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Loans and Allowance for Loan Losses
 12 Months Ended
Dec. 31, 2012
Loans and Allowance for Loan Losses [Abstract]  
LOANS AND ALLOWANCE FOR LOAN LOSSES

NOTE D – LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans at year-end were as follows (in thousands):

 

                 
    2012     2011  
     

Commercial

   $ 82,543     $ 70,056  

Real estate - commercial

     172,764       150,829  

Real estate - construction

     16,802       12,479  

Consumer

     8,349       8,167  

Real estate mortgage

     89,147       91,273  
   

 

 

    

 

 

  
      369,605       332,804  

Less allowance for loan losses

     (5,455 )      (5,412 ) 
   

 

 

    

 

 

  

Loans, net

   $ 364,150     $ 327,392  
   

 

 

    

 

 

  

 

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 completion of the 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 Federal Home Loan Mortgage Corporation 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.

The Bank has an internal credit analyst who reviews and validates credit risk on a periodic basis, as well as an internal loan review performed throughout the year. Results of the credit analyst are presented to management. Internal loan reviews are presented to management and the Audit Committee. The credit analysis and loan review processes complement and reinforce the risk identification and assessment decisions made by lenders and credit personnel, as well as the Bank’s policies and procedures.

At December 31, 2012 and 2011, certain directors and executive officers of the Company, including their associates and companies in which they are principal owners, were indebted to the Bank. The following is a summary of activity of loans (in thousands) exceeding $60,000 in the aggregate to these individuals and their associates. All of these loans were made in the ordinary course of business, were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to the Company and did not involve more than the normal risk of collectability or present other unfavorable features. None of these loans were in default at December 31, 2012. Other changes include adjustments for loans applicable to one reporting period that are excludable from the other reporting period.

 

                         
    2012     2011     2010  
       

Balance at January 1

   $ 13,542     $ 14,099     $ 16,578  

New loans, including renewals

     5,306       11,230       7,805  

Repayments

     (4,626 )      (11,659 )      (10,192 ) 

Other changes, net

     58       (128 )      (92 ) 
   

 

 

    

 

 

    

 

 

  

Balance at December 31

   $ 14,280     $ 13,542     $ 14,099  
   

 

 

    

 

 

    

 

 

  

The unpaid principal balance of mortgage loans serviced for others, which are not included on the consolidated balance sheet, was $197,238,000 and $168,025,000 at December 31, 2012 and 2011, respectively.

Activity for capitalized mortgage servicing rights, included in other assets, was as follows (in thousands):

 

                         
    2012     2011     2010  
       

Balance at January 1

   $ 969     $ 868     $ 753  

Additions

     641       412       371  

Amortized to expense

     (367 )      (311 )      (256 ) 
   

 

 

    

 

 

    

 

 

  

Balance at December 31

   $ 1,243     $ 969     $ 868  
   

 

 

    

 

 

    

 

 

  

No valuation allowance for capitalized mortgage servicing rights was considered necessary at December 31, 2012 or 2011 because the estimated fair value of such rights exceeded the carrying value.

Changes in the allowance for loan losses for the years ended December 31 were as follows (in thousands):

 

                         
    2012     2011     2010  
       

Balance at January 1

   $ 5,412     $ 5,694     $ 6,075  

Provision for loan losses

     1,350       1,050       1,375  

Loans charged off

     (1,547 )      (1,561 )      (2,031 ) 

Recoveries

     240       229       275  
   

 

 

    

 

 

    

 

 

  

Net charge-offs

     (1,307 )      (1,332 )      (1,756 ) 
   

 

 

    

 

 

    

 

 

  
       

Balance at December 31

   $ 5,455     $ 5,412     $ 5,694  
   

 

 

    

 

 

    

 

 

  

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 may vary within the disclosures.

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

 

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

December 31, 2012

                                        

Balance at January 1

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

Provision for loan losses

     1,038       9       249       54       1,350  

Loans charged off

     (1,084 )      (40 )      (341 )      (82 )      (1,547 ) 

Recoveries

     165       20       42       13       240  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Balance at December 31

   $ 4,158     $ 57     $ 1,105     $ 135     $ 5,455  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  
           

Ending balance individually evaluated for impairment

   $ 534       —       $ 224       —       $ 758  
           

Ending balance collectively evaluated for impairment

     3,624       57       881       135       4,697  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  
           

Total

   $ 4,158     $ 57     $ 1,105     $ 135     $ 5,455  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  
           

December 31, 2011

                                        
           

Balance at January 1

   $ 4,239     $ 87     $ 1,211     $ 157     $ 5,694  

Provision for loan losses

     498       14       433       105       1,050  

Loans charged off

     (875 )      (71 )      (498 )      (117 )      (1,561 ) 

Recoveries

     177       38       9       5       229  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Balance at December 31

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  
           

Ending balance individually evaluated for impairment

   $ 744       —       $ 240       —       $ 984  
           

Ending balance collectively evaluated for impairment

     3,295       68       915       150       4,428  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  
           

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Commercial loans also include demand deposit loan account charge-offs and recoveries amounting to $132,000 and $125,000, respectively, for the year ended December 31, 2012 and $167,000 and $72,000, respectively, for the year ended December 31, 2011.

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

 

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

December 31, 2012:

                                        

Ending balance individually evaluated for impairment

   $ 5,964     $ 17     $ 2,879     $ 129     $ 8,989  
           

Ending balance collectively evaluated for impairment

     276,539       7,884       64,143       12,050       360,616  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  
           

Ending balance

   $ 282,503     $ 7,901     $ 67,022     $ 12,179     $ 369,605  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  
           

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  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  
           

Ending balance

   $ 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 December 31, 2012 and December 31, 2011 (in thousands):

 

                         
December 31, 2012   Unpaid
Principal
Balance		     Recorded
Investment		     Allowance for
Loan Losses
Allocated		  
       

With no related allowance recorded:

                        
       

Commercial

   $ 492     $ 492     $ —    

Real estate - commercial

     2,599       2,194       —    

Real estate - construction

     80       80       —    

Consumer

     16       16       —    

Real estate mortgage

     1,835       1,698       —    
       

With an allowance recorded:

                        

Commercial

     482       423       37  

Real estate - commercial

     1,590       1,561       122  

Real estate - construction

     188       188       161  

Consumer

     —         —         —    

Real estate mortgage

     2,337       2,337       438  
   

 

 

    

 

 

    

 

 

  
       

Total

   $   9,619     $ 8,989     $ 758  
   

 

 

    

 

 

    

 

 

  

 

                         
December 31, 2011   Unpaid
Principal
Balance		     Recorded
Investment		     Allowance for
Loan Losses
Allocated		  
       

With no related allowance recorded:

                        
       

Commercial

   $ 135     $ 135     $ —    

Real estate - commercial

     2,808       2,649       —    

Real estate - construction

     244       232       —    

Consumer

     29       29       —    

Real estate mortgage

     2,999       2,485       —    
       

With an allowance recorded:

                        

Commercial

     804       744       26  

Real estate - commercial

     1,434       1,403       490  

Real estate - construction

     —         —         —    

Consumer

     —         —         —    

Real estate mortgage

     2,204       2,204       468  
   

 

 

    

 

 

    

 

 

  
       

Total

   $ 10,657     $ 9,881     $ 984  
   

 

 

    

 

 

    

 

 

  

Information regarding impaired loans at December 31 follows (in thousands):

 

                         
    2012     2011     2010  
       

Average balance of impaired loans during the year

   $ 9,486     $ 10,530     $ 11,719  
       

Cash basis interest income recognized during the year

   $ 252     $ 250     $ 345  
       

Interest income recognized during the year

   $ 268     $ 285     $ 396  

The Company’s loan portfolio also includes certain loans that have been modified in a 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.

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 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 December 31, 2012 and 2011, as well as the number of TDR loans added each year and the amount of specific reserves in the allowance for loan losses relating to TDRs (dollars in thousands):

 

                                                 
    Total     Added During the Year  
December 31, 2012   Number of
Loans		     Amount     Specific
Reserves
Allocated		     Number of
Loans		     Amount     Specific
Reserves
Allocated		  
             

Commercial

     6     $ 740     $ 37       1     $ 98     $ —    

Real estate - commercial

     7       2,088       122       2       518       11  

Real estate - construction

     —         —         —         —         —         —    

Real estate - mortgage

     17       1,483       117       2       92       30  

Consumer

     —         —         —         —         —         —    
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  
             

Total

     30     $ 4,311     $ 276       5     $ 708     $ 41  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  
             
December 31, 2011                                    
             

Commercial

     5     $ 733     $ 23       2     $ 267     $ 11  

Real estate - commercial

     5       1,619       13       2       455       13  

Real estate - construction

     —         —         —         —         —         —    

Real estate - mortgage

     21       1,882       181       13       1,182       112  

Consumer

     —         —         —         —         —         —    
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  
             

Total

     31     $ 4,234     $ 217       17     $ 1,904     $ 136  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

The modification of the terms of loans that resulted in a TDR included one or a combination of the following: a reduction of the stated interest rate of the loan or an extension of the maturity date or amortization period. The post-modified loan balance for TDR’s was essentially the same as the pre-modified balance.

The Company has not committed to lend any additional funds to these borrowers.

There was one $30,000 real estate mortgage TDR in default of its modified terms as of December 31, 2012. No charge off or specific reserve was recorded for this loan through December 31, 2012.

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

 

                                                         
December 31, 2012   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  
               

Commercial

   $ 46     $ —       $ —       $ 46     $ 492     $ 82,005     $ 82,543  

Real estate - commercial

     199       62       —         261       2,189       170,314       172,764  

Real estate - construction

     10       —         26       36       269       16,497       16,802  

Consumer

     22       6       7       35       16       8,298       8,349  

Real estate mortgage

     442       109       —         551       2,417       86,179       89,147  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  
               

Total

   $  719     $    177     $ 33     $    929     $ 5,383     $ 363,293     $ 369,605  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

                                                         
December 31, 2011   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  
               

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  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

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:

Pass: Loans classified as pass have no existing or known potential weaknesses deserving of management’s close attention.

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.

As of December 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):

 

                                                 
December 31, 2012   Pass     Special
Mention		     Substandard     Doubtful     Not Risk
Rated		     Total  
             

Commercial

   $ 72,521     $ 8,993     $ 1,029     $ —       $ —       $ 82,543  

Real estate - commercial

     156,105       10,755       4,971       —         933       172,764  

Real estate - construction

     10,572       869       359       —         5,002       16,802  

Real estate - mortgage

     9,797       2,483       2,533       —         74,334       89,147  

Consumer

     —         —         —         —         8,349       8,349  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  
             

Total

   $  248,995     $ 23,100     $ 8,892     $ —       $ 88,618     $ 369,605  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

                                                 
December 31, 2011   Pass     Special
Mention		     Substandard     Doubtful     Not Risk
Rated		     Total  
             

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