Loans and Allowance for Loans Losses

9 Months Ended

Sep. 30, 2011

Notes to Financial Statements

Loans and Allowance for Loans Losses

Note C Loans and Allowance for Loans Losses

Major classifications of loans as of September 30, 2011 and December 31, 2010 are as follows (in thousands):

	September 30,		December 31,
	2011		2010
Real Estate Mortgages:
Residential 1-4 Family	$	21,044	$	19,541
Commercial		18,258		20,282
Construction		6,386		9,023
Second Mortgages		880		949
Other		1,641		1,725
		48,209		51,520
Commercial		2,719		2,714
Personal		1,642		1,203
Credit Cards		5,788		6,321
Overdrafts		217		277
		58,575		62,036
Allowance for Loan Losses		1,800		1,800
Net Loans	$	56,775	$	60,236

The following is a classification of loans by rate and maturity:

	September 30,			December 31,
	2011			2010
	(In Thousands)
Fixed Rate Loans:
Maturing in 3 Months or Less	$	15,734		$	13,785
Maturing Between 3 and 12 Months		25,642			29,769
Maturing Between 1 and 5 Years		14,867			14,154
Maturing After 5 Years		613			631
Variable Rate Loans:
Maturing Quarterly or More Frequently		665			723
Maturing Between 3 and 12 Months		—			698
Maturing Between 1 and 5 Years		—			—
Non accrual Loans		1,054			2,276
Less: Allowance for Loan Losses		(1,800	)		(1,800	)
Net Loans	$	56,775		$	60,236

Non-accrual loans are those loans for which the payment of principal or interest is delinquent for 90 days, or earlier in some cases. All interest accrued but not collected for loans that are placed on non-accrual status is reversed against income. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet the payment obligations as they become due, as well as when required by regulatory provisions. Loans placed on non-accrual status cease to accrue interest.

Non-accruals loans, segregated by class of loan, are as follows:

	September 30		December 31,
	2011		2010
	(In Thousands)
Real Estate Mortgages
Residential 1-4 Family	$	678	$	793
Commercial		130		101
Construction		222		1,371
Second Mortgages		—		—
Other		—		—
Commercial		11		—
Personal		12		12
Credit Cards		—		—
Overdrafts		—		—
Total	$	1,054	$	2,276

An aging analysis of past due loans, segregated by class of loans, as of September 30, 2011 and December 31, 2010, is as follows (in thousands):

											ACCRUING
	30-89		90-MORE		TOTAL		CURRENT		TOTAL		90-MORE
September 30, 2011	DAYS		DAYS		PAST DUE		LOANS		LOANS		PAST DUE
Real Estate
1-4 Family Res	$	1,129	$	1,183	$	2,312	$	18,732	$	21,044	$	505
Commercial		275		130		405		17,853		18,258		—
Construction		427		851		1,277		5,108		6,386		628
Second Mortgages		—		—		—		880		880		—
Other		199		130		329		1,312		1,641		130
Commercial		1,010		96		1,106		1,613		2,719		85
Personal		30		43		73		1,569		1,642		32
Credit Cards		152		41		192		5,596		5,788		41
Overdrafts		14		75		89		128		217		75
Total	$	3,235	$	2,550	$	5,785	$	52,790	$	58,575	$	1,496

											ACCRUING
	30-89		90-MORE		TOTAL		CURRENT		TOTAL		90-MORE
December 31, 2010	DAYS		DAYS		PAST DUE		LOANS		LOANS		PAST DUE
Real Estate
1-4 Family Res	$	1,467	$	2,410	$	3,877	$	15,664	$	19,541	$	1,617
Commercial		328		101		429		19,853		20,282		—
Construction		406		1,371		1,777		7,246		9,023		—
Second Mortgages		29		—		29		920		949		—
Other		279				279		1,446		1,725		—
Commercial		461		1		463		2,252		2,714		1
Personal		63		22		85		1,118		1,203		11
Credit Cards		129		56		185		6,137		6,321		56
Overdrafts		4		210		214		63		277		210
Total	$	3,166	$	4,171	$	7,337	$	54,699	$	62,036	$	1,895

Loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Impaired loans, or portions thereof, are charged off when deemed uncollectible. Although the loan may be currently performing under the contractual terms of the loan agreement, management may consider the loan impaired based on past history, changes in market condition, etc. On a loan-by-loan basis, management assesses whether the accrual of interest should be continued. Interest income for loans for which the interest rate has been modified continues to be accrued at the reduced rate as long as the borrower complies with the revised terms and conditions.

Impaired loans, including TDR’s, as of September 30, 2011 are set forth in the following table:

	Unpaid		Recorded		Recorded
	Contractual		Investment		Investment		Total
	Principal		with No		with		Recorded		Related
	Balance		Allowance		Allowance		Investment		Allowance
Real Estate
Residential 1-4 Family	$	1,730,605	$	859,574	$	2,408,779	$	3,268,353	$	483,781
Commercial		130,392		—		130,392		130,392		14,630
Construction		574,387		—		574,387		574,387		81,707
Second Mortgages		—		—		—		—		—
Other		—		—		—		—		—
Commercial		309,188		—		309,188		309,188		73,004
Personal		11,793		—		11,793		11,793		4,000
Credit Cards		—		—		—		—		—
Overdrafts		—		—		—		—		—
Total	$	2,756,365	$	859,574	$	3,434,539	$	4,294,113	$	657,122

Impaired loans as of December 31, 2010 are set forth in the following table:

	Unpaid		Recorded		Recorded
	Contractual		Investment		Investment		Total
	Principal		with No		with		Recorded		Related
	Balance		Allowance		Allowance		Investment		Allowance
Real Estate
Residential 1-4 Family	$	3,061,009	$	—	$	3,061,009	$	3,061,009	$	532,438
Commercial		—		—		—		—		—
Construction		1,573,321		—		1,573,321		1,573,321		382,261
Second Mortgages		—		—		—		—		—
Other		115,856		—		115,856		115,856		11,284
Commercial		7,303		—		7,303		7,303		820
Personal		108,894		—		108,894		108,894		5,362
Credit Cards		—		—		—		—		—
Overdrafts		205,751		—		205,751		205,751		30,863
Total	$	5,072,134	$	—	$	5,072,134	$	5,072,134	$	963,028

Provision for Loan Losses

The allowance for loan losses is established through a provision for loan losses. Management’s policy is to maintain the allowance at a level believed, to the best of management’s knowledge, to cover all known and inherent losses in the loan portfolio. Management reviews the allowance for loan losses on a periodic basis in order to identify those inherent losses and to assess the overall collection probability of the loan portfolio. The evaluation process includes, among other things, an analysis of delinquency trends, non-performing loan trends, the level of charge-offs and recoveries, prior loss experience, total loans outstanding, the volume of loan originations, the type, size and geographic concentration of our loans, the value of collateral securing the loan, the borrower’s ability to repay and repayment performance, the number of loans requiring heightened management oversight, local economic conditions and industry experience. From this analysis, a general, specific and unallocated reserve is established, which totals the allowance for loan losses at each reporting date.

For real estate, commercial and consumer loans, the Bank evaluates the average historical charge-off rate for the previous five years. However, charge-off trends occurring within the past 12 to 24 months are considered in determining the appropriate loss percentage to use in the Bank’s allowance estimate for these types of loans. For charge card loans, the Bank considers the past two years of historical charge-offs in order to develop an appropriate estimate for the provision for loan losses.

At September 30, 2011 and December 31, 2010 the allowance for loan losses was $1,800,000. The provision for loan losses for the nine months ended September 30, 2011 and September 30, 2010 totaled $75,679 and $304,688, respectively. The overall decrease in our provision for the two periods is due to an overall decrease in our total loan portfolio, as well an overall improvement in the performance in the Bank’s loan portfolio during the nine months ended September 30, 2011. We believe that the improvement in the overall credit quality of our Real Estate loans and Overdraft accounts indicates that a reduction in allowance pertaining to these segments are appropriate.

Changes in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2011 are as follows:

	Real Estate			Commercial			Personal			Credit Cards			Overdrafts			Unallocated			Total
Balance at January 1, 2011	$	970,452		$	45,287		$	17,763		$	367,544		$	31,171		$	367,783		$	1,800,000
Provision for Possible Loan Losses		(12,381	)		85,094			22,335			54,014			(17,434	)		(55,949	)		75,679
Charge-Offs		(19,153	)		(15,959	)		(6,376	)		(194,679	)		(3,628	)		(25	)		(239,820	)
Recoveries		50,326			—			3,549			109,285			911			70			164,141
Net Charge-Offs		31,173			(15,959	)		(2,827	)		(85,394	)		(2,717	)		45			(75,679	)
Ending Balance	$	989,244		$	114,422		$	37,271		$	336,164		$	11,020		$	311,879		$	1,800,000
Period-End Amount Allocated To:
Loans Individually Evaluated for Impairment	$	580,118		$	73,004		$	4,000		$	—		$	—		$	—		$	657,122
Loans Collectively Evaluated for Impairment		409,126			41,418			33,271			336,164			11,020			311,879			1,142,878
Ending Balance	$	989,244		$	114,422		$	37,271		$	336,164		$	11,020		$	311,879		$	1,800,000

Changes in the allowance for loan losses by portfolio segment for the year ended December 31, 2010 are as follows:

	Real Estate			Commercial			Personal			Credit Cards			Overdrafts			Unallocated		Total
Balance at January 1, 2010	$	1,229,554		$	125,487		$	67,616		$	360,976		$	13,033		$	3,334	$	1,800,000
Provision for Possible Loan Losses		(256,220	)		(105,250	)		(43,117	)		312,444			32,382			364,449		304,688
Charge-Offs		(4,371	)		—			(6,736	)		(476,737	)		(16,704	)		—		(504,548	)
Recoveries		1,489			25,050			—			170,861			2,460			—		199,860
Net Charge-Offs		(2,882	)		25,050			(6,736	)		(305,876	)		(14,244	)		—		(304,688	)
Ending Balance	$	970,452		$	45,287		$	17,763		$	367,544		$	31,171		$	367,783	$	1,800,000
Period-End Amount Allocated To:
Loans Individually Evaluated for Impairment	$	925,985		$	820		$	5,363		$	—		$	30,862		$	—	$	963,030
Loans Collectively Evaluated for Impairment		44,467			44,467			12,400			367,544			309			367,783		836,970
Balance at December 31, 2010	$	970,452		$	45,287		$	17,763		$	367,544		$	31,171		$	367,783	$	1,800,000

From a credit risk standpoint, the Company classifies it’s loans in four categories: (i) pass, (ii) watch, (iii) substandard or (iv) doubtful.

The classification of loans reflects a judgment about the risks of default and loss associated with the loan. The Company reviews the ratings on credits monthly. Ratings are adjusted to reflect the degree of risk and loss that is felt to be inherent in each credit as of each monthly reporting period. The methodology is structured so that specific allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss).

Credits rated watch show clear signs of financial weakness or deterioration in credit worthiness; however, such concerns are not so pronounced that the Company generally expects to experience significant loss within the short-term. Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits rated more harshly.

Credits rated substandard are those in which the normal repayment of principal and interest may be, or has been jeopardized by reason of adverse trends or developments in financial, managerial, economic or political nature, or important weaknesses exist in collateral. Corrective action is required to strengthen the Company’s position, and/or to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits.

Credits rated doubtful are those in which full collection of principal appears highly questionable, and which some degree of loss is anticipated, even though the ultimate amount of loss may not yet be certain and/or other factors exist which could affect collection of debt. Based upon available information, positive action by the Company is required to avert or minimize loss. Credits rated doubtful are generally also placed on nonaccrual.

At September 30, 2011, the following table summarizes the Company’s internal ratings of its loans:

	Real						Credit
	Estate		Commercial		Personal		Cards		Overdrafts		Total
Pass	$	43,107,129	$	2,344,357	$	1,575,308	$	5,787,977	$	144,509	$	52,959,280
Watch		1,114,564		300,363				—				1,414,927
Substandard		2,956,532		62,677		55,075		—		72,737		3,147,021
Doubtful		1,030,891		11,305		11,793		—		—		1,053,989
Totals	$	48,209,116	$	2,718,702	$	1,642,176	$	5,787,977	$	217,246	$	58,575,217

At December 31, 2010, the following table summarizes the Company’s internal ratings of its loans:

	Real						Credit
	Estate		Commercial		Personal		Cards		Overdrafts		Total
Pass	$	44,399,289	$	1,546,798	$	1,082,245	$	6,321,359	$	—	$	53,349,691
Watch		2,382,733		1,160,384		—		—		71,181		3,614,298
Substandard		2,473,968		7,303		108,894		—		205,751		2,795,916
Doubtful		2,264,423		—		11,793		—		—		2,276,216
Totals	$	51,520,413	$	2,714,485	$	1,202,932	$	6,321,359	$	276,932	$	62,036,121

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, 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 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, impairment is recognized through an allowance estimate.

The following table summarizes the number and volume of TDRs the Company has recorded in its loan portfolio as of September 30, 2011 as well as the amount of specific reserves in the allowance for loan losses relating to the TDRs (in thousands):

Loan Type	Number of Loans		Amount		Specific Reserves Allocated
Real Estate:
1 - 4 Family Residential		8	$	2,397,322	$	345,148
Construction		1		144,285		16,189
Commercial		2		297,883		68,736
Total		11	$	2,839,490	$	430,073