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LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
 3 Months Ended
Mar. 31, 2012
Loans Receivable And Allowance For Loan Losses  
LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

NOTE 3 – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

 

Loans

 

Loans that management has the intent to hold for the foreseeable future or until maturity or pay-off are generally reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest on loans is credited to income as earned. Interest income is not accrued on loans where management has determined collection of such interest is doubtful or those loans which are past due 90 days or more as to principal or interest payments. When a loan is placed on nonaccrual status, previously accrued but unpaid interest deemed uncollectible is reversed and charged against current income. After being placed on nonaccrual status, additional income is recorded only to the extent that payments are received and the collection of principal becomes reasonably assured. Interest income recognition on loans considered to be impaired is consistent with the recognition on all other loans. Loan origination fees and certain direct loan origination costs are deferred and recognized as an adjustment of the related loan yield using the interest method.

 

Allowance for Loan Losses

 

The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes the collectability of the principal is unlikely.

 

Management maintains the allowance for loan losses at a level to cover probable credit losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio. In accordance with current accounting standards, the allowance is provided for losses that have been incurred based on events that have occurred as of the balance sheet date. The allowance is based on past events and current economic conditions and does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions.

 

The allowance for loan losses includes specific allowances related to loans which have been judged to be impaired. A loan is impaired when, based on current information, it is probable that PSB will not collect all amounts due in accordance with the contractual terms of the loan agreement. Management has determined that impaired loans include nonaccrual loans, loans identified as restructurings of troubled debt, and loans accruing interest with elevated risk of default in the near term based on a variety of credit factors. Specific allowances on impaired loans are based on discounted cash flows of expected future payments using the loan’s initial effective interest rate or the fair value of the collateral if the loan is collateral dependent.

 

In addition, various regulatory agencies periodically review the allowance for loan losses. These agencies may require PSB to make additions to the allowance for loan losses based on their judgments of collectability resulting from information available to them at the time of their examination.

 

The composition of loans, categorized by the type of the loan, is as follows:

 

   March 31, 2012   December 31, 2011 
         
Commercial, industrial, and municipal  $130,552   $127,192 
Commercial real estate mortgage   178,844    184,360 
Commercial construction and development   18,165    20,078 
Residential real estate mortgage   78,588    78,114 
Residential construction and development   13,122    13,419 
Residential real estate home equity   23,380    23,193 
Consumer and individual   3,390    3,732 
           
Subtotals - Gross loans   446,041    450,088 
Loans in process of disbursement   (3,004)   (4,787)
           
Subtotals - Disbursed loans   443,037    445,301 
Net deferred loan costs   199    197 
Allowance for loan losses   (7,755)   (7,941)
           
Net loans receivable  $435,481   $437,557 

 

The following is a summary of information pertaining to impaired loans at period-end:

 

   March 31, 2012   December 31, 2011 
         
Impaired loans without a valuation allowance  $6,560   $5,474 
Impaired loans with a valuation allowance   11,049    11,745 
           
Total impaired loans before valuation allowances   17,609    17,219 
Valuation allowance related to impaired loans   3,099    3,178 
           
Net impaired loans  $14,510   $14,041 

 

Activity in the allowance for loans losses during the three months ended March 31, 2012 and 2011, follows:

 

   March 31, 2012 
Allowance for loan losses:  Commercial   Commercial
Real Estate		   Residential
Real Estate		   Consumer   Unallocated   Total 
                         
Beginning Balance  $3,406   $3,175   $1,242   $118   $—   $7,941 
Provision   (35)   (149)   348    (4)   —    160 
Recoveries   1    —    —    —    —    1 
Charge offs   (102)   —    (237)   (8)   —    (347)
                               
Ending balance  $3,270   $3,026   $1,353   $106   $—   $7,755 
Individually evaluated for impairment  $1,445   $947   $689   $18   $—   $3,099 
Collectively evaluated for impairment  $1,825   $2,079   $664   $88   $—   $4,656 
                               
Loans receivable (gross):                              
                               
Individually evaluated for impairment  $6,281   $8,693   $2,564   $71   $—   $17,609 
Collectively evaluated for impairment  $124,271   $188,316   $112,526   $3,319   $—   $428,432 

 

   March 31, 2011 
Allowance for loan losses:  Commercial   Commercial
Real Estate		   Residential
Real Estate		   Consumer   Unallocated   Total 
                         
Beginning balance  $3,862   $3,674   $211   $213   $—   $7,960 
Provision   650    (868)   672    (94)   —    360 
Recoveries   1    —    —    2    —    3 
Charge offs   (725)   (132)   (82)   (7)   —    (946)
                               
Ending balance  $3,788   $2,674   $801   $114   $—   $7,377 
Individually evaluated for impairment  $1,844   $820   $349   $44   $—   $3,057 
Collectively evaluated for impairment  $1,944   $1,854   $452   $70   $—   $4,320 
                               
Loans receivable (gross):                              
                               
Individually evaluated for impairment  $6,813   $4,985   $1,150   $472   $—   $13,420 
Collectively evaluated for impairment  $120,177   $207,101   $105,008   $3,601   $—   $435,887 

 

PSB maintains an independent credit administration staff that continually monitors aggregate commercial loan portfolio and individual borrower credit quality trends. All commercial purpose loans are assigned a credit grade upon origination, and credit grades for nonproblem borrowers with aggregate credit in excess of $500 are reviewed annually. In addition, all past due, restructured, or identified problem loans, both commercial and consumer purpose, are reviewed and assigned an up-to-date credit grade quarterly.

 

PSB uses a seven point grading scale to estimate credit risk with risk rating 1, representing the high credit quality, and risk rating 7, representing the lowest credit quality. The assigned credit grade takes into account several credit quality components which are assigned a weight and blended into the composite grade. The factors considered and their assigned weight for the final composite grade is as follows:

 

Cash flow (30% weight) – Considers earnings trends and debt service coverage levels.

 

Collateral (25% weight) – Considers loan to value and other measures of collateral coverage.

 

Leverage (15% weight) – Considers balance sheet debt and capital ratios compared to Robert Morris & Associates (RMA) industry medians.

 

Liquidity (10% weight) – Considers balance sheet current, quick, and other working capital ratios compared to RMA industry medians.

 

Management (5% weight) – Considers the past performance, character, and depth of borrower management.

 

Guarantor (5% weight) – Considers the existence of a guarantor along with a bank’s past experience with the guarantor and his related liquidity and credit score.

 

Financial reporting (5% weight) – Considers the relative level of independent financial review obtained by the borrower on its financial statements, from audited financial statements down to existence of only tax returns or potentially unreliable financial information.

 

Industry (5% weight) – Considers the borrower’s industry and whether it is stable or subject to cyclical or seasonal factors.

 

Nonclassified loans are assigned a risk rating of 1 to 4 and have credit quality that ranges from well above average to some inherent industry weaknesses that may present higher than average risk due to conditions affecting the borrower, the borrower’s industry, or economic development.

 

Special mention and watch loans are assigned a risk rating of 5 when potential weaknesses exist that deserve management’s close attention. If left uncorrected, the potential weaknesses may result in deterioration of repayment prospects or in credit position at some future date. Substandard loans are assigned a risk rating of 6 and are inadequately protected by the current worth and borrowing capacity of the borrower. Well-defined weaknesses exist that may jeopardize the liquidation of the debt. There is a possibility of some loss if the deficiencies are not corrected. At this point, the loan may still be performing and accruing.

 

Impaired and other doubtful loans assigned a risk rating of 7 have all of the weaknesses of a substandard credit plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of current facts, conditions, and collateral values highly questionable and improbable. Impaired loans include all nonaccrual loans and all restructured loans including restructured loans performing according to the restructured terms. In special situations, an impaired loan with a risk rating of 7 could still be maintained on accrual status such as in the case of restructured loans performing according to restructured terms.

 

The commercial credit exposure based on internally assigned credit grade at March 31, 2012, follows:

 

       Commercial   Construction             
   Commercial   Real Estate   & Development   Agricultural   Government   Total 
                         
High quality (risk rating 1)  $37   $—   $—   $—   $—   $37 
Minimal risk (2)   10,488    21,862    180    529    1,648    34,707 
Average risk (3)   58,862    99,037    11,514    1,216    11,128    181,757 
Acceptable risk (4)   31,762    40,283    2,392    305    —    74,742 
Watch risk (5)   7,470    8,602    1,856    —    —    17,928 
Substandard risk (6)   826    998    1,592    —    —    3,416 
Impaired loans (7)   6,253    8,062    631    28    —    14,974 
                               
Total  $115,698   $178,844   $18,165   $2,078   $12,776   $327,561 

 

The commercial credit exposure based on internally assigned credit grade at December 31, 2011, follows:

 

       Commercial   Construction             
   Commercial   Real Estate   & Development   Agricultural   Government   Total 
                         
High quality (risk rating 1)  $65   $0   $0   $0   $0   $65 
Minimal risk (2)   10,404    21,922    205    534    1,660    34,725 
Average risk (3)   54,387    103,614    12,981    1,088    6,153    178,223 
Acceptable risk (4)   38,381    42,435    2,401    307    0    83,524 
Watch risk (5)   7,054    7,972    2,903    0    0    17,929 
Substandard risk (6)   675    1,005    937    0    0    2,617 
Impaired loans (7)   6,456    7,412    651    28    0    14,547 
                               
Total  $117,422   $184,360   $20,078   $1,957   $7,813   $331,630 

 

The consumer credit exposure based on payment activity at March 31, 2012, follows:

 

    Residential-   Residential-   Construction and         
    Prime   HELOC   Development   Consumer   Total 
                      
Performing   $76,673   $23,196   $13,044   $3,332   $116,245 
Nonperforming    1,915    184    78    58    2,235 
                            
Total   $78,588   $23,380   $13,122   $3,390   $118,480 

 

The consumer credit exposure based on payment activity at December 31, 2011, follows:

 

    Residential-   Residential-   Construction and         
    Prime   HELOC   Development   Consumer   Total 
                      
Performing   $76,474   $23,034   $13,341   $3,677   $116,526 
Nonperforming    1,640    159    78    55    1,932 
                            
Total   $78,114   $23,193   $13,419   $3,732   $118,458 

 

The payment age analysis of loans receivable disbursed at March 31, 2012, follows:

 

   30-59   60-89   90+   Total       Total   90+ and 
Loan Class  Days   Days   Days   Past Due   Current   Loans   Accruing 
                             
Commercial:                                   
                                    
Commercial and industrial  $942   $313   $1,269   $2,524   $113,174   $115,698   $— 
Agricultural   —    —    —    —    2,078    2,078    — 
Government   —    —    —    —    12,776    12,776    — 
                                    
Commercial real estate:                                   
                                    
Commercial real estate   312    242    1,358    1,912    176,932    178,844    — 
Commercial construction and development   42    —    127    169    16,948    17,117    — 
                                    
Residential real estate:                                   
                                    
Residential – Prime   1,762    102    1,167    3,031    75,557    78,588    — 
Residential – HELOC   118    12    99    229    23,151    23,380    — 
Residential – construction and development   35    —    78    113    11,053    11,166    — 
                                    
Consumer   102    2    57    161    3,229    3,390    — 
                                    
Total  $3,313   $671   $4,155   $8,139   $434,898   $443,037   $— 

 

The payment age analysis of loans receivable disbursed at December 31, 2011, follows:

 

   30-59   60-89   90+   Total       Total   90+ and 
Loan Class  Days   Days   Days   Past Due   Current   Loans   Accruing 
                             
Commercial:                                   
                                    
Commercial and industrial  $670   $25   $2,041   $2,736   $114,686   $117,422   $— 
Agricultural   —    —    —    —    1,957    1,957    — 
Government   —    —    —    —    7,813    7,813    — 
                                    
Commercial real estate:                                   
                                    
Commercial real estate   542    —    1,229    1,771    182,589    184,360    — 
Commercial construction and development   —    —    145    145    17,195    17,340    — 
                                    
Residential real estate:                                   
                                    
Residential – prime   1,127    173    1,144    2,444    75,670    78,114    — 
Residential – HELOC   255    5    129    389    22,804    23,193    — 
Residential – construction and development   —    35    77    112    11,258    11,370    — 
                                    
Consumer   11    —    54    65    3,667    3,732    — 
                                    
Total  $2,605   $238   $4,819   $7,662   $437,639   $445,301   $— 

 

Impaired loans as of March 31, 2012, and during the three months then ended, by loan class, follows:

 

   Unpaid           Average   Interest 
   Principal   Related   Recorded   Recorded   Income 
   Balance   Allowance   Investment   Investment   Recognized 
                     
With no related allowance recorded:                         
                          
Commercial & industrial  $1,930   $—   $1,930   $1,768   $15 
Commercial real estate   4,167    —    4,167    3,937    72 
Residential – prime   363    —    363    263    2 
Residential – HELOC   100    —    100    50    1 
                          
With an allowance recorded:                         
                          
Commercial & industrial  $4,323   $1,417   $2,906   $3,061   $19 
Commercial real estate   3,895    778    3,117    3,065    37 
Commercial construction & development   631    169    462    461    7 
Agricultural   28    28    —    —    — 
Residential – prime   1,818    502    1,316    1,449    2 
Residential – HELOC   184    145    39    88    — 
Residential construction & development   99    42    57    83    1 
Consumer   71    18    53    54    — 
                          
Totals:                         
                          
Commercial & industrial  $6,253   $1,417   $4,836   $4,829   $34 
Commercial real estate   8,062    778    7,284    7,002    109 
Commercial construction & development   631    169    462    461    7 
Agricultural   28    28    —    —    — 
Residential – prime   2,181    502    1,679    1,712    4 
Residential – HELOC   284    145    139    138    1 
Residential construction & development   99    42    57    83    1 
Consumer   71    18    53    54    — 

 

The impaired loans at December 31, 2011, and during the year then ended, by loan class, follows:

 

   Unpaid           Average   Interest 
   Principal   Related   Recorded   Recorded   Income 
   Balance   Allowance   Investment   Investment   Recognized 
                     
With no related allowance recorded:                         
                          
Commercial and industrial  $1,606   $—   $1,606   $2,409   $51 
Commercial real estate   3,706    —    3,706    4,515    204 
Commercial construction and development   —    —    —    120    — 
Agricultural   —    —    —    150    — 
Residential – Prime   162    —    162    396    1 
Residential – HELOC   —    —    —    23    — 
Residential construction and development   —    —    —    12    — 
Consumer   —    —    —    11    — 
                          
With an allowance recorded:                         
                          
Commercial and industrial  $4,850   $1,635   $3,215   $2,050   $93 
Commercial real estate   3,706    694    3,012    1,637    154 
Commercial construction and development   651    191    460    386    23 
Agricultural   28    28    —    5    2 
Residential – Prime   2,029    448    1,581    1,041    53 
Residential – HELOC   268    131    137    99    9 
Residential construction and development   144    36    108    74    5 
Consumer   69    15    54    37    2 
                          
Totals:                         
                          
Commercial and industrial  $6,456   $1,635   $4,821   $4,459   $144 
Commercial real estate   7,412    694    6,718    6,152    358 
Commercial construction and development   651    191    460    506    23 
Agricultural   28    28    —    155    2 
Residential – Prime   2,191    448    1,743    1,437    54 
Residential – HELOC   268    131    137    122    9 
Residential construction and development   144    36    108    86    5 
Consumer   69    15    54    48    2 

 

Loans on nonaccrual status at period-end, follows:

 

   March 31, 2012   December 31, 2011 
         
Commercial:          
           
       Commercial and industrial  $3,995   $4,309 
       Agricultural   —    — 
       Government   —    — 
           
Commercial real estate:          
           
       Commercial real estate   1,709    1,585 
       Commercial construction and development   130    148 
           
Residential real estate:          
           
       Residential – prime   1,915    1,640 
       Residential – HELOC   184    159 
       Residential construction and development   78    78 
           
Consumer   58    55 
           
Total  $8,069   $7,974 

 

The following tables present information concerning modifications of troubled debt made during the three months ended March 31, 2012 and 2011. During the quarter ended March 31, 2012, the commercial and industrial contracts identified below were modified to convert from amortizing principal payments to interest only payments and the commercial real estate contract was modified to capitalize unpaid property taxes. During the quarter ended March 31, 2011, the commercial and industrial contract identified below was modified to defer principal payments due. No loan principal was charged off or forgiven in connection with the modifications during the quarters ended March 31, 2012 or 2011. All modified or restructured loans are classified as impaired loans. Recorded investment as presented in the tables concerning modified loans below represents principal outstanding before specific reserves. Specific loan reserves maintained in connection with these impaired loans totaled $58 at March 31, 2012 and $4 at March 31, 2011.

 

The following table presents information concerning modifications of troubled debt made during the quarter ended March 31, 2012:

 

    Pre-modification Post-modification
  Number of outstanding recorded outstanding recorded
As of March 31, 2012 ($000s) contracts investment investment at period-end
       
Commercial and industrial 3 $ 180 $ 180
Commercial real estate 1 $ 379 $ 379

 

The following table presents information concerning modifications of troubled debt made during the quarter ended March 31, 2011:

 

    Pre-modification Post-modification
  Number of outstanding recorded outstanding recorded
As of March 31, 2011 ($000s) contracts investment investment at period-end
       
Commercial and industrial 1 $  25 $  25

 

During the quarters ended March 31, 2012 or 2011, there were no defaults of troubled debt restructurings that were previously restructured within the past 12 months. Default is defined as 90 days or more past due on restructured payments.