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LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
 9 Months Ended
Sep. 30, 2012
Loans Receivable And Allowance For Loan Losses  
LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

NOTE 4 – 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:

 

   September 30, 2012  December 31, 2011
       
Commercial, industrial, and municipal  $138,021   $127,192 
Commercial real estate mortgage   184,183    184,360 
Commercial construction and development   25,544    20,078 
Residential real estate mortgage   97,687    78,114 
Residential construction and development   13,514    13,419 
Residential real estate home equity   22,883    23,193 
Consumer and individual   5,302    3,732 
           
Subtotals – Gross loans   487,134    450,088 
Loans in process of disbursement   (6,676)   (4,787)
           
Subtotals – Disbursed loans   480,458    445,301 
Net deferred loan costs   222    197 
Allowance for loan losses   (7,431)   (7,941)
           
Net loans receivable  $473,249   $437,557 

 

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

 

   September 30, 2012  December 31, 2011
       
Impaired loans without a valuation allowance  $8,199   $5,474 
Impaired loans with a valuation allowance   9,055    11,745 
           
Total impaired loans before valuation allowances   17,254    17,219 
Valuation allowance related to impaired loans   2,537    3,178 
           
Net impaired loans  $14,717   $14,041 

 

Activity in the allowance for loans losses during the nine months ended September 30, 2012 follows:

 

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   233    (458)   530    20    —    325 
Recoveries   6    4    3    4    —    17 
Charge offs   (105)   (234)   (462)   (51)   —    (852)
                               
Ending balance  $3,540   $2,487   $1,313   $91   $—   $7,431 
Individually evaluated for impairment  $1,625   $570   $336   $6   $—   $2,537 
Collectively evaluated for impairment  $1,915   $1,917   $977   $85   $—   $4,894 
                               
Loans receivable (gross):                              
                               
Individually evaluated for impairment  $5,741   $8,955   $2,543   $15   $—   $17,254 
Collectively evaluated for impairment  $132,280   $200,772   $131,541   $5,287   $—   $469,880 

 

 

Activity in the allowance for loans losses during the nine months ended September 30, 2011, follows:

 

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   604    (468)   1,016    (2)   —    1,150 
Recoveries   166    6    —    5    —    177 
Charge offs   (808)   (132)   (224)   (104)   —    (1,268)
                               
Ending balance  $3,824   $3,080   $1,003   $112   $—   $8,019 
Individually evaluated for impairment  $2,020   $970   $456   $22   $—   $3,468 
Collectively evaluated for impairment  $1,804   $2,110   $547   $90   $—   $4,551 
                               
Loans receivable (gross):                              
                               
Individually evaluated for impairment  $6,947   $8,418   $2,093   $75   $—   $17,533 
Collectively evaluated for impairment  $125,311   $188,029   $108,133   $3,509   $—   $424,982 

 

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 interest.

 

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 September 30, 2012, follows:

 

      Commercial  Construction         
   Commercial  Real Estate  & Development  Agricultural  Government  Total
                   
High quality (risk rating 1)  $38   $—   $—   $—   $—   $38 
Minimal risk (2)   24,317    21,524    307    517    1,640    48,305 
Average risk (3)   53,364    102,052    18,877    2,305    12,224    188,822 
Acceptable risk (4)   29,153    43,189    2,762    344    —    75,448 
Watch risk (5)   7,700    7,979    1,758    —    —    17,437 
Substandard risk (6)   678    1,723    601    —    —    3,002 
Impaired loans (7)   5,713    7,716    1,239    28    —    14,696 
                               
Total  $120,963   $184,183   $25,544   $3,194   $13,864   $347,748 

 

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   $—   $—   $—   $—   $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    —    83,524 
Watch risk (5)   7,054    7,972    2,903    —    —    17,929 
Substandard risk (6)   675    1,005    937    —    —    2,617 
Impaired loans (7)   6,456    7,412    651    28    —    14,547 
                               
Total  $117,422   $184,360   $20,078   $1,957   $7,813   $331,630 

 

The consumer credit exposure based on payment activity and internally assigned credit grade at September 30, 2012, follows:

 

   Residential-  Residential-  Construction and      
   Prime  HELOC  Development  Consumer  Total
                
Performing  $95,478   $22,702   $13,361   $5,287   $136,828 
Impaired loans   2,209    181    153    15    2,558 
                          
Total  $97,687   $22,883   $13,514   $5,302   $139,386 

 

The consumer credit exposure based on payment activity and internally assigned credit grade at December 31, 2011, follows:

 

   Residential-  Residential-  Construction and      
   Prime  HELOC  Development  Consumer  Total
                
Performing  $75,923   $22,925   $13,275   $3,663   $115,786 
Impaired loans   2,191    268    144    69    2,672 
                          
Total  $78,114   $23,193   $13,419   $3,732   $118,458 

 

The payment age analysis of loans receivable disbursed at September 30, 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  $660   $281   $1,478   $2,419   $118,544   $120,963   $— 
Agricultural   —    —    —    —    3,194    3,194    — 
Government   —    —    —    —    13,864    13,864    — 
                                    
Commercial real estate:                                   
                                    
Commercial real estate   705    160    1,354    2,219    181,964    184,183    — 
Commercial construction and development   20    909    127    1,056    20,475    21,530    — 
                                    
Residential real estate:                                   
                                    
Residential – Prime   297    159    1,359    1,815    95,872    97,687    — 
Residential – HELOC   148    42    111    301    22,582    22,883    — 
Residential – construction and development   14    —    132    146    10,706    10,852    — 
                                    
Consumer   26    3    3    32    5,270    5,302    — 
                                    
Total  $1,870   $1,554   $4,564   $7,988   $472,471   $480,458   $— 

 

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 September 30, 2012, and during the nine 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  $1,657   $—   $1,657   $1,632   $55 
Commercial real estate   4,814    —    4,814    4,260    184 
Commercial construction & development   1,035    —    1,035    518    — 
Agricultural   —    —    —    —    — 
Government   —    —    —    —    — 
Residential – prime   673    —    673    418    6 
Residential – HELOC   20    —    20    10    3 
Residential construction & development   —    —    —    —    — 
Consumer   —    —    —    —    — 
                          
With an allowance recorded:                         
                          
Commercial & industrial  $4,056   $1,599   $2,457   $2,836   $44 
Commercial real estate   2,902    550    2,352    2,682    85 
Commercial construction & development   204    20    184    322    18 
Agricultural   28    26    2    1    — 
Government   —    —    —    —    — 
Residential – prime   1,536    278    1,258    1,420    8 
Residential – HELOC   161    54    107    122    — 
Residential construction & development   153    4    149    129    5 
Consumer   15    6    9    32    1 
                          
Totals:                         
                          
Commercial & industrial  $5,713   $1,599   $4,114   $4,468   $99 
Commercial real estate   7,716    550    7,166    6,942    269 
Commercial construction & development   1,239    20    1,219    840    18 
Agricultural   28    26    2    1    — 
Government   —    —    —    —    — 
Residential – prime   2,209    278    1,931    1,838    14 
Residential – HELOC   181    54    127    132    3 
Residential construction & development   153    4    149    129    5 
Consumer   15    6    9    32    1 

 

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    — 
Government   —    —    —    —    — 
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 
Government   —    —    —    —    — 
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 
Government   —    —    —    —    — 
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:

 

   September 30, 2012  December 31, 2011
       
Commercial:          
           
       Commercial and industrial  $3,748   $4,309 
      Agricultural   27    — 
           
Commercial real estate:          
           
       Commercial real estate   1,903    1,585 
       Commercial construction and development   129    148 
           
Residential real estate:          
           
       Residential – prime   2,033    1,640 
       Residential – HELOC   161    159 
       Residential construction and development   133    78 
           
Consumer   6    55 
           
Total  $8,140   $7,974 

 

During the quarter and nine months ended September 30, 2012, the contracts identified below were modified to convert from amortizing principal payments to interest only payments, extend payment amortization periods, or to capitalize unpaid property taxes, and were categorized as troubled debt restructurings. During the quarter and nine months ended September 30, 2011, the commercial related contracts identified below were modified to defer principal payments due while converting to interest only payments, or to lower the interest rate. Specific loan reserves maintained in connection with loans restructured during the year to date period totaled $262 at September 30, 2012 and $526 at September 30, 2011. All modified or restructured loans are classified as impaired loans. Recorded investment as presented in the tables below concerning modified loans represents principal outstanding before specific reserves.

 

The following table presents information concerning modifications of troubled debt made during the quarter ended September 30, 2012 before specific reserves:

 

      Pre-modification  Post-modification
   Number of  outstanding recorded  outstanding recorded
As of September 30, 2012 ($000s)  contracts  investment  investment at period-end
                
Commercial & industrial   3   $481   $475 
Residential real estate   1   $121   $89 

 

The following table presents information concerning modifications of troubled debt made during the nine months ended September 30, 2012 before specific reserves:

 

      Pre-modification  Post-modification
   Number of  outstanding recorded  outstanding recorded
As of September 30, 2012 ($000s)  contracts  investment  investment at period-end
          
Commercial & industrial   6   $661   $637 
Commercial real estate   2   $527   $508 
Residential real estate   1   $121   $89 

 

The following table presents information concerning modifications of troubled debt made during the quarter ended September 30, 2011 before specific reserves:

 

      Pre-modification  Post-modification
   Number of  outstanding recorded  outstanding recorded
As of September 30, 2011 ($000s)  contracts  investment  investment at period-end
                
Commercial real estate   1   $89   $89 

 

The following table presents information concerning modifications of troubled debt made during the nine months ended September 30, 2011 before specific reserves:

 

      Pre-modification  Post-modification
   Number of  outstanding recorded  outstanding recorded
As of September 30, 2011 ($000s)  contracts  investment  investment at period-end
                
Commercial & industrial   6   $1,157   $1,123 
Commercial real estate   7   $4,371   $4,363 
Commercial construction & development   1   $74   $73 

 

The following table outlines past troubled debt restructurings that subsequently defaulted within twelve months of the last restructuring date. For purposes of this table, default is defined as 90 days or more past due on restructured payments.

 

Default during the quarter ended  Number of  Recorded
September 30, 2012 ($000s)  contracts  investment
           
Commercial real estate   1   $45 

 

Default during the nine months ended  Number of  Recorded
September 30, 2012 ($000s)  contracts  investment
           
Commercial & industrial   1   $— 
Commercial real estate   1   $45 

 

Default during the quarter and nine months ended  Number of  Recorded
September 30, 2011 ($000s)  contracts  investment
           
Commercial real estate   2   $267