Loans and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2012

Allowance for Loan Losses [Abstract]

Loans and Allowance for Loan Losses

5. Loans and 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 an eight-quarter historical charge-off rate to all pools of non-classified loans.

· Qualitative Factors Component – The loan portfolio is broken down 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 quarter ended September 30, 2012. During the period, the average historical loss factors improved for commercial real estate loans, the most significant category, due to minimal charge-off activity. 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)				For the Nine months ended September 30, 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		172			(56	)		-			5			121
Charge-offs		(56	)		-			(80	)		(16	)		(152	)
Recoveries		-			8			14			11			33
Net charge-offs		(56	)		8			(66	)		(5	)		(119	)
Ending balance	$	503		$	364		$	2		$	-		$	869

(in 000's)				For the Nine months ended September 30, 2011
	Commercial and industrial			Commercial real estate			Consumer real estate		Consumer loans other			Total
Beginning balance	$	301		$	553		$	52	$	20		$	926
Provision for possible loan losses		55			23			15		7			100
Charge-offs		(62	)		(148	)		-		(42	)		(252	)
Recoveries		1			5			4		15			25
Net charge-offs		(61	)		(143	)		4		(27	)		(227	)
Ending balance	$	295		$	433		$	71		-		$	799

(in 000's)				For the Three Months ended September 30, 2012
	Commercial and industrial			Commercial real estate			Consumer real estate			Consumer loans other			Total
Beginning balance	$	496		$	367		$	43		$	-		$	906
Provision for possible loan losses		63			(6	)		1			3			61
Charge-offs		(56	)		-			(43	)		(7	)		(106	)
Recoveries		-			3			1			4			8
Net charge-offs		(56	)		3			(42	)		(3	)		(98	)
Ending balance	$	503		$	364		$	2		$	-		$	869

(in 000's)			For the Three Months ended September 30, 2011
	Commercial and industrial		Commercial real estate		Consumer real estate		Consumer loans other			Total
Beginning balance	$	280	$	432	$	55	$	-		$	767
Provision for possible loan losses		15		-		15		-			30
Charge-offs		-		-		-		(5	)		(5	)
Recoveries		-		1		1		5			7
Net charge-offs		-		1		1		-			2
Ending balance	$	295	$	433	$	71	$	-		$	799

(in 000's)			As of September 30, 2012
	Commercial and industrial		Commercial real estate		Consumer real estate		Consumer loans other		Total
Period-end amount allocated to:
Loans individually evaluated for impairment	$	503	$	-	$	-	$	-	$	503
Loans collectively evaluated for impairment		-		364		2		-		366
	$	503	$	364	$	2	$	-	$	869
Loans, ending balance:
Loans individually evaluated for impairment	$	626	$	1,120	$	-	$	-	$	1,746
Loans collectively evaluated for impairment		3,267		29,019		4,806		1,835		38,927
Total	$	3,893	$	30,139	$	4,806	$	1,835	$	40,673

(in 000's)			As of December 31, 2011
	Commercial and industrial		Commercial real estate		Consumer real estate		Consumer loans other		Total
Period-end amount allocated to:
Loans individually evaluated for impairment	$	308	$	-	$	-	$	-	$	308
Loans collectively evaluated for impairment		79		412		68		-		559
	$	387	$	412	$	68	$	-	$	867
Loans, ending balance:
Loans individually evaluated for impairment	$	592	$	1,095	$	-	$	-	$	1,687
Loans collectively evaluated for impairment		3,138		29,102		5,586		1,989		39,815
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 September 30, 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	$	75	$	340	$	479	$	894	$	698	$	1,592
SBA loans		-		-		-		-		127		127
Asset-based		-		-		99		99		2,075		2,174
Total Commercial and industrial		75		340		578		993		2,900		3,893
Commercial real estate:
Commercial mortgages		131		-		732		863		13,552		14,415
SBA loans		-		-		-		-		628		628
Construction		-		-		-		-		2,530		2,530
Religious organizations		806		-		387		1,193		11,373		12,566
Total Commercial real estate		937		-		1,119		2,056		28,083		30,139
Consumer real estate:
Home equity loans		121		188		64		373		1,096		1,469
Home equity lines of credit		-		-		-		-		26		26
1-4 family residential mortgages		-		-		227		227		3,084		3,311
Total consumer real estate		121		188		291		600		4,206		4,806
Total real estate		1,058		188		1,410		2,656		32,289		34,945
Consumer and other:
Consumer installment		3		-		-		3		35		38
Student loans		24		108		-		132		1,498		1,630
Other		4		-		-		4		163		167
Total consumer and other		31		108		-		139		1,696		1,835
Total loans	$	1,164	$	636	$	1,988	$	3,788	$	36,885	$	40,673

An age analysis of past due loans, segregated by class of loans, as of December 31, 2011 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	$	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		13,901		14,677
SBA loans		-		-		-		-		476		476
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.

                Classified Loans by Class

(In 000's)	September 30, 2012
	Good/ Excellent		Satisfactory		Pass		Special Mention		Substandard		Doubtful		Total
Commercial and industrial:
Commercial	$	250	$	87	$	758	$	19	$	85	$	393	$	1,592
SBA loans		-		30		-		48		49		-		127
Asset-based		-		1,897		125		53		99		-		2,174
		250		2,014		883		120		233		393		3,893
Commercial real estate:
Commercial mortgages		-		12,266		749		-		1,083		317		14,415
SBA Loans		-		628		-		-		-		-		628
Construction		-		1,899		-		-		631		-		2,530
Religious organizations		-		8,746		3,269		164		387		-		12,566
		-		23,539		4,018		164		2,101		317		30,139
Total commercial loans	$	250	$	25,553	$	4,901	$	284	$	2,334	$	710	$	34,032

	September 30, 2012
	Residential Mortgage and Consumer Loans- Performing/Nonperforming
	Performing		Nonperforming		Total
Consumer Real Estate:
Home equity	$	1,405	$	64	$	1,469
Home equity line of credit		26		-		26
1-4 family residential mortgages		3,084		227		3,311
		4,515		291		4,806
Consumer Other:
Consumer Installment		38		-		38
Student loans		1,630		-		1,630
Other		167		-		167
		1,835		-		1,835
Total consumer loans		6,350	$	291	$	6,641
Total loans							$ 40,673

(In 000's)					December 31, 2011
	Good/ Excellent		Satisfactory		Pass		Special Mention		Substandard		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 and 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 nine months ended September 30, 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 September 30, 2012 are set forth in the following table.

(In 000's)	Unpaid Contractual		Recorded Investment		Recorded Investment
	Principal		With No		With		Related
	Balance		Allowance		Allowance		Allowance
Commercial and industrial:
Commercial	$	478	$	23	$	455	$	355
SBA loans		49		-		49		49
Asset-based		99		-		99		99
Total Commercial and industrial		626		23		603		503
Commercial real estate:
Commercial mortgages		733		733		-		-
Religious Organizations		387		387		-		-
Total Commercial real estate		1,120		1,120		-		-
Total Loans	$	1,746	$	1,143	$	603	$	503

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

(In 000's)	Unpaid Contractual		Recorded Investment		Recorded Investment
	Principal		With No		With		Related
	Balance		Allowance		Allowance		Allowance
Commercial and industrial:
Commercial	$	491	$	78	$	413	$	246
Asset-based		101		-		101		62
Total Commercial and industrial		592		78		514		308
Commercial real estate:
Commercial mortgages		677		677		-		-
SBA Loans		-		-		-		-
Religious Organizations		407		407		-		-
Total Commercial real estate		1,095		1,095		-		-
Total Loans	$	1,687	$	1,173	$	514	$	308

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. The following tables present additional information about impaired loans for the three and six months ended September 30, 2012 and 2011.

			Nine Months Ended				Nine Months Ended
(In 000's)			September 30, 2012				September 30, 2011
	Average		Interest recognized		Average		Interest recognized
	Recorded		on impaired		Recorded		on impaired
	Investment		loans		Investment		loans
Commercial and industrial:
Commercial	$	503	$	1	$	479	$	-
SBA loans		-		2		18		-
Asset-based		125		-		45		-
Total Commercial and industrial		628		3		542		-
Commercial real estate:
Commercial mortgages		673		-		846		-
SBA Loans		-		-		58		-
Religious Organizations		400		-		439		3
Total Commercial real estate		1,073		-		1,343		3
Total Loans	$	1,701	$	3	$	1,885	$	3

			Three Months Ended				Three Months Ended
(In 000's)			September 30, 2012				September 30, 2011
	Average		Interest recognized		Average		Interest recognized
	Recorded		on impaired		Recorded		on impaired
	Investment		loans		Investment		loans
Commercial and industrial:
Commercial	$	500	$	1	$	470	$	-
SBA loans		-		1		18		-
Asset-based		120		-		40		-
Total Commercial and industrial		620		2		528		-
Commercial real estate:
Commercial mortgages		670		-		835		-
SBA loans		-		-		58		-
Religious Organizations		390		-		436		-
Total Commercial real estate		1,060		-		1,329		-
Total Loans	$	1,680	$	2	$	1,857	$	-

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 September 30, 2012 and December 31, 2011.