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Allowance For Loan Losses

3 Months Ended

Mar. 31, 2012

5. Allowance for Loan Losses

The determination of the allowance for loan losses involves a higher degree of judgment and complexity than its other significant accounting policies. The allowance is the accumulation of three components that are calculated based on various independent methodologies that are based on management’s estimates. The three components are as follows:

·	Specific Loan Evaluation Component – Includes the specific evaluation of impaired loans.

·	Historical Charge-Off Component – Applies a twelve-quarter historical charge-off rate to all pools of non-classified loans.

Qualitative Factors Component – The loan portfolio is segregated into multiple homogenous sub classifications, upon which multiple factors (such as delinquency trends, economic conditions, concentrations, growth/volume trends, and management/staff ability) are evaluated, resulting in an allowance amount for each of the sub classifications. The sum of these amounts comprises the Qualitative Factors Component.

All of these factors may be susceptible to significant change. There were no changes in qualitative factors during the three months ended March 31, 2012. During the period, the average 3-year net loss factors declined in each category with the exception of consumer loans for which the level of net charge-offs increased. To the extent actual outcomes differ from management’s estimates, additional provisions for loan losses may be required that would adversely impact earnings in future periods.

The following table presents an analysis of the allowance for loan losses.

(in 000's)	As of March 31, 2012
	Commercial and industrial		Commercial real estate		Consumer real estate			Consumer loans other			Total
Beginning balance	$	387	$	412	$	68		$	-		$	867
Provision for possible loan losses		30									$	30

Charge-offs		-		-		(38	)		(3	)		(41	)
Recoveries		-		-		5			3			8
Net charge-offs		-		-		(33	)		-			(33	)

Ending balance	$	417	$	412	$	35		$	-		$	864

	For the three months ended March 31, 2011
(in 000's)
	Commercial and industrial			Commercial real estate			Residential mortgages		Consumer real estate		Consumer loans other			Total
Beginning balance	$	301		$	553		$	36	$	36	$	-		$	926
Provision for possible loan losses		-			23			-		-		7			30

Charge-offs		(62	)		(148	)		-		-		(13	)		(223	)
Recoveries		-			2			-		3		6			11
Net charge-offs		(62	)		(146	)		-		3		(7	)		(212	)

Ending balance	$	239		$	430		$	36	$	39	$	-		$	744


(in 000's)	As of March 31, 2012
	Commercial and industrial		Commercial real estate		Consumer real estate		Consumer loans other		Total
Period-end amount allocated to:

Loans indivdually evaluated for impairment	$	304	$	-	$	-	$	-	$	304
Loans collectively evaluated for impairment		113		412		35		-		560
	$	417	$	412	$	35	$	-	$	864

Loans, ending balance:
Loans indivdually evaluated for impairment	$	586	$	1,080	$	-	$	-	$	1,666
Loans collectively evaluated for impairment		3,370		29,354		5,118		1,961		39,803
Total	$	3,956	$	30,434	$	5,118	$	1,961	$	41,469


	As of December 31, 2011
Period-end amount allocated to:

Loans indivdually evaluated for impairment	$	308	$	-	$	-	$	-	$	308
Loans collectively evaluated for impairment		79		412		68		-		559
	$	387	$	412	$	68	$	-	$	867

Loans, ending balance:
Loans indivdually evaluated for impairment	$	586	$	1,080	$	-	$	-	$	1,666
Loans collectively evaluated for impairment		3,144		29,117		5,586		1,989		39,836
Total	$	3,730	$	30,197	$	5,586	$	1,989	$	41,502

Nonperforming and Nonaccrual and Past Due Loans

An age analysis of past due loans, segregated by class of loans, as of March 31, 2012 is as follows:


(In 000's)			Accruing
	Loans		Loans 90 or
	30-89 Days		More Days				Total Past		Current
	Past Due		Past Due		Nonaccrual		Due Loans		Loans		Total Loans
Commercial and industrial:
Commercial	$	89	$	-	$	485		574	$	1,277	$	1,851
SBA loans		50		-		-		50		86		136
Asset-based		56		-		101		157		1,812		1,969
Total Commercial and industrial		195		-		586		781		3,175		3,956

Commercial real estate:
Commercial mortgages		128		-		673		801		14,520		15,321
SBA loans		-		-		-		-		472		472
Construction		-		-		-		-		1,173		1,173
Religious organizations		-		-		407		407		13,061		13,468
Total Commercial real estate		128		-		1,080		1,208		29,226		30,434

Consumer real estate:
Home equity loans		69		189		112		370		1,641		2,011
Home equity lines of credit		-		-		-		-		46		46
1-4 family residential mortgages		-		-		228		228		2,833		3,061
Total consumer real estate		69		189		340		598		4,520		5,118

Total real estate		197		189		1,420		1,806		33,746		35,552

Consumer and other:
Consumer installment		-		-		-		-		52		52
Student loans		57		70		-		127		1,612		1,739
Other		4		-		-		4		166		170
Total consumer and other		61		70		-		131		1,830		1,961

Total loans	$	453	$	259	$	2,006	$	2,718	$	38,751	$	41,469

An age analysis of past due loans, segregated by class of loans, as of December 31, 2011 is as follows:


(In 000's)	Loans 30-89 Days Past Due		Accruing Loans 90 or More Days Past Due		Nonaccrual		Total Past Due Loans		Current Loans		Total Loans
Commercial and industrial:
Commercial	$	32	$	-	$	491		523	$	963	$	1,486
SBA loans		-		-		-		-		235		235
Asset-based		-		-		101		101		1,908		2,009
Total Commercial and industrial		32		-		592		624		3,106		3,730

Commercial real estate:
Commercial mortgages		99		-		677		776		13,900		14,676
SBA loans		-		-		-		-		477		477
Construction		-		-		-		-		1,391		1,391
Religious organizations		559		173		418		1,150		12,503		13,653
Total Commercial real estate		658		173		1,095		1,926		28,271		30,197

Consumer real estate:
Home equity loans		173		152		106		431		1,714		2,145
Home equity lines of credit		-		-		38		38		47		85
1-4 family residential mortgages		-		-		301		301		3,055		3,356
Total consumer real estate		173		152		445		770		4,816		5,586

Total real estate		831		325		1,540		2,696		33,087		35,783

Consumer and other:
Consumer installment		-		-		-		-		58		58
Student loans		112		146		-		258		1,503		1,761
Other		3		-		-		3		167		170
Total consumer and other		115		146		-		261		1,728		1,989

Total loans	$	978	$	471	$	2,132	$	3,581	$	37,921	$	41,502

Loan Origination/Risk Management. The Bank has lending policies and procedures in place to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with periodic reports related to loan origination, asset quality, concentrations of credit, loan delinquencies and non-performing and emerging problem loans. Diversification in the portfolio is a means of managing risk with fluctuations in economic conditions.

Credit Quality Indicators. For commercial loans, management uses internally assigned risk ratings as the best indicator of credit quality. Each loan’s internal risk weighting is assigned at origination and updated at least annually and more frequently if circumstances warrant a change in risk rating. The Bank uses a 1 through 8 loan grading system that follows regulatory accepted definitions as follows:

Risk ratings of “1” through “3” are used for loans that are performing and meet and are expected to continue to meet all of the terms and conditions set forth in the original loan documentation and are generally current on principal and interest payments. Loans with these risk ratings are reflected as “Good/Excellent” and “Satisfactory” in the following table.

Risk ratings of “4” are assigned to “Pass/Watch” loans which may require a higher degree of regular, careful attention. Borrowers may be exhibiting weaker balance sheets and positive but inconsistent cash flow coverage. Borrowers in this classification generally exhibit a higher level of credit risk and are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Loans with this rating would not normally be acceptable as new credits unless they are adequately secured and/or carry substantial guarantors. Loans with this rating are reflected as “Pass” in the following table.

Risk ratings of “5” are assigned to “Special Mention” loans that do not presently expose the Bank to a significant degree of risks, but have potential weaknesses/deficiencies deserving Management’s closer 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. No loss of principal or interest is envisioned. Borrower is experiencing adverse operating trends, which potentially could impair debt, services capacity and may necessitate restructuring of credit. Secondary sources of repayment are accessible and considered adequate to cover the Bank's exposure. However, a restructuring of the debt should result in repayment. The asset is currently protected, but is potentially weak. This category may include credits with inadequate loan agreements, control over the collateral or an unbalanced position in the balance sheet which has not reached a point where the liquidation is jeopardized but exceptions are considered material. These borrowers would have limited ability to obtain credit elsewhere.

Risk ratings of “6” are assigned to “Substandard” loans which are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets must have a well-defined weakness. They are characterized by the distinct possibility that some loss is possible if the deficiencies are not corrected. The borrower’s recent performance indicated an inability to repay the debt, even if restructured. Primary source of repayment is gone or severely impaired and the Bank may have to rely upon the secondary source. Secondary sources of repayment (e.g., guarantors and collateral) should be adequate for a full recovery. Flaws in documentation may leave the bank in a subordinated or unsecured position when the collateral is needed for the repayment.

Risk ratings of “7” are assigned to “Doubtful” loans which have all the weaknesses inherent in those classified “Substandard” with the added characteristic that the weakness makes the collection or liquidation in full, on the basis of current existing facts, conditions, and values, highly questionable and improbable. The borrower's recent performance indicates an inability to repay the debt. Recovery from secondary sources is uncertain. The possibility of a loss is extremely high, but because of certain important and reasonably- specific pending factors, its classification as a loss is deferred.

Risk rating of “8” are assigned to “Loss” loans which are considered non-collectible and do not warrant classification as active assets. They are recommended for charge-off if attempts to recover will be long term in nature. This classification does not mean that an asset has no recovery or salvage value, but rather, that it is not practical or desirable to defer writing off the loss, although a future recovery may be possible. Loss should always be taken in the period in which they surface and are identified as non-collectible as a result there is no tabular presentation.

For consumer and residential mortgage loans, management uses performing versus nonperforming as the best indicator of credit quality. Nonperforming loans consist of loans that are not accruing interest (nonaccrual loans) as a result of principal or interest being in default for a period of 90 days or more or when the ability to collect principal and interest according to contractual terms is in doubt. These credit quality indicators are updated on an ongoing basis. A loan is placed on nonaccrual status as soon as management believes there is doubt as to the ultimate ability to collect interest on a loan, but no later than 90 days past due.

The tables below detail the Bank’s loans by class according to their credit quality indictors discussed above.


(In 000's)	March 31, 2012
	Good/Excellent		Satisfactory		Pass		Special Mention		Substandard		Doubtful		Total



Commercial and industrial:
Commercial	$	379	$	686	$	273	$	27	$	260	$	226	$	1,851
SBA loans		-		33		-		53		50		-		136
Asset-based		-		1,628		125		115		101		-		1,969
		379		2,347		398		195		411		226		3,956
Commercial real estate:
Commercial mortgages		-		13,173		779		-		1,369		-		15,321
SBA Loans		-		468		-		-		4		-		472
Construction		-		1,173		-		-		-		-		1,173
Religious organizations		-		8,984		3,328		170		986		-		13,468
		-		23,798		4,107		170		2,359		-		30,434

Total commercial loans	$	379	$	26,145	$	4,505	$	365	$	2,770	$	226	$	34,390


	March 31, 2012
	Residential Mortgage & Consumer Loans- Performing/Nonperforming
	Performing		Nonperforming		Total

Consumer Real Estate:
Home equity	$	1,899	$	112	$	2,011
Home equity line of credit		46		-		46
1-4 family residential mortgages		2,833	$	228		3,061
		4,778		340		5,118

Consumer Other:
Consumer Installment		52		-		52
Student loans		1,739		-		1,739
Other		170		-		170
		1,961		-		1,961

Total consumer loans	$	6,739	$	340	$	7,079

Total loans							$41,469


(In 000's)			December 31, 2011
	Good/Excellent		Satisfactory		Pass		Special Mention		Subtandard		Doubtful		Total



Commercial and industrial:
Commercial	$	379	$	586	$	-	$	31	$	264	$	226	$	1,486
SBA loans		-		130		56		-		49		-		235
Asset-based		-		1,847		61		-		101		-		2,009
		379		2,563		117		31		414		226		3,730
Commercial real estate:
Commercial mortgages		-		13,118		151		-		1,408		-		14,677
SBA Loans		-		471		-		-		5		-		476
Construction		-		1,391		-		-		-		-		1,391
Religious organizations		-		9,751		2,925		-		977		-		13,653
		-		24,731		3,076		-		2,390				30,197

Total commercial loans	$	379	$	27,294	$	3,193	$	31	$	2,804	$	226	$	33,927


				December 31, 2011
	Residential Mortgage & Consumer Loans- Performing/Nonperforming
	Performing				Nonperforming				Total

Consumer Real Estate:
Home equity	$	2,039			$	106			$	2,145
Home equity line of credit		47				38				85
1-4 family residential mortgages		3,055				301				3,356
		5,141				445				5,586

Consumer Other:
Consumer Installment		58				-				58
Student loans		1,761				-				1,761
Other		170				-				170
		1,989				-				1,989

Total consumer loans	$	7,130			$	445			$	7,575

Total loans													$	41,502

Impaired Loans. The Bank identifies a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. The Bank recognizes interest income on impaired loans under the cash basis when the collateral on the loan is sufficient to cover the outstanding obligation to the Bank. If these factors do not exist, the Bank will record interest payments on the cost recovery basis.

In accordance with guidance provided by ASC 310-10, Accounting by Creditors for Impairment of a Loan, management employs one of three methods to determine and measure impairment: the Present Value of Future Cash Flow Method; the Fair Value of Collateral Method; or the Observable Market Price of a Loan Method. To perform an impairment analysis, the Company reviews a loan’s internally assigned grade, its outstanding balance, guarantors, collateral, strategy, and a current report of the action being implemented. Based on the nature of the specific loans, one of the impairment methods is chosen for the respective loan and any impairment is determined, based on criteria established in ASC 310-10.

The Company makes partial charge-offs of impaired loans when the impairment is deemed permanent and is considered a loss. To date, these charge-offs have only included the unguaranteed portion of Small Business Administration (“SBA”) loans. Specific reserves are allocated to cover “other-than-permanent” impairment for which the underlying collateral value may fluctuate with market conditions. During the quarters ended March 31, 2012 and 2011, there were no partial charge-offs of impaired loans.

Consumer real estate and other loans are not individually evaluated for impairment, but collectively evaluated, because they are pools of smaller balance homogeneous loans.

Impaired loans as of March 31, 2012 are set forth in the following table.



(In 000's)	Unpaid		Recorded		Recorded
	Contractual		Investment		Investment		Total
	Principal		With No		With		Recorded		Related
	Balance		Allowance		Allowance		Investment		Allowance

Commercial and industrial:
Commercial	$	485	$	76	$	409	$	485	$	242
SBA loans		-		-		-		-		-
Asset-based		-		-		-		-		-
Asset-based		101		-		101		101		62
Total Commercial and industrial		586		76		510		586		304

Commercial real estate:
Commercial mortgages		673		673		-		673		-
SBA Loans		-		-		-		-		-
Construction		-		-		-		-		-
Religious Organizations		407		407		-		407		-
Total Commercial real estate		1,080		1,080		-		1,080		-

Total Loans	$	1,666	$	1,156	$	510	$	1,666	$	304

Impaired loans as of December 31, 2011 are set forth in the following table.



(In 000's)	Unpaid		Recorded		Recorded
	Contractual		Investment		Investment		Total
	Principal		With No		With		Recorded		Related
	Balance		Allowance		Allowance		Investment		Allowance

Commercial and industrial:
Commercial	$	491	$	78	$	413	$	491	$	246
SBA loans		-		-		-		-		-
Asset-based		101		-		101		101		62
Total Commercial and industrial		592		78		514		592		308

Commercial real estate:
Commercial mortgages		677		677		-		677		-
SBA Loans		-		-		-		-		-
Religious Organizations		418		418		-		418		-
Total Commercial real estate		1,095		1,095		-		1,095		-

Total Loans	$	1,687	$	1,173	$	514	$	1,687	$	308


	Three Months Ended						Three Months Ended
(In 000's)	March 31, 2012						March 31, 2011
	Average		Interest recognized		Average		Interest recognized
	Recorded		on impaired		Recorded		on impaired
	Investment		loans		Investment		loans

Commercial and industrial:
Commercial	$	481	$	-	$	483	$	-
SBA loans		-		-		-		-
Asset-based		101		-		18		-
Total Commercial and industrial		582		-		501		-

Commercial real estate:
Commercial mortgages		675		-		1,243		-
SBA Loans		-		-		58		-
Religious Organizations		410		-		441		3
Total Commercial real estate		1,085		-		1,742		3

Total Loans	$	1,667		-	$	2,243	$	3

Troubled debt restructurings (“TDRs”). TDRs occur when a creditor, for economic or legal reasons related to a debtor’s financial condition, grants a concession to the debtor that it would not otherwise consider, such as a below market interest rate, extending the maturity of a loan, or a combination of both. The Company made modifications to certain loans in its commercial loan portfolio that included the term out of lines of credit to begin the amortization of principal. The terms of these loans do not include any financial concessions and are consistent with the current market. Management reviews all loan modifications to determine whether the modification qualifies as a troubled debt restructuring (i.e. whether the creditor has been granted a concession or is experiencing financial difficulties). Based on this review and evaluation, none of the modified loans met the criteria of a troubled debt restructuring. Therefore, the Company had no troubled debt restructurings at March 31, 2012 and December 31, 2011.