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Loans and Allowance for Loan Losses
 6 Months Ended
Jun. 30, 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 six month periods ended June 30, 2012 and 2011 (in thousands):

 

                                         
    Commercial
including
Commercial
Real Estate		     Consumer     Real
Estate
Mortgage
1 st Lien		     Real
Estate
Mortgage
Junior
Lien 		    Total  

June 30, 2012:

                                        

Balance at January 1

   $ 4,039     $ 68     $ 1,155     $ 150     $ 5,412  

Provision for loan losses

     439       6       252       3       700  

Loans charged off

     (809 )      (19 )      (224 )      (15 )      (1,067 ) 

Recoveries

     92       14       8       8       122  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Balance at June 30

   $ 3,761     $ 69     $ 1,191     $ 146     $ 5,167  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Ending balance individually evaluated for impairment

   $ 341       —       $ 256       —       $ 597  

Ending balance collectively evaluated for impairment

     3,420       69       935       146       4,570  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total

   $ 3,761     $ 69     $ 1,191     $ 146     $ 5,167  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

June 30, 2011:

                                        

Balance at January 1

   $ 4,239     $ 86     $ 1,211     $ 158     $ 5,694  

Provision for loan losses

     175       31       149       145       500  

Loans charged off

     (523 )      (40 )      (241 )      (105 )      (909 ) 

Recoveries

     101       5       8       3       117  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Balance at June 30

   $ 3,992     $ 82     $ 1,127     $ 201     $ 5,402  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Ending balance individually evaluated for impairment

   $ 817       —       $ 232     $ 13     $ 1,062  

Ending balance collectively evaluated for impairment

   $ 3,175     $ 82     $ 895     $ 188     $ 4,340  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total

   $ 3,992     $ 82     $ 1,127     $ 201     $ 5,402  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Commercial loans also include demand deposit loan account charge-offs and recoveries amounting to $63,000 and $68,000, respectively, for the six months ended June 30, 2012 and $78,000 and $42,000, respectively, for the six months ended June 30, 2011.

 

The following is a summary of the recorded investment in loans, by portfolio segment and based on impairment method, as of June 30, 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  

June 30, 2012:

                                        

Ending balance individually evaluated for impairment

   $ 7,220     $ 35     $ 3,314     $ 137     $ 10,706  

Ending balance collectively evaluated for impairment

     254,504       7,892       63,576       12,439       338,502  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total loans

   $ 261,783     $ 7,927     $ 66,922     $ 12,576     $ 349,208  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

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 June 30, 2012 and December 31, 2011 (in thousands):

 

                 
    Unpaid
Principal
Balance		     Allowance for
Loan Losses
Allocated		  

June 30, 2012:

                

With no related allowance recorded:

                

Commercial

   $ 924     $ —    

Real estate – commercial

     4,135       —    

Real estate – construction

     107       —    

Consumer

     35       —    

Real estate mortgage

     2,219       —    

With an allowance recorded:

                

Commercial

     78       50  

Real estate – commercial

     817       39  

Real estate – construction

     —         —    

Consumer

     —         —    

Real estate mortgage

     2,391       508  
   

 

 

    

 

 

  

Total

   $ 10,706     $ 597  
   

 

 

    

 

 

  

 

                 
    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 June 30, 2012 and December 31, 2011 by class of loans (in thousands):

 

                                                         
    Loans Past Due Accruing Interest                    
    30-59
Days		     60-89
Days		     Over
90
Days		     Total     Loans
on Non-
Accrual		     Loans Not
Past Due
or Non-
Accrual		     Total  

June 30, 2012:

                                                        

Commercial

   $ 160     $ —       $ —       $ 160     $ 487     $ 78,720     $ 79,367  

Real estate – commercial

     1,032       95       —         1,127       2,863       154,357       158,347  

Real estate – construction

     161       —         —         161       107       14,627       14,895  

Consumer

     18       2       8       28       35       8,240       8,303  

Real estate mortgage

     826       10       —         836       2,805       84,655       88,296  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total

   $ 2,197     $ 107     $ 8     $ 2,312     $ 6,297     $ 340,599     $ 349,208  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

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 June 30, 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		  

June 30, 2012

                        

Commercial

     5     $ 695     $ —    

Real estate – commercial

     6       2,120       12  

Real estate – construction

     —         —         —    

Real estate – mortgage

     17       1,599       161  

Consumer

     —         —         —    
   

 

 

    

 

 

    

 

 

  

Total

     28     $ 4,414     $ 173  
   

 

 

    

 

 

    

 

 

  

The following summarizes the number and volume of loans the Company classified as TDRs during the first six months of 2012 (in thousands):

 

                         
    Number of
Loans
Added		     Amount     Specific
Reserves
Allocated		  

June 30, 2012

                        

Commercial

     —       $ —       $ —    

Real estate – commercial

     1       515       —    

Real estate – construction

     —         —         —    

Real estate – mortgage

     —         —         —    

Consumer

     —         —         —    
   

 

 

    

 

 

    

 

 

  

Total

     1     $ 515     $ —    
   

 

 

    

 

 

    

 

 

  

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 June 30, 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  

June 30, 2012

                                                

Commercial

   $ 69,117     $ 4,962     $ 5,288     $ —       $ —       $ 79,367  

Real estate—commercial

     137,813       11,505       8,676       —         353       158,347  

Real estate—construction

     8,535       1,668       1,118       —         3,574       14,895  

Real estate—mortgage

     6,827       2,370       3,014       —         76,085       88,296  

Consumer

     —         —         —         —         8,303       8,303  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total

   $ 222,292     $ 20,505     $ 18,096     $ —       $ 88,315     $ 349,208  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  
             

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