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Loans Receivable and Allowance for Loan Losses
 9 Months Ended
Sep. 30, 2014
Loans Receivable and Allowance for Loan Losses [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:

 

  September 30,
2014		  December 31,
2013		 
       
Commercial, industrial, and municipal $138,999  $130,220 
Commercial real estate mortgage  207,477   212,850 
Commercial construction and development  31,943   13,672 
Residential real estate mortgage  129,286   123,980 
Residential construction and development  17,254   18,277 
Residential real estate home equity  23,570   20,677 
Consumer and individual  3,448   3,567 
         
Subtotals – Gross loans  551,977   523,243 
Loans in process of disbursement  (12,776)  (6,895)
         
Subtotals – Disbursed loans  539,201   516,348 
Net deferred loan costs  311   315 
Allowance for loan losses  (6,424)  (6,783)
         
Net loans receivable $533,088  $509,880 

 

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

 

  September 30,
2014		  December 31,
2013		 
       
Impaired loans without a valuation allowance $9,042  $9,303 
Impaired loans with a valuation allowance  10,298   6,472 
         
Total impaired loans before valuation allowances  19,340   15,775 
Valuation allowance related to impaired loans  2,283   2,108 
         
Net impaired loans $17,057  $13,667 

 

Activity in the allowance for loans losses during the nine months ended September 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)  (455)  (241)  1,116   –   –   420 
Recoveries  6   –   18   7   –   31 
Charge offs  (99)  –   (692)  (19)  –   (810)
                         
Ending balance $2,280  $2,412  $1,665  $67  $–  $6,424 

 

Activity in the allowance for loans losses during the nine months ended September 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  3,553   226   198   38   –   4,015 
Recoveries  2   30   3   11   –   46 
Charge offs  (3,568)  (174)  (574)  (50)  –   (4,366)
                         
Ending balance $3,001  $2,885  $1,138  $102  $–  $7,126 

 

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

 

  At September 30, 2014 
     Commercial  Residential          
Allowance for loan losses: Commercial  Real Estate  Real Estate  Consumer  Unallocated  Total 
                   
Individually evaluated for impairment $1,233  $519  $522  $9  $–  $2,283 
Collectively evaluated for impairment  1,047   1,893   1,143   58   –   4,141 
                         
Total allowance for loan losses $2,280  $2,412  $1,665  $67  $–  $6,424 
                         
Loans receivable (gross):                        
                         
Individually evaluated for impairment $10,965  $5,277  $3,089  $9  $–  $19,340 
Collectively evaluated for impairment  128,034   234,143   167,021   3,439   –   532,637 
                         
Total loans receivable (gross) $138,999  $239,420  $170,110  $3,448  $–  $551,977 

 

  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 September 30, 2014, follows:

 

     Commercial  Construction &          
  Commercial  Real Estate  Development  Agricultural  Government  Total 
                   
High quality (risk rating 1) $197  $–  $–  $–  $–  $197 
Minimal risk (2)  32,034   19,535   298   1,718   65   53,650 
Average risk (3)  49,742   127,406   26,888   3,100   6,526   213,662 
Acceptable risk (4)  30,552   47,617   3,098   580   301   82,148 
Watch risk (5)  2,500   7,306   1,527   11   –   11,344 
Substandard risk (6)  708   468   –   –   –   1,176 
Impaired loans (7)  7,996   5,145   132   124   2,845   16,242 
                         
Total $123,729  $207,477  $31,943  $5,533  $9,737  $378,419 

 

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 September 30, 2014, follows:

 

  Residential-  Construction and  Residential-       
  Prime  Development  HELOC  Consumer  Total 
                
Performing $127,076  $16,756  $23,189  $3,439  $170,460 
Impaired loans  2,210   498   381   9   3,098 
                     
Total $129,286  $17,254  $23,570  $3,448  $173,558 

 

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 September 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 $350  $67  $555  $972  $122,757  $123,729  $– 
Agricultural  7   –   124   131   5,402   5,533   – 
Government  –   –   –   –   9,737   9,737   – 
                             
Commercial real estate:                            
                             
Commercial real estate  655   32   625   1,312   206,165   207,477   – 
Commercial construction and development  –   –   16   16   20,962   20,978   – 
                             
Residential real estate:                            
                             
Residential – Prime  13   391   962   1,366   127,920   129,286   – 
Residential – HELOC  218   41   124   383   23,187   23,570   – 
Residential – construction and development  114   37   118   269   15,174   15,443   – 
                             
Consumer  4   5   2   11   3,437   3,448   – 
                             
Total $1,361  $573  $2,526  $4,460  $534,741  $539,201  $– 

 

 

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 September 30, 2014, and during the year to date period 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 $2,505  $–  $2,456  $2,659  $164 
Commercial real estate  2,615   –   2,389   2,383   55 
Government  2,845   –   2,845   2,968   72 
Residential – prime  1,289   –   1,197   1,032   23 
Residential – HELOC  155   –   155   133   4 
                     
With an allowance recorded:                    
                     
Commercial & industrial $5,809  $1,194  $5,540  $3,770  $128 
Commercial real estate  3,058   497   2,756   2,884   5 
Commercial construction & development  135   22   132   136   5 
Agricultural  127   39   124   138   – 
Residential – prime  1,518   232   1,013   859   16 
Residential – HELOC  250   118   226   313   – 
Residential construction & development  505   172   498   273   1 
Consumer  10   9   9   14   – 
                     
Totals:                    
                     
Commercial & industrial $8,314  $1,194  $7,996  $6,429  $292 
Commercial real estate  5,673   497   5,145   5,267   60 
Commercial construction & development  135   22   132   136   5 
Agricultural  127   39   124   138   – 
Government  2,845   –   2,845   2,968   72 
Residential – prime  2,807   232   2,210   1,891   39 
Residential – HELOC  405   118   381   446   4 
Residential construction & development  505   172   498   273   1 
Consumer  10   9   9   14   – 

 

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:

 

  September 30,
2014		  December 31,
2013		 
       
Commercial:      
       
Commercial and industrial $2,737  $1,575 
Agricultural  124   152 
         
Commercial real estate:        
         
Commercial real estate  3,608   4,103 
Commercial construction and development  16   17 
         
Residential real estate:        
         
Residential – prime  1,317   1,059 
Residential – HELOC  242   387 
Residential construction and development  482   30 
         
Consumer  9   17 
         
Total $8,535  $7,340 

  

During the quarter and nine months ended September 30, 2014, the contracts identified below were modified to capitalize unpaid property taxes or interest, convert amortizing payments to interest only payments, or to extend payment amortization periods, and were categorized as troubled debt restructurings. During the quarter and nine months ended September 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 nine months September 30 totaled $546 at September 30, 2014, and $165 at September 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 September 30, 2014:

 

  Number of Pre-modification
outstanding recorded		  Post-modification outstanding recorded investment at 
As of September 30, 2014 ($000s) contracts investment  period-end 
           
Commercial real estate 2 $376  $339 

 

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

 

  Number of Pre-modification
outstanding recorded		  Post-modification outstanding recorded investment at 
As of September 30, 2014 ($000s) contracts investment  period-end 
           
Commercial & industrial 5 $1,252  $1,198 
Commercial real estate 3 $866  $786 
Residential real estate – prime 2 $309  $183 

 

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

 

  Number of Pre-modification
outstanding recorded		  Post-modification outstanding recorded investment at 
As of September 30, 2013 ($000s) contracts investment  period-end 
           
Commercial & industrial 1 $75  $75 
Commercial real estate 1 $82  $81 
Residential real estate – prime 4 $777  $774 

 

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

 

  Number of Pre-modification
outstanding recorded		  Post-modification outstanding recorded investment at 
As of September 30, 2013 ($000s) contracts investment  period-end 
           
Commercial & industrial 4 $471  $369 
Commercial real estate 3 $303  $288 
Residential real estate – prime 5 $867  $862 

   

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 September 30, 2014 ($000s) contracts investment 
      
Commercial and industrial 2 $255 
Commercial real estate 1 $102 

 

  Number of Recorded 
Default during the nine months ended September 30, 2014 ($000s) contracts investment 
      
Commercial and industrial 3 $255 
Commercial real estate 3 $102 
Residential real estate – prime 2 $– 

 

  Number of Recorded 
Default during the quarter ended September 30, 2013 ($000s) contracts investment 
       
Commercial and industrial 1 $172 

 

  Number of Recorded 
Default during the nine months ended September 30, 2013 ($000s) contracts investment 
      
Commercial and industrial 1 $172 
Commercial real estate 1 $81 
Residential – prime 1 $88