Loans and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2014

Receivables [Abstract]

Loans and Allowance for Loan Losses

Note 2. Loans and Allowance for Loan Losses

For financial reporting purposes, the Company classifies its loan portfolio based on the underlying collateral utilized to secure each loan. This classification is consistent with those utilized in the Quarterly Report of Condition and Income filed by the Bank with the Federal Deposit Insurance Corporation (“FDIC”).

The following schedule details the loans of the Company at March 31, 2014 and December 31, 2013:

	(In Thousands)
	March 31,			December 31,
	2014			2013
Mortgage Loans on real estate
Residential 1-4 family	$	332,452		$	332,432
Multifamily		17,946			13,920
Commercial		519,203			526,258
Construction and land development		203,808			194,426
Farmland		27,132			22,771
Second mortgages		10,780			10,511
Equity lines of credit		35,645			34,185
Total mortgage loans on real estate		1,146,966			1,134,503
Commercial loans		28,179			29,444
Agricultural loans		2,193			2,099
Consumer installment loans
Personal		35,629			37,789
Credit cards		2,959			3,329
Total consumer installment loans		38,588			41,118
Other loans		3,079			3,291
		1,219,005			1,210,455
Net deferred loan fees		(3,321	)		(3,253	)
Total loans		1,215,684			1,207,202
Less: Allowance for loan losses		(23,325	)		(22,935	)
Net Loans	$	1,192,359		$	1,184,267

The adequacy of the allowance for loan losses is assessed at the end of each calendar quarter. The level of the allowance is based upon evaluation of the loan portfolio, past loan loss experience, current asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, historical loss experience, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations.

Transactions in the allowance for loan losses for the three months ended March 31, 2014 and year ended December 31, 2013 are summarized as follows:

	(In Thousands)
	Residential						Commercial							Second			Equity Lines									Installment
	1-4 Family			Multifamily			Real Estate			Construction		Farmland		Mortgages			of Credit			Commercial			Agricultural			and Other			Total
March 31, 2014
Allowance for loan losses:
Beginning balance	$	4,935			77			10,918			5,159		618		205			300			395			7			321			22,935
Provision		1,239			(6	)		(1,468	)		843		184		(58	)		(73	)		(383	)		(4	)		(25	)		249
Charge-offs		(218	)		—			(94	)		—		—		—			—			(15	)		—			(42	)		(369	)
Recoveries		19			—			2			29		—		2			—			428			1			29			510
Ending balance	$	5,975			71			9,358			6,031		802		149			227			425			4			283			23,325
Ending balance individually evaluated for impairment	$	665			—			1,360			950		263		—			—			—			—			—			3,238
Ending balance collectively evaluated for impairment	$	5,310			71			7,998			5,081		539		149			227			425			4			283			20,087
Ending balance loans acquired with deteriorated credit quality	$	—			—			—			—		—		—			—			—			—			—			—
Loans:
Ending balance	$	332,452			17,946			519,203			203,808		27,132		10,780			35,645			28,179			2,193			41,667			1,219,005
Ending balance individually evaluated for impairment	$	2,195			—			12,736			4,290		830		606			—			—			—			—			20,657
Ending balance collectively evaluated for impairment	$	330,257			17,946			506,467			199,518		26,302		10,174			35.645			28,179			2,193			41,667			1,198,348
Ending balance loans acquired with deteriorated credit quality	$	—			—			—			—		—		—			—			—			—			—			—

	(In Thousands)
	Residential						Commercial									Second			Equity Lines									Installment
	1-4 Family			Multifamily			Real Estate			Construction			Farmland			Mortgages			of Credit			Commercial			Agricultural			and Other			Total
December 31, 2013
Allowance for loan losses:
Beginning balance	$	5,699			89			9,305			7,191			1,658			272			492			382			15			394			25,497
Provision		36			(12	)		3,063			(741	)		(266	)		(70	)		(89	)		131			(14	)		139			2,177
Charge-offs		(877	)		—			(1,478	)		(1,470	)		(781	)		(7	)		(104	)		(149	)		(1	)		(380	)		(5,247	)
Recoveries		77			—			28			179			7			10			1			31			7			168			508
Ending balance	$	4,935			77			10,918			5,159			618			205			300			395			7			321			22,935
Ending balance individually evaluated for impairment	$	1,150			—			2,300			950			57			49			10			—			—			—			4,516
Ending balance collectively evaluated for impairment	$	3,785			77			8,618			4,209			561			156			290			395			7			321			18,419
Ending balance loans acquired with deteriorated credit quality	$	—			—			—			—			—			—			—			—			—			—			—
Loans:
Ending balance	$	332,432			13,920			526,258			194,426			22,771			10,511			34,185			29,444			2,099			44,409			1,210,455
Ending balance individually evaluated for impairment	$	4,303			—			17,722			3,806			130			761			174			—			—			—			26,896
Ending balance collectively evaluated for impairment	$	328,129			13,920			508,536			190,620			22,641			9,750			34,011			29,444			2,099			44,409			1,183,559
Ending balance loans acquired with deteriorated credit quality	$	—			—			—			—			—			—			—			—			—			—			—

Impaired Loans

At March 31, 2014, the Company had certain impaired loans of $4,989,000 which were on non-accruing interest status. At December 31, 2013, the Company had certain impaired loans of $4,718,000 which were on non-accruing interest status. In each case, at the date such loans were placed on nonaccrual status, the Company reversed all previously accrued interest income against current year earnings. The following table presents the Company’s impaired loans at March 31, 2014 and December 31, 2013.

	In Thousands
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
March 31, 2014
With no related allowance recorded:
Residential 1-4 family	$	550		543		—		454		8
Multifamily		—		—		—		—		—
Commercial real estate		7,134		7,086		—		7,184		108
Construction		1,880		1,877		—		1,637		3
Farmland		—		—		—		—		—
Second mortgages		606		606		—		606		—
Equity lines of credit		—		—		—		—		—
Commercial		—		—		—		—		—
Agricultural		—		—		—		—		—
	$	10,170		10,112		—		9,881		119
With allowance recorded:
Residential 1-4 family	$	1,661		1,887		665		2,817		11
Multifamily		—		—		—		—		—
Commercial real estate		5,674		7,353		1,360		8,132		61
Construction		2,413		2,413		950		2,413		—
Farmland		831		830		263		481		2
Second mortgages		—		—		—		78		—
Equity lines of credit		—		—		—		87		—
Commercial		—		—		—		—		—
Agricultural		—		—		—		—		—
	$	10,579		12,483		3,238		14,008		74
Total
Residential 1-4 family	$	2,211		2,430		665		3,271		19
Multifamily		—		—		—		—		—
Commercial real estate		12,808		14,439		1,360		15,316		169
Construction		4,293		4,290		950		4,050		3
Farmland		831		830		263		481		2
Second mortgages		606		606		—		684		—
Equity lines of credit		—		—		—		87		—
Commercial		—		—		—		—		—
Agricultural		—		—		—		—		—
	$	20,749		22,595		3,238		23,889		193

	In Thousands
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
December 31, 2013
With no related allowance recorded:
Residential 1-4 family	$	357		404		—		2,947		16
Multifamily		—		—		—		—		—
Commercial real estate		7,234		7,199		—		3,750		260
Construction		1,393		1,393		—		2,265		11
Farmland		—		—		—		—		—
Second mortgages		606		606		—		665		—
Equity lines of credit		—		—		—		—		—
Commercial		—		—		—		52		—
Agricultural		—		—		—		—		—
	$	9,590		9,602		—		9,679		287
With allowance recorded:
Residential 1-4 family	$	3,972		4,186		1,150		5,107		187
Multifamily		—		—		—		—		—
Commercial real estate		10,589		12,226		2,300		11,834		264
Construction		2,413		2,413		950		5,859		—
Farmland		131		131		57		1,818		8
Second mortgages		156		155		49		157		—
Equity lines of credit		174		174		10		175		9
Commercial		—		—		—		—		—
Agricultural		—		—		—		—		—
	$	17,435		19,285		4,516		24,950		468
Total
Residential 1-4 family	$	4,329		4,590		1,150		8,054		203
Multifamily		—		—		—		—		—
Commercial real estate		17,823		19,425		2,300		15,584		524
Construction		3,806		3,806		950		8,124		11
Farmland		131		131		57		1,818		8
Second mortgages		762		761		49		822		—
Equity lines of credit		174		174		10		175		9
Commercial		—		—		—		52		—
Agricultural		—		—		—		—		—
	$	27,025		28,887		4,516		34,629		755

Impaired loans also include loans that the Company may elect to formally restructure due to the weakening credit status of a borrower such that the restructuring may facilitate a repayment plan that minimizes the potential losses that the Company may have to otherwise incur. These loans are classified as impaired loans and, if on non-accruing status as of the date of restructuring, the loans are included in the nonperforming loan balances noted above. Not included in nonperforming loans are loans that have been restructured that were performing as of the restructure date.

Troubled Debt Restructuring

The Company periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring. Such concessions may include a reduction of an interest rate to a below market rate, taking into account the credit quality of the borrower, a significant reduction or deferral of payments of principal and/or interest or an extension of the maturity date. All troubled debt restructurings are initially classified as impaired.

The following table outlines the amount of each troubled debt restructuring categorized by loan classification for the three months ended March 31, 2014 and the year ended December 31, 2013:

	March 31, 2014						December 31, 2013
					Post						Post
					Modification						Modification
			Pre		Outstanding				Pre		Outstanding
			Modification		Recorded				Modification		Recorded
	Number		Outstanding		Investment,		Number		Outstanding		Investment,
	of		Recorded		Net of Related		of		Recorded		Net of Related
	Contracts		Investment		Allowance		Contracts		Investment		Allowance
Residential 1-4 family		1	$	139	$	139		6	$	800	$	800
Multifamily		—		—		—		—		—		—
Commercial real estate		—		—		—		2		5,522		3,291
Construction		—		—		—		1		282		282
Farmland		—		—		—		—		—		—
Second mortgages		—		—		—		1		24		24
Equity lines of credit		—		—		—		—		—		—
Commercial		—		—		—		—		—		—
Agricultural, installment and other		—		—		—		2		13		13
Total		1	$	139	$	139		12	$	6,641	$	4,410

As of March 31, 2014 and December 31, 2013, the Company did not have any loans previously classified as troubled debt restructurings subsequently default within twelve months of restructuring. A default is defined as an occurrence which violates the terms of the receivable’s contract.

As of March 31, 2014, the Company’s recorded investment in consumer mortgage loans in the process of foreclosure amounted to $721,000.

Potential problem loans, which include nonperforming loans, amounted to approximately $37.2 million at March 31, 2014 compared to $38.0 million at December 31, 2013. Potential problem loans represent those loans with a well defined weakness and where information about possible credit problems of borrowers has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by the FDIC, the Bank’s primary federal regulator, for loans classified as special mention, substandard, or doubtful.

The following summary presents our loan balances by primary loan classification and the amount classified within each risk rating category. Pass rated loans include all credits other than those included in special mention, substandard and doubtful which are defined as follows:

• Special mention loans 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 asset or in the Bank’s credit position at some future date.

• Substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

• Doubtful loans have all the characteristics of substandard loans 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. The Bank considers all doubtful loans to be impaired and places the loan on nonaccrual status.

The following table is a summary of the Bank’s loan portfolio by risk rating:

	(In Thousands)
	Residential 1-4 Family		Multifamily		Commercial Real Estate		Construction		Farmland		Second Mortgages		Equity Lines of Credit		Commercial		Agricultural		Installment and Other		Total
March 31, 2014
Credit Risk Profile by Internally Assigned Rating
Pass	$	320,486		17,946		501,313		199,697		25,990		9,595		35,401		27,707		2,190		41,446		1,181,771
Special Mention		8,866		—		5,246		339		62		475		174		355		3		34		15,554
Substandard		3,100		—		12,644		3,772		1,080		710		70		117		—		187		21,680
Doubtful		—		—		—		—		—		—		—		—		—		—		—
Total	$	332,452		17,946		519,203		203,808		27,132		10,780		35,645		28,179		2,193		41,667		1,219,005
December 31, 2013
Credit Risk Profile by Internally Assigned Rating
Pass	$	319,762		13,920		507,769		190,083		22,324		9,135		33,964		29,298		2,089		44,159		1,172,503
Special Mention		9,460		—		5,308		367		64		665		174		26		3		43		16,110
Substandard		3,210		—		13,181		3,976		383		711		47		120		7		207		21,842
Doubtful		—		—		—		—		—		—		—		—		—		—		—
Total	$	332,432		13,920		526,258		194,426		22,771		10,511		34,185		29,444		2,099		44,409		1,210,455