Loans and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2012

Loans and Allowance for Loan Losses [Abstract]

LOANS AND ALLOWANCE FOR LOAN LOSSES

NOTE D – LOANS AND ALLOWANCE FOR LOAN LOSSES

Credit Risk Elements:

Construction loans are underwritten utilizing independent appraisals, sensitivity analysis of absorption, vacancy and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. Construction loans often involve the disbursement of funds with repayment substantially dependent on the success of the ultimate project. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. The Bank typically requires guarantees on these loans. The Bank’s construction loans are secured primarily by properties located in its primary market area.

The Bank originates 1 – 4 family real estate and consumer loans utilizing credit reports to supplement the underwriting process. The Bank’s manual underwriting standards for 1 – 4 family loans are generally in accordance with FHLMC and loan policy manual underwriting guidelines. Properties securing 1 – 4 family real estate loans are appraised by fee appraisers, which are independent of the loan origination function and have been approved by management. The loan-to-value ratios normally do not exceed 80% without credit enhancements such as mortgage insurance. The Bank will lend up to 100% of the lesser of the appraised value or purchase price for conventional 1 – 4 family real estate loans, provided private mortgage insurance is obtained. The underwriting standards for consumer loans include a determination of the applicant’s payment history on other debts and an assessment of their ability to meet existing obligations and payments on the proposed loan. To monitor and manage loan risk, policies and procedures are developed and modified, as needed by management. This activity, coupled with smaller loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, market conditions are reviewed by management on a regular basis. The Bank’s 1 – 4 family real estate loans are secured primarily by properties located in its primary market area.

Commercial and agricultural real estate loans are subject to underwriting standards and processes similar to commercial and agricultural operating loans, in addition to those unique to real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial and agricultural real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Loan to value is generally 75% of the lower of the cost or value of the assets. Appraisals on properties securing these loans are generally performed by fee appraisers approved by the Commercial Loan Committee. Because payments on commercial and agricultural real estate loans are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. Management monitors and evaluates commercial and agricultural real estate loans based on collateral and risk rating criteria. The Bank typically requires guarantees on these loans. The Bank’s commercial and agricultural real estate loans are secured primarily by properties located in its primary market area.

Commercial and agricultural operating loans are underwritten based on the Bank’s examination of current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. This underwriting includes the evaluation of cash flows of the borrower, underlying collateral, if applicable, and the borrower’s ability to manage its business activities. The cash flows of borrowers and the collateral securing these loans may fluctuate in value after the initial evaluation. A first priority lien on the general assets of the business normally secures these types of loans. Loan to value limits vary and are dependent upon the nature and type of the underlying collateral and the financial strength of the borrower. Crop and hail insurance is required for most agricultural borrowers. Loans are generally guaranteed by the principal(s). The Bank’s commercial and agricultural operating lending is principally in its primary market area.

In evaluating the allowance for loan losses, loans are analyzed based on the department originating the loan (commercial, mortgage or consumer), which in some instances may be different than how the loans are categorized for regulatory reporting purposes. Consequently, loan groupings for impaired loans for purposes of calculating the allowance for loan losses by portfolio segment may differ from impaired loan groupings for regulatory reporting purposes.

The following is an analysis of the allowance for loan losses by portfolio segment and based on impairment method as of and for the three month periods ended March 31, 2012 and 2011 (in thousands):

	Commercial including Commercial Real Estate			Consumer			Real Estate Mortgage 1 st Lien			Real Estate Mortgage Junior  Lien			Total
March 31, 2012:
Balance at January 1	$	4,039		$	68		$	1,155		$	150		$	5,412
Provision for loan losses		60			3			155			7			225
Loans charged off		(48	)		(8	)		(124	)		(11	)		(191	)
Recoveries		63			6			2			8			79
Balance at March 31	$	4,114		$	69		$	1,188		$	154		$	5,525
Ending balance individually evaluated for impairment	$	895			—		$	243		$	5		$	1,143
Ending balance collectively evaluated for impairment		3,219			69			945			149			4,382
Total	$	4,114		$	69		$	1,188		$	154		$	5,525
March 31, 2011:
Balance at January 1	$	4,239		$	86		$	1,211		$	158		$	5,694
Provision for loan losses		(202	)		47			146			134			125
Loans charged off		(100	)		(35	)		(120	)		(64	)		(319	)
Recoveries		66			3			6			1			76
Balance at March 31	$	4,003		$	101		$	1,243		$	229		$	5,576
Ending balance individually evaluated for impairment	$	842			—		$	309		$	15		$	1,166
Ending balance collectively evaluated for impairment		3,161			101			934			214			4,410
Total	$	4,003		$	101		$	1,243		$	229		$	5,576

Commercial loans also include demand deposit loan account charge-offs and recoveries amounting to $43,000 and $39,000, respectively, for the three months ended March 31, 2012 and $37,000 and $23,000, respectively, for the three months ended March 31, 2011.

The following is a summary of the recorded investment in loans, by portfolio segment and based on impairment method, as of March 31, 2012 and December 31, 2011 (in thousands):

	Commercial including Commercial Real Estate		Consumer		Real Estate Mortgage 1 st Lien		Real Estate Mortgage Junior  Lien		Total
March 31, 2012:
Ending balance individually evaluated for impairment	$	6,961	$	26	$	3,042	$	84	$	10,113
Ending balance collectively evaluated for impairment		238,325		7,871		63,947		12,613		322,756
Total loans	$	245,286	$	7,897	$	66,989	$	12,697	$	332,869
December 31, 2011:
Ending balance individually evaluated for impairment	$	6,440	$	29	$	3,326	$	86	$	9,881
Ending balance collectively evaluated for impairment		237,263		7,800		64,927		12,933		322,923
Total loans	$	243,703	$	7,829	$	68,253	$	13,019	$	332,804

The following tables present loans individually evaluated for impairment by class of loans as of March 31, 2012 and December 31, 2011 (in thousands):

	Unpaid Principal Balance		Allowance for Loan Losses Allocated
March 31, 2012:
With no related allowance recorded:
Commercial	$	358	$	—
Real estate - commercial		3,058		—
Real estate - construction		221		—
Consumer		26		—
Real estate mortgage		2,305		—
With an allowance recorded:
Commercial		534		50
Real estate - commercial		1,424		588
Real estate - construction		36		5
Consumer		—		—
Real estate mortgage		2,151		500
Total	$	10,113	$	1,143

	Unpaid Principal Balance		Allowance for Loan Losses Allocated
December 31, 2011:
With no related allowance recorded:
Commercial	$	135	$	—
Real estate - commercial		2,649		—
Real estate - construction		232		—
Consumer		29		—
Real estate mortgage		2,485		—
With an allowance recorded:
Commercial		744		26
Real estate - commercial		1,403		490
Real estate - construction		—		—
Consumer		—		—
Real estate mortgage		2,204		468
Total	$	9,881	$	984

The following table presents the aging of the recorded investment in past due and nonaccrual loans as of March 31, 2012 and December 31, 2011 by class of loans (in thousands):

	Loans Past Due Accruing Interest								Loans on Non- Accrual		Loans Not Past Due or Non- Accrual
	30-59 Days		60-89 Days		Over 90 Days		Total						Total
March 31, 2012:
Commercial	$	13	$	—	$	117	$	130	$	367	$	69,406	$	69,903
Real estate - commercial		97		53		—		150		3,412		148,258		151,820
Real estate - construction		—		—		—		—		234		12,396		12,630
Consumer		61		22		6		89		26		8,090		8,205
Real estate mortgage		721		358		—		1,079		1,986		87,246		90,311
Total	$	892	$	433	$	123	$	1,448	$	6,025	$	325,396	$	332,869
December 31, 2011:
Commercial	$	182	$	120	$	6	$	308	$	413	$	69,335	$	70,056
Real estate - commercial		538		144		—		682		2,982		147,165		150,829
Real estate - construction		—		—		—		—		231		12,248		12,479
Consumer		22		4		—		26		29		8,112		8,167
Real estate mortgage		1,476		780		—		2,256		2,048		86,969		91,273
Total	$	2,218	$	1,048	$	6	$	3,272	$	5,703	$	323,829	$	332,804

Modifications:

The Company’s loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring (TDR), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.

When the Company modifies a loan, management evaluates any possible concession based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, except when the sole source of repayment for the loan is the liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling costs. If management determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs and deferred loan fees or costs), impairment is recognized through an allowance estimate or a charge-off to the allowance.

The following table summarizes the number and volume of TDRs the Company has recorded in its loan portfolio as of March 31, 2012 and the amount of specific reserves in the allowance for loan losses relating to the TDRs (in thousands):

	Number of Loans		Amount		Specific Reserves Allocated
March 31, 2012
Commercial		5	$	716	$	18
Real estate - commercial		5		1,613		12
Real estate - construction		—		—		—
Real estate - mortgage		17		1,609		169
Consumer		—		—		—
Total		27	$	3,938	$	199

No additional loans were classified as TDRs during the first quarter of 2012.

Credit Quality Indicators:

The Company 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 experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes all loans from the commercial loan department. This analysis is performed at least annually. The Company uses the following definitions for risk ratings:

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.

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 a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies 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.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

As of March 31, 2012 and December 31, 2011, based on the most recent analysis performed, the risk category of loans by class of loans was as follows (in thousands):

	Pass		Special Mention		Substandard		Doubtful		Not Risk Rated		Total
March 31, 2012
Commercial	$	59,128	$	6,163	$	4,612	$	—	$	—	$	69,903
Real estate - commercial		129,856		14,111		7,561		—		292		151,820
Real estate - construction		6,092		2,341		538		—		3,659		12,630
Real estate - mortgage		7,377		3,258		2,990		—		76,686		90,311
Consumer		—		—		—		—		8,205		8,205
Total	$	202,453	$	25,873	$	15,701	$	—	$	88,842	$	332,869
December 31, 2011
Commercial	$	59,492	$	5,855	$	4,709	$	—	$	—	$	70,056
Real estate - commercial		128,405		14,681		7,437		—		306		150,829
Real estate - construction		5,547		2,542		520		—		3,870		12,479
Real estate - mortgage		7,399		3,177		2,743		—		77,954		91,273
Consumer		—		—		—		—		8,167		8,167
Total	$	200,843	$	26,255	$	15,409	$	—	$	90,297	$	332,804