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LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
 3 Months Ended
Mar. 31, 2013
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:

 

    March 31, 2013   December 31, 2012
         
Commercial, industrial, and municipal   $ 128,875     $ 132,633  
Commercial real estate mortgage     190,613       183,818  
Commercial construction and development     29,867       28,482  
Residential real estate mortgage     116,816       105,579  
Residential construction and development     13,302       15,247  
Residential real estate home equity     20,734       21,756  
Consumer and individual     4,494       4,715  
                 
Subtotals – Gross loans     504,701       492,230  
Loans in process of disbursement     (4,937 )     (7,039 )
                 
Subtotals – Disbursed loans     499,764       485,191  
Net deferred loan costs     258       231  
Allowance for loan losses     (7,434 )     (7,431 )
                 
Net loans receivable   $ 492,588     $ 477,991  

 

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

 

    March 31, 2013   December 31, 2012
                 
Impaired loans without a valuation allowance   $ 4,645     $ 3,410  
Impaired loans with a valuation allowance     7,357       9,029  
                 
Total impaired loans before valuation allowances     12,002       12,439  
Valuation allowance related to impaired loans     2,526       2,434  
                 
Net impaired loans   $ 9,476     $ 10,005  

 

Activity in the allowance for loans losses during the three months ended March 31, 2013 follows:

 

Allowance for loan losses:   Commercial   Commercial
Real Estate		   Residential
Real Estate		   Consumer   Unallocated   Total
                                                 
Beginning Balance   $ 3,014     $ 2,803     $ 1,511     $ 103     $ —     $ 7,431  
Provision     343       (293 )     264       9       —       323  
Recoveries     2       —       1       5       —       8  
Charge offs     (130 )     —       (172 )     (26 )     —       (328 )
                                                 
Ending balance   $ 3,229     $ 2,510     $ 1,604     $ 91     $ —     $ 7,434  
Individually evaluated for impairment   $ 1,424     $ 635     $ 450     $ 17     $ —     $ 2,526  
Collectively evaluated for impairment   $ 1,805     $ 1,875     $ 1,154     $ 74     $ —     $ 4,908  
                                                 
Loans receivable (gross):                                                
                                                 
Individually evaluated for impairment   $ 4,675     $ 4,539     $ 2,763     $ 25     $ —     $ 12,002  
Collectively evaluated for impairment   $ 124,200     $ 215,941     $ 148,089     $ 4,469     $ —     $ 492,699  

 

Activity in the allowance for loans losses during the three months ended March 31, 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     (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  

 

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 March 31, 2013, follows:

 

        Commercial   Construction            
    Commercial   Real Estate   & Development   Agricultural   Government   Total
                                                 
High quality (risk rating 1)   $ 40     $ —     $ —     $ —     $ —     $ 40  
Minimal risk (2)     17,556       19,206       269       845       91       37,967  
Average risk (3)     50,163       121,049       23,943       3,149       12,315       210,619  
Acceptable risk (4)     32,412       36,013       3,306       213       —       71,944  
Watch risk (5)     6,837       7,734       1,735       —       —       16,306  
Substandard risk (6)     579       2,291       395       —       —       3,265  
Impaired loans (7)     4,521       4,320       219       154       —       9,214  
                                                 
Total   $ 112,108     $ 190,613     $ 29,867     $ 4,361     $ 12,406     $ 349,355  

 

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

 

        Commercial   Construction            
    Commercial   Real Estate   & Development   Agricultural   Government   Total
                                                 
High quality (risk rating 1)   $ 38     $ —     $ —     $ —     $ —     $ 38  
Minimal risk (2)     16,360       20,193       305       559       1,575       38,992  
Average risk (3)     51,846       103,454       22,573       3,336       12,550       193,759  
Acceptable risk (4)     32,002       45,699       3,318       216       —       81,235  
Watch risk (5)     8,271       8,291       1,757       —       —       18,319  
Substandard risk (6)     617       2,179       327       —       —       3,123  
Impaired loans (7)     5,109       4,002       202       154       —       9,467  
                                                 
Total   $ 114,243     $ 183,818     $ 28,482     $ 4,265     $ 14,125     $ 344,933  

 

The consumer credit exposure based on payment activity and internally assigned credit grade at March 31, 2013, follows:

 

    Residential-   Residential-   Construction and        
    Prime   HELOC   Development   Consumer   Total
                                         
Performing   $ 114,725     $ 20,247     $ 13,117     $ 4,469     $ 152,558  
Impaired loans     2,091       487       185       25       2,788  
                                         
Total   $ 116,816     $ 20,734     $ 13,302     $ 4,494     $ 155,346  

 

The consumer credit exposure based on payment activity and internally assigned credit grade at December 31, 2012, follows:

 

    Residential-   Residential-   Construction and        
    Prime   HELOC   Development   Consumer   Total
                                         
Performing   $ 103,292     $ 21,250     $ 15,094     $ 4,689     $ 144,325  
Impaired loans     2,287       506       153       26       2,972  
                                         
Total   $ 105,579     $ 21,756     $ 15,247     $ 4,715     $ 147,297  

 

The payment age analysis of loans receivable disbursed at March 31, 2013, follows:

 

    30-59   60-89   90+   Total       Total   90+ and
Loan Class   Days   Days   Days   Past Due   Current   Loans   Accruing
                                                         
Commercial:                                                        
                                                         
Commercial and industrial   $ 637     $ 106     $ 1,132     $ 1,875     $ 110,233     $ 112,108     $ —  
Agricultural     —       24       154       178       4,183       4,361       —  
Government     —       —       —       —       12,406       12,406       —  
                                                         
Commercial real estate:                                                        
                                                         
Commercial real estate     579       266       1,320       2,165       188,448       190,613       —  
Commercial construction and development     575       20       —       595       26,705       27,300       —  
                                                         
Residential real estate:                                                        
                                                         
Residential – Prime     996       84       1,364       2,444       114,372       116,816       —  
Residential – HELOC     204       29       118       351       20,383       20,734       —  
Residential – construction and development     249       33       133       415       10,517       10,932       —  
                                                         
Consumer     8       1       16       25       4,469       4,494       —  
                                                         
Total   $ 3,248     $ 563     $ 4,237     $ 8,048     $ 491,716     $ 499,764     $ —  

 

The payment age analysis of loans receivable disbursed at December 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   $ 375     $ 83     $ 1,795     $ 2,253     $ 111,990     $ 114,243     $ —  
Agricultural     —       154       —       154       4,111       4,265       —  
Government     —       —       —       —       14,125       14,125       —  
                                                         
Commercial real estate:                                                        
                                                         
Commercial real estate     936       76       1,028       2,040       181,778       183,818       —  
Commercial construction and development     —       20       —       20       25,340       25,360       —  
                                                         
Residential real estate:                                                        
                                                         
Residential – prime     950       274       1,344       2,568       103,011       105,579       —  
Residential – HELOC     64       —       335       399       21,357       21,756       —  
Residential – construction and development     —       —       133       133       11,197       11,330       —  
                                                         
Consumer     21       3       15       39       4,676       4,715       —  
                                                         
Total   $ 2,346     $ 610     $ 4,650     $ 7,606     $ 477,585     $ 485,191     $ —  

 

Impaired loans as of March 31, 2013, 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   $ 1,859     $ —     $ 1,754     $ 1,619     $ 18  
Commercial real estate     1,873       —       1,716       1,410       9  
Commercial construction & development     3       —       1       1       —  
Residential – prime     1,222       —       1,124       974       1  
Residential – HELOC     50       —       50       25       1  
                                         
With an allowance recorded:                                        
                                         
Commercial & industrial   $ 2,986     $ 1,356     $ 2,767     $ 3,197     $ 12  
Commercial real estate     2,701       592       2,604       2,752       21  
Commercial construction & development     218       43       218       210       4  
Agricultural     155       68       154       154       —  
Residential – prime     977       261       967       1,215       1  
Residential – HELOC     446       133       437       472       1  
Residential construction & development     185       56       185       169       —  
Consumer     26       17       25       26       —  
                                         
Totals:                                        
                                         
Commercial & industrial   $ 4,845     $ 1,356     $ 4,521     $ 4,816     $ 30  
Commercial real estate     4,574       592       4,320       4,162       30  
Commercial construction & development     221       43       219       211       4  
Agricultural     155       68       154       154       —  
Residential – prime     2,199       261       2,091       2,189       2  
Residential – HELOC     496       133       487       497       2  
Residential construction & development     185       56       185       169       —  
Consumer     26       17       25       26       —  

 

The impaired loans at December 31, 2012, 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   $ 1,521     $ —     $ 1,483     $ 1,545     $ 88  
Commercial real estate     1,176       —       1,103       2,405       194  
Commercial construction and development     —       —       —       —       33  
Residential – Prime     881       —       824       493       9  
Residential – HELOC     —       —       —       —       3  
                                         
With an allowance recorded:                                        
                                         
Commercial and industrial   $ 3,960     $ 1,287     $ 3,626     $ 4,238     $ 62  
Commercial real estate     3,035       643       2,899       3,303       105  
Commercial construction and development     205       31       202       427       21  
Agricultural     154       40       154       91       10  
Residential – Prime     1,511       277       1,463       1,746       22  
Residential – HELOC     510       126       506       387       15  
Residential construction and development     153       4       153       149       5  
Consumer     26       26       26       48       2  
                                         
Totals:                                        
                                         
Commercial and industrial   $ 5,481     $ 1,287     $ 5,109     $ 5,783     $ 150  
Commercial real estate     4,211       643       4,002       5,708       299  
Commercial construction and development     205       31       202       427       54  
Agricultural     154       40       154       91       10  
Residential – Prime     2,392       277       2,287       2,239       31  
Residential – HELOC     510       126       506       387       18  
Residential construction and development     153       4       153       149       5  
Consumer     26       26       26       48       2  

 

Loans on nonaccrual status at period-end, follows:

 

    March 31, 2013   December 31, 2012
                 
Commercial:                
                 
Commercial and industrial   $ 2,467     $ 3,023  
Agricultural     154       154  
                 
Commercial real estate:                
                 
Commercial real estate     2,266       2,001  
Commercial construction and development     20       1  
                 
Residential real estate:                
                 
Residential – prime     1,921       2,021  
Residential – HELOC     338       365  
Residential construction and development     166       133  
                 
Consumer     17       17  
                 
Total   $ 7,349     $ 7,715  

 

During the quarter ended March 31, 2013, the contracts identified below were modified to capitalize unpaid property taxes, lower the interest rate, and extend payment amortization periods, and were categorized as troubled debt restructurings. 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. Specific loan reserves maintained in connection with loans restructured during the quarter totaled $27 at March 31, 2013 and $58 at March 31, 2012. 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 three months ended March 31, 2013:

 

        Pre-modification   Post-modification
    Number of   outstanding recorded   outstanding recorded
As of March 31, 2013 ($000s)   contracts   investment   investment at period-end
                     
Commercial & industrial   1   $ 38     $ 38  
Commercial real estate   2   $ 221     $ 221  

 

The following table presents information concerning modifications of troubled debt made during the three months 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 & industrial   3   $ 180     $ 180  
Commercial real estate   1   $ 379     $ 379  

 

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. No past troubled debt restructurings subsequently defaulted within twelve months of the last restructuring during the three months ended March 31, 2012.

 

Default during the three months ended   Number of   Recorded
March 31, 2013 ($000s)   contracts   investment
             
Commercial real estate   1   $ 74  
Residential – prime   1   $ 90