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LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
 6 Months Ended
Jun. 30, 2014
Receivables [Abstract]  
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:

 

    June 30, 2014   December 31, 2013
         
Commercial, industrial, and municipal   $ 127,994     $ 130,220  
Commercial real estate mortgage     211,126       212,850  
Commercial construction and development     24,684       13,672  
Residential real estate mortgage     130,740       123,980  
Residential construction and development     18,366       18,277  
Residential real estate home equity     23,005       20,677  
Consumer and individual     3,587       3,567  
                 
Subtotals – Gross loans     539,502       523,243  
Loans in process of disbursement     (11,067 )     (6,895 )
                 
Subtotals – Disbursed loans     528,435       516,348  
Net deferred loan costs     318       315  
Allowance for loan losses     (6,929 )     (6,783 )
                 
Net loans receivable   $ 521,824     $ 509,880  

 

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

 

    June 30, 2014   December 31, 2013
         
Impaired loans without a valuation allowance   $ 12,118     $ 9,303  
Impaired loans with a valuation allowance     8,223       6,472  
                 
Total impaired loans before valuation allowances     20,341       15,775  
Valuation allowance related to impaired loans     2,704       2,108  
                 
Net impaired loans   $ 17,637     $ 13,667  

 

Activity in the allowance for loans losses during the six months ended June 30, 2014 follows:

 

Allowance for loan losses:   Commercial   Commercial
Real Estate		   Residential
Real Estate		   Consumer   Unallocated   Total
                         
Beginning Balance   $ 2,828     $ 2,653     $ 1,223     $ 79     $ —     $ 6,783  
Provision (credit)     (572 )     (87 )     949       (10 )     —       280  
Recoveries     4       —       4       4       —       12  
Charge offs     (28 )     —       (117 )     (1 )     —       (146 )
                                                 
Ending balance   $ 2,232     $ 2,566     $ 2,059     $ 72     $ —     $ 6,929  

 

Activity in the allowance for loans losses during the six months ended June 30, 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     252       336       73       14       —       675  
Recoveries     2               2       10       —       14  
Charge offs     (130 )     (27 )     (283 )     (40 )     —       (480 )
                                                 
Ending balance   $ 3,138     $ 3,112     $ 1,303     $ 87     $ —     $ 7,640  

 

 

The following tables provide other information regarding the allowance for loan losses and balances by type of allowance methodology.

 

    At June 30, 2014
        Commercial   Residential            
Allowance for loan losses:   Commercial   Real Estate   Real Estate   Consumer   Unallocated   Total
                                                 
Individually evaluated for impairment   $ 1,207     $ 630     $ 843     $ 24     $ —     $ 2,704  
Collectively evaluated for impairment     1,025       1,936       1,216       48       —       4,225  
                                                 
Total allowance for loan losses   $ 2,232     $ 2,566     $ 2,059     $ 72     $ —     $ 6,929  
                                                 
Loans receivable (gross):                                                
                                                 
Individually evaluated for impairment   $ 11,166     $ 5,513     $ 3,637     $ 25     $ —     $ 20,341  
Collectively evaluated for impairment     116,828       230,297       168,474       3,562       —       519,161  
                                                 
Total loans receivable (gross)   $ 127,994     $ 235,810     $ 172,111     $ 3,587     $ —     $ 539,502  

 

    At December 31, 2013
        Commercial   Residential            
Allowance for loan losses:   Commercial   Real Estate   Real Estate   Consumer   Unallocated   Total
                         
Individually evaluated for impairment   $ 1,167     $ 695     $ 228     $ 18     $ —     $ 2,108  
Collectively evaluated for impairment     1,661       1,958       995       61       —       4,675  
                                                 
Total allowance for loan losses   $ 2,828     $ 2,653     $ 1,223     $ 79     $ —     $ 6,783  
                                                 
Loans receivable (gross):                                                
                                                 
Individually evaluated for impairment   $ 8,102     $ 5,527     $ 2,129     $ 17     $ —     $ 15,775  
Collectively evaluated for impairment     122,118       220,995       160,805       3,550       —       507,468  
                                                 
Total loans receivable (gross)   $ 130,220     $ 226,522     $ 162,934     $ 3,567     $ —     $ 523,243  

 

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 PSB’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 June 30, 2014, follows:

 

        Commercial   Construction            
    Commercial   Real Estate   & Development   Agricultural   Government   Total
                         
High quality (risk rating 1)   $ 202     $ —     $ —     $ —     $ —     $ 202  
Minimal risk (2)     22,682       16,790       124       1,693       70       41,359  
Average risk (3)     55,189       135,820       19,760       3,072       6,373       220,214  
Acceptable risk (4)     23,569       44,858       3,036       514       311       72,288  
Watch risk (5)     2,455       7,151       1,629       11       —       11,246  
Substandard risk (6)     687       1,129       —       —       —       1,816  
Impaired loans (7)     8,196       5,378       135       125       2,845       16,679  
                                                 
Total   $ 112,980     $ 211,126     $ 24,684     $ 5,415     $ 9,599     $ 363,804  

 

The commercial credit exposure based on internally assigned credit grade at December 31, 2013, follows:

 

        Commercial   Construction            
    Commercial   Real Estate   & Development   Agricultural   Government   Total
                         
High quality (risk rating 1)   $ 44     $ —     $ —     $ —     $ —     $ 44  
Minimal risk (2)     24,085       19,249       120       1,115       78       44,647  
Average risk (3)     51,745       145,673       8,863       2,563       6,512       215,356  
Acceptable risk (4)     26,395       34,154       2,917       424       357       64,247  
Watch risk (5)     8,146       7,572       1,632       —       —       17,350  
Substandard risk (6)     654       815       —       —       —       1,469  
Impaired loans (7)     4,860       5,387       140       152       3,090       13,629  
                                                 
Total   $ 115,929     $ 212,850     $ 13,672     $ 4,254     $ 10,037     $ 356,742  

 

The consumer credit exposure based on payment activity and internally assigned credit grade at June 30, 2014, follows:

 

    Residential-   Construction and   Residential-        
    Prime   Development   HELOC   Consumer   Total
                     
Performing   $ 127,683     $ 18,195     $ 22,596     $ 3,562     $ 172,036  
Impaired loans     3,057       171       409       25       3,662  
                                         
Total   $ 130,740     $ 18,366     $ 23,005     $ 3,587     $ 175,698  

 

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

 

    Residential-   Construction and   Residential-        
    Prime   Development   HELOC   Consumer   Total
                     
Performing   $ 122,408     $ 18,230     $ 20,167     $ 3,550     $ 164,355  
Impaired loans     1,572       47       510       17       2,146  
                                         
Total   $ 123,980     $ 18,277     $ 20,677     $ 3,567     $ 166,501  

 

The payment age analysis of loans receivable disbursed at June 30, 2014, follows:

 

    30-59   60-89   90+   Total       Total   90+ and
Loan Class   Days   Days   Days   Past Due   Current   Loans   Accruing
                             
Commercial:                                                        
                                                         
Commercial and industrial   $ 606     $ 499     $ 277     $ 1,382     $ 111,598     $ 112,980     $ —  
Agricultural     22       —       125       147       5,268       5,415       —  
Government     —       —       —       —       9,599       9,599       —  
                                                         
Commercial real estate:                                                        
                                                         
Commercial real estate     788       190       823       1,801       209,325       211,126       —  
Commercial construction and development     329       —       17       346       15,813       16,159       —  
                                                         
Residential real estate:                                                        
                                                         
Residential – Prime     445       253       1,776       2,474       128,266       130,740       —  
Residential – HELOC     31       28       192       251       22,754       23,005       —  
Residential – construction and development     185       —       127       312       15,512       15,824       —  
                                                         
Consumer     6       7       9       22       3,565       3,587       —  
                                                         
Total   $ 2,412     $ 977     $ 3,346     $ 6,735     $ 521,700     $ 528,435     $ —  

 

The payment age analysis of loans receivable disbursed at December 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   $ 297     $ 57     $ 610     $ 964     $ 114,965     $ 115,929     $ —  
Agricultural     —       —       152       152       4,102       4,254       —  
Government     —       —       —       —       10,037       10,037       —  
                                                         
Commercial real estate:                                                        
                                                         
Commercial real estate     376       547       1,276       2,199       210,651       212,850       —  
Commercial construction and development     —       —       —       —       11,434       11,434       —  
                                                         
Residential real estate:                                                        
                                                         
Residential – prime     369       87       335       791       123,189       123,980       —  
Residential – HELOC     45       14       314       373       20,304       20,677       —  
Residential – construction and development     37       —       —       37       13,583       13,620       —  
                                                         
Consumer     2       10       9       21       3,546       3,567       —  
                                                         
Total   $ 1,126     $ 715     $ 2,696     $ 4,537     $ 511,811     $ 516,348     $ —  

 

Impaired loans as of June 30, 2014, and during the six 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   $ 5,257     $ —     $ 5,207     $ 4,034     $ 127  
Commercial real estate     2,951       —       2,726       2,551       36  
Government     2,845       —       2,845       2,968       72  
Residential – prime     1,379       —       1,223       1,045       8  
Residential – HELOC     116       —       115       113       2  
Consumer     2       —       2       1       —  
                                         
With an allowance recorded:                                        
                                         
Commercial & industrial   $ 3,240     $ 1,167     $ 2,989     $ 2,494     $ 18  
Commercial real estate     2,887       602       2,652       2,832       2  
Commercial construction & development     137       28       135       138       3  
Agricultural     127       40       125       139       —  
Residential – prime     1,843       664       1,834       1,270       13  
Residential – HELOC     309       141       294       347       —  
Residential construction & development     174       38       171       109       1  
Consumer     24       24       23       20       —  
                                         
Totals:                                        
                                         
Commercial & industrial   $ 8,497     $ 1,167     $ 8,196     $ 6,528     $ 145  
Commercial real estate     5,838       602       5,378       5,383       38  
Commercial construction & development     137       28       135       138       3  
Agricultural     127       40       125       139       —  
Government     2,845       —       2,845       2,968       72  
Residential – prime     3,222       664       3,057       2,315       21  
Residential – HELOC     425       141       409       460       2  
Residential construction & development     174       38       171       109       1  
Consumer     26       24       25       21       —  

 

The impaired loans at December 31, 2013, 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   $ 2,906     $ —     $ 2,861     $ 2,172     $ 135  
Commercial real estate     2,555       —       2,376       1,740       85  
Commercial construction and development     1       —       —       —       —  
Government     3,090       —       3,090       1,545       150  
Residential – Prime     979       —       866       845       14  
Residential – HELOC     110       —       110       55       3  
                                         
With an allowance recorded:                                        
                                         
Commercial and industrial   $ 2,231     $ 1,112     $ 1,999     $ 2,813     $ 43  
Commercial real estate     3,143       621       3,011       2,955       81  
Commercial construction and development     142       74       140       171       8  
Agricultural     152       55       152       153       —  
Residential – Prime     749       101       706       1,085       9  
Residential – HELOC     412       119       400       453       5  
Residential construction and development     49       8       47       100       1  
Consumer     19       18       17       22       —  
                                         
Totals:                                        
                                         
Commercial and industrial   $ 5,137     $ 1,112     $ 4,860     $ 4,985     $ 178  
Commercial real estate     5,698       621       5,387       4,695       166  
Commercial construction and development     143       74       140       171       8  
Agricultural     152       55       152       153       —  
Government     3,090       —       3,090       1,545       150  
Residential – Prime     1,728       101       1,572       1,930       23  
Residential – HELOC     522       119       510       508       8  
Residential construction and development     49       8       47       100       1  
Consumer     19       18       17       22       —  

 

Loans on nonaccrual status at period-end, follows:

 

    June 30, 2014   December 31, 2013
                 
Commercial:                
                 
Commercial and industrial   $ 2,738     $ 1,575  
Agricultural     125       152  
                 
Commercial real estate:                
                 
Commercial real estate     4,039       4,103  
Commercial construction and development     17       17  
                 
Residential real estate:                
                 
Residential – prime     2,224       1,059  
Residential – HELOC     309       387  
Residential construction and development     155       30  
                 
Consumer     25       17  
                 
Total   $ 9,632     $ 7,340  

  

During the quarter and six months ended June 30, 2014, the contracts identified below were modified to capitalize unpaid property taxes, convert amortizing payments to interest only payments, or to extend payment amortization periods, and were categorized as troubled debt restructurings. During the quarter and six months ended June 30, 2013, the contracts identified below were modified to capitalize unpaid property taxes, convert amortizing payments to interest only payments, extend the amortization period, or lower the interest rate. Specific loan reserves maintained in connection with loans restructured during the six months ended June 30 totaled $668 at June 30, 2014, and $173 at June 30, 2013. 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 June 30, 2014:

 

        Pre-modification   Post-modification
    Number of   outstanding recorded   outstanding recorded
As of June 30, 2014   contracts   investment   investment at period-end
             
Commercial & industrial   4   $ 1,192     $ 1,160  
Commercial real estate   1   $ 490     $ 460  

 

The following table presents information concerning modifications of troubled debt made during the six months ended June 30, 2014:

 

            Post-modification
        Pre-modification   outstanding
        outstanding   recorded
    Number of   recorded   investment
As of June 30, 2014   contracts   investment   at period-end
             
Commercial & industrial   1   $ 1,252     $ 1,218  
Commercial real estate   1   $ 490     $ 460  
Residential real estate - prime   2   $ 309     $ 183  

 

The following table presents information concerning modifications of troubled debt made during the quarter ended June 30, 2013:

 

        Pre-modification   Post-modification
    Number of   outstanding recorded   outstanding recorded
As of June 30, 2013 ($000s)   contracts   investment   investment at period-end
             
Commercial & industrial   2   $ 358     $ 354  
Residential real estate - prime   1   $ 90     $ 90  

 

The following table presents information concerning modifications of troubled debt made during the six months ended June 30, 2013:

 

            Post-modification
        Pre-modification   outstanding
        outstanding   recorded
    Number of   recorded   investment
As of June 30, 2013 ($000s)   contracts   investment   at period-end
             
Commercial & industrial   3   $ 396     $ 390  
Commercial real estate   2   $ 221     $ 214  
Residential real estate - prime   1   $ 90     $ 90  

 

 

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.

 

    Number of   Recorded
Default during the quarter ended June 30, 2014 (000s)   contracts   investment
             
Residential real estate – prime   1   $ 296  

 

    Number of   Recorded
Default during the six months ended June 30, 2014 ($000s)   contracts   investment
         
Commercial and industrial   1   $ 55  
Commercial real estate   2   $ 124  
Residential real estate – prime   2   $ 380  

 

    Number of   Recorded
Default during the quarter ended June 30, 2013 (000s)   contracts   investment
             
None            

 

    Number of   Recorded
Default during the six months ended June 30, 2013 ($000s)   contracts   investment
         
Commercial real estate   1   $ 74  
Residential real estate – prime   1   $ 90