1,159		24		8,114
Total	$	7,795	$	1,248	$	29	$	9,043

The following table presents new TDRs that were restructured during the six months ended June 30, 2012, and June 30, 2011:

	Six Months Ended June 30, 2012						Six Months Ended June 30, 2011
	Total Number of Contracts		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment		Total Number of Contracts		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment
	(Dollars in thousands)
Interest only modification:
Commercial real estate		1		590		590		3		1,050		1,050
Subtotal		1	$	590	$	590		3	$	1,050	$	1,050
Term modification:
Residential real estate		1	$	208	$	208		-	$	-	$	-
Commercial business		-		-		-		3		598		598
Subtotal		1	$	208	$	208		3	$	598	$	598
Debt reduction reduction:
Commercial land		3	$	4,576	$	3,285		-	$	-	$	-
Subtotal		3	$	4,576	$	3,285		-	$	-	$	-
Total		5	$	5,374	$	4,083		6	$	1,648	$	1,648

All TDRs are not automatically placed on nonaccrual status.  Generally, those TDRs that are placed on non-accrual status may return to accrual status when the borrower has sustained repayment performance in accordance with the modified terms.  The number of payments needed to meet these criteria varies from loan to loan.  However, as a general rule, most non-accrual loans should be able to return to accrual status after the payment of six consecutive regular scheduled payments. During the six month period ended June 30, 2012, there were no payment defaults on any TDRs.  During the 12 month period ended December 31, 2011, there was one payment default on a residential TDR.  The collateral for this residential loan was acquired through foreclosure and was sold during the third quarter of 2011.  The loan had an original principal balance of $1.1 million and the resulting loss from disposition of the collateral was approximately $335,000.

Also, in the normal course of business, the Company will make loan restructurings or modifications to borrowers for reasons unrelated to the borrower’s financial condition.  These restructurings or modifications are made based on the prevailing interest rates and terms offered to other borrowers for similar types of loans at the time of the modification. These types of debt restructurings or loan modifications would not be considered troubled debt restructurings.

Impaired Loans.  The Company evaluates impairment of its non-covered residential mortgage and consumer loans on a collective basis, while non-covered commercial and construction loans are evaluated individually for impairment.  The Company identifies a non-covered loan as impaired when it is probable that principal and interest will not be collected when due according to the contractual terms of the loan agreement.  Principal write-downs may be recognized for individual non-covered loans that management considers impaired.  The remainder of the portfolio of non-covered loans is segmented into groups of loans with similar risk characteristics for evaluation and analysis. Since all estimated impairments resulted in principal writedowns, there were no specific related allowances for the impaired loans at June 30, 2012, or December 31, 2011.

The following table details the Company’s impaired loans by type at June 30, 2012, and December 31, 2011:

	June 30, 2012								December 31, 2011
	Recorded Investment		Unpaid Principal Balance		Net Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Net Principal Balance		Related Allowance
	(Dollars in thousands)
June 30, 2012
One-to-four family residential	$	4,696	$	5,143	$	4,488	$	-	$	2,781	$	2,739	$	2,739	$	-
Commercial land		3,355		4,343		3,194		-		3,062		4,523		2,826		-
Residential development		3,679		5,427		3,472		-		8,428		10,173		8,262		-
Commercial real estate - office		7,449		8,584		7,375		-		6,322		7,573		6,305		-
Commercial real estate - residential rental		2,288		2,933		2,244		-		4,076		4,808		4,029		-
Commercial real estate - owner-occupied		2,721		3,301		2,614		-		-		-		-		-
Commercial real estate - other		2,188		2,585		2,168		-		2,426		2,945		2,323		-
Consumer real estate		1,158		1,968		1,047		-		2,689		2,801		2,630		-
Commercial business		948		945		945		-		169		169		169		-
Other consumer		18		18		18		-		89		90		89		-
Total impaired loans	$	28,500	$	35,247	$	27,565	$	-	$	30,042	$	35,821	$	29,372	$	-

Credit Quality Indicators. We categorize loans using various credit quality indicators based on relevant information about the ability of borrowers to service their debts such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.  We analyze loans individually by classifying the loans as to credit risk.  This analysis is performed on at least a quarterly basis.  We use the following definitions for credit quality indicators:

Pass - Loans in classes that comprise the commercial business and consumer segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. The Company’s portfolio of FDIC-covered loans was considered to be Pass rated loans at June 30, 2012, and December 31, 2011, as the loans were recorded at estimated fair value on the acquisition date and have FDIC loss-share agreements to cover at least 80% of any future losses.

Special Mention - Loans designated as special mention have potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of our credit position at some future date. Management believes that there is a moderate likelihood of some loss related to loans designated as Special Mention.

Substandard -  Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans so classified have one or more well-defined weaknesses that jeopardize the liquidation of the debt.  There is a distinct possibility that the Company will sustain some loss if the deficiencies on these loans are not corrected.

Doubtful -  Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values highly questionable and improbable.

Loss – Loans classified as loss are considered to be completely uncollectable and as a result the loans have been completely written-off the books of the Company.   

As of June 30, 2012 and December 31, 2011, the credit quality indicators of loans were as follows:

	Pass		Special Mention		Substandard		Total
	(Dollars in thousands)
June 30, 2012
Real estate:
One-to-four family residential	$	138,184	$	483	$	4,680	$	143,347
Multifamily residential		18,901		1,055		-		19,956
Construction		27,147		-		-		27,147
Commercial land		25,296		720		5,651		31,667
Residential development		11,904		-		4,190		16,094
Owner occupied CRE		126,414		4,988		2,905		134,307
Other commercial real estate		153,500		15,846		9,838		179,184
Consumer land		15,479		200		516		16,195
Home equity lines of credit		89,853		1,294		1,277		92,424
Total real estate		606,678		24,586		29,057		660,321
Commercial business		47,138		244		1,048		48,430
Other consumer		7,416		168		37		7,621
Total loans	$	661,232	$	24,998	$	30,142	$	716,372
December 31, 2011
Real estate:
One-to-four family residential	$	149,013	$	562	$	1,925	$	151,500
Multifamily residential		19,685		-		-		19,685
Construction		20,857		-		-		20,857
Commercial land		30,202		8,600		2,990		41,792
Residential development		15,806		1,037		7,696		24,539
Other commercial real estate		269,970		19,925		12,400		302,295
Consumer land		17,356		458		1,560		19,374
Home equity lines of credit		92,752		790		1,753		95,295
Total real estate		615,641		31,372		28,324		675,337
Commercial business		48,477		254		296		49,027
Other consumer		9,147		170		107		9,424
Total loans	$	673,265	$	31,796	$	28,727	$	733,788