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Loans Receivable
 3 Months Ended
Mar. 31, 2013
Receivables [Abstract]  
Loans, Notes, Trade and Other Receivables Disclosure [Text Block]
Note 4: Loans Receivable

 

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balance adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.

 

For loans recorded at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.

 

Categories of loans include:

 

    March 31, 2013     December 31, 2012  
Real estate loans                
Residential   $ 124,290     $ 128,815  
Commercial     89,347       84,918  
Total real estate loans     213,637       213,733  
Commercial loans     19,744       14,271  
Consumer loans     121,500       126,486  
Total loans     354,881       354,490  
Deferred loan origination costs and premiums and discounts on purchased loans     3,483       3,671  
Allowance for loan losses     (5,748 )     (5,833 )
Total net loans   $ 352,616     $ 352,328  

 

The risk characteristics of each loan portfolio segment are as follows:

 

Commercial Real Estate: These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of property type and geographic location. Management monitors and evaluates commercial real estate loans based on property financial performance, collateral value and other risk grade criteria. As a general rule, the Company avoids financing special use projects or properties outside of its designated market areas unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus nonowner-occupied loans.

  

Commercial: Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

 

Residential Real Estate and Consumer: With respect to residential loans that are secured by 1-4 family residences and are generally owner occupied, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured, such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

 

Allowance for Loan Losses Methodology

 

Company policy is designed to ensure that an adequate allowance for loan losses (“ALLL”) is maintained. The portfolio is segmented by loan type.  The required ALLL for types of performing homogeneous loans which do not have a specific reserve is determined by applying a factor based on historical losses averaged over the past 12 months.  Management believes the historical loss experience methodology is appropriate in the current economic environment, as it captures loss rates that are comparable to the current period being analyzed.  Management adds qualitative factors for observable trends, changes in internal practices, changes in delinquencies and impairments, and, finally, external factors.  Observable factors include changes in the composition and size of portfolios, as well as loan terms or concentration levels.  We evaluate the impact of internal changes such as management and staff experience levels or modification to loan review processes.  Delinquency trends are scrutinized for both volume and severity of past due, nonaccrual, classified or graded loans as well as any changes in the value of underlying collateral.  Finally, we consider the effect of other external factors such as national, regional and local economic and business conditions, as well as competitive, legal and regulatory requirements. All criticized, classified and impaired loans are evaluated for impairment by applying at least one of three methodologies: present value of future cash flows; fair value of collateral less cost to sell; or the loan’s observable market price.  All troubled debt restructurings (“TDR”) are considered impaired loans.  Loans evaluated for impairment are removed from other pools to prevent double-counting.

 

Provision for Loan Losses

 

A provision for estimated losses on loans is charged to operations based upon management’s evaluation of the potential losses. Such an evaluation, which includes a review of all loans for which full collectability may not be reasonably assured considers, among other matters, the estimated net realizable value of the underlying collateral, as applicable, economic conditions, loan loss experience and other factors that are particularly susceptible to changes that could result in a material adjustment in the near term. While management endeavors to use the best information available in making its evaluations, future allowance adjustments may be necessary if economic conditions change substantially from the assumptions used in making the evaluations.

 

Accounting Standards Codification (ASC) Topic 310, Receivables, requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loans’ effective interest rates or the fair value of the underlying collateral and allows existing methods for recognizing interest income.

  

Policy for Charging Off Loans

 

The Company’s policy is to charge off a loan at any point in time when it no longer can be considered a bankable asset, meaning collectable within the parameters of policy. A secured loan is generally charged off to the estimated fair value of the collateral no later than when it is 120 days past due as to principal or interest. An unsecured loan generally is charged off no later than when it is 180 days past due as to principal or interest. All charge-offs are approved by the Chief Credit Officer.

 

The following tables present the balance in the ALLL and the recorded investment in loans based on portfolio segment and impairment method as of March 31, 2013, December 31, 2012 and March 31, 2012:

  

    March 31, 2013  
    Residential
Real Estate		     Commercial
Real Estate		     Commercial     Consumer     Total  
Allowance for loan losses:                                        
Balance, beginning of year   $ 1,149     $ 3,107     $ 371     $ 1,206     $ 5,833  
Provision charged to expense     (81 )     (25 )     95       145       134  
Losses charged off     (54 )     —       —       (236 )     (290 )
Recoveries     8       —       —       63       71  
Balance, end of year     1,022       3,082       466       1,178       5,748  
Ending balance:                                        
individually evaluated for impairment     11       680       —       64       755  
Ending balance:                                        
collectively evaluated for impairment   $ 1,011     $ 2,402     $ 466     $ 1,114     $ 4,993  
Loans:                                        
Ending balance   $ 124,290     $ 89,347     $ 19,744     $ 121,500     $ 354,881  
Ending balance:                                        
individually evaluated for impairment     2,272       2,465       —       476       5,213  
Ending balance:                                        
collectively evaluated for impairment   $ 122,018     $ 86,882     $ 19,744     $ 121,024     $ 349,668  

 

    March 31, 2012  
    Residential
Real Estate		     Commercial
Real Estate		     Commercial     Consumer     Total  
Allowance for loan losses:                                        
Balance, beginning of year   $ 1,099     $ 2,485     $ 333     $ 1,739     $ 5,656  
Provision charged to expense     181       79       97       213       570  
Losses charged off     (129 )     —       —       (450 )     (579 )
Recoveries     9       —       —       132       141  
Balance, end of year     1,160       2,564       430       1,634       5,788  
Ending balance:                                        
individually evaluated for impairment     350       1,328       —       15       1,693  
Ending balance:                                        
collectively evaluated for impairment   $ 810     $ 1,236     $ 430     $ 1,619     $ 4,095  

 

 

   December 31, 2012  
    Residential
Real Estate		     Commercial
Real Estate		     Commercial     Consumer     Total  
Loans:                                        
Ending balance   $ 128,815     $ 84,918     $ 14,271     $ 126,486     $ 354,490  
Ending balance:                                        
individually evaluated for impairment     2,482       2,467       —       474       5,423  
Ending balance:                                        
collectively evaluated for impairment   $ 126,333     $ 82,451     $ 14,271     $ 126,012     $ 349,067  

 

The Company utilizes a risk grading matrix to assign a risk grade to each of its commercial loans. Loans are graded on a scale of 1 to 8. A description of the general characteristics of the 8 risk grades is as follows:

 

· Grades 1 & 2 - These grades are assigned to loans with very high credit quality borrowers of investment or near investment grade or where the loan is primarily secured by cash or conservatively margined high quality marketable securities. These borrowers are generally publicly traded, have significant capital strength, possess investment grade public debt ratings, demonstrate low leverage, exhibit stable earnings and growth and have ready access to various financing alternatives.

 

· Grades 3 & 4 - Loans assigned these grades include loans to borrowers possessing solid credit quality with acceptable risk. Borrowers in these grades are differentiated from higher grades on the basis of size (capital and/or revenue), leverage, asset quality, stability of the industry or specific market area and quality/coverage of collateral. These borrowers generally have a history of consistent earnings and reasonable leverage.

 

· Grade 5 - This grade includes “pass grade” loans to borrowers which require special monitoring because of deteriorating financial results, declining credit ratings, decreasing cash flow, increasing leverage, marginal collateral coverage or industry stress that has resulted or may result in a changing overall risk profile.

 

· Grade 6 - This grade is for “Special Mention” loans in accordance with regulatory guidelines. This grade is intended to include loans to borrowers whose credit quality has clearly deteriorated and where risk of further decline is possible unless active measures are taken to correct the situation. Weaknesses are considered potential at this state and are not yet fully defined.

 

· Grade 7 - This grade includes “Substandard” loans in accordance with regulatory guidelines. Loans categorized in this grade possess a well-defined credit weakness, and the likelihood of repayment from the primary source is uncertain. Significant financial deterioration has occurred, and very close attention is warranted to ensure the full repayment without loss. Collateral coverage may be marginal, and the accrual of interest has been suspended.

 

· Grade 8 - This grade includes “Doubtful” loans in accordance with regulatory guidelines. Such loans have been placed on nonaccrual status and may be heavily dependent upon collateral possessing a value that is difficult to determine or based upon some near-term event which lacks clear certainty. These loans have all of the weaknesses of those classified as Substandard; however, based on existing conditions, these weaknesses make full collection of the principal balance highly improbable.

 

Nonaccrual Loans

 

Any loan which becomes 90 days delinquent or has the full collection of principal and interest in doubt will be considered for nonaccrual status. At the time a loan is placed on nonaccrual, all accrued but unpaid interest will be reversed from interest income. Placing the loan on nonaccrual does not relieve the borrower of the obligation to repay interest. A loan placed on nonaccrual may be restored to accrual status when all delinquent principal and interest has been brought current, and the Company expects full payment of the remaining contractual principal and interest.

 

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of March 31, 2013 and December 31, 2012:

 

    March 31, 2013  
    Commercial
Real Estate		     Commercial  
Rating:                
1-5 Pass   $ 85,253     $ 19,361  
6 Special Mention     1,629       383  
7 Substandard     2,465       —  
8 Doubtful     —       —  
Total   $ 89,347     $ 19,744  

 

    March 31, 2013  
    Residential
Real Estate		     Consumer  
Performing   $ 123,101     $ 121,323  
Nonperforming (nonaccrual)     1,189       177  
Total   $ 124,290     $ 121,500  

 

    December 31, 2012  
    Commercial
Real Estate		     Commercial  
Rating:                
1-5 Pass   $ 80,830     $ 13,860  
6 Special Mention     1,621       411  
7 Substandard     2,467       —  
8 Doubtful     —       —  
Total   $ 84,918     $ 14,271  

 

    December 31, 2012  
    Residential
Real Estate		     Consumer  
Performing   $ 127,426     $ 126,331  
Nonperforming (nonaccrual)     1,389       155  
Total   $ 128,815     $ 126,486  

 

The following tables present the Company’s loan portfolio aging analysis as of March 31, 2013 and December 31, 2012:

 

    March 31, 2013  
    30-59
Days
Past Due		     60-89
Days
Past Due		     90 Days
or More
Past Due		     Total
Past Due		     Current     Total
Loans
Receivable		     Nonaccrual
Loans		     Total Loans
90 Days or
More Past Due
and Accruing		  
Real estate loans                                                                
Residential   $ 485     $ 185     $ 1,056     $ 1,726     $ 122,564     $ 124,290     $ 1,189     $ —  
Commercial     —       —       2,362       2,362       86,985       89,347       2,362       —  
Commercial     —       —       —       —       19,744       19,744       —       —  
Consumer     676       83       129       888       120,612       121,500       177       44  
Total   $ 1,161     $ 268     $ 3,547     $ 4,976     $ 349,905     $ 354,881     $ 3,728     $ 44  

 

    December 31, 2012  
    30-59
Days
Past Due		     60-89
Days
Past Due		     90 Days
or More
Past Due		     Total
Past Due		     Current     Total
Loans
Receivable		     Nonaccrual
Loans		     Total Loans
90 Days or
More Past Due
and Accruing		  
Real estate loans                                                                
Residential   $ 130     $ 5     $ 1,555     $ 1,690     $ 127,125     $ 128,815     $ 1,389     $ 450  
Commercial     —       —       2,362       2,362       82,556       84,918       2,362       —  
Commercial     —       —       —       —       14,271       14,271       —       —  
Consumer     1,025       148       122       1,295       125,191       126,486       155       21  
Total   $ 1,155     $ 153     $ 4,039     $ 5,347     $ 349,143     $ 354,490     $ 3,906     $ 471  

 

Impaired Loans

 

A loan is designated as impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16) when, based on current information or events, it is probable that the Company will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Payments with insignificant delays not exceeding 90 days outstanding are not considered impaired. Certain nonaccrual and substantially all delinquent loans may be considered to be impaired. Generally, loans are placed on nonaccrual status at 90 days past due and accrued interest is reversed against earnings, unless the loan is well-secured and in the process of collection. The accrual of interest on impaired and nonaccrual loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due.

 

Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

 

The following tables present the Company’s impaired loans as of March 31, 2013, December 31, 2012 and March 31, 2012:

 

    March 31, 2013  
    Recorded
Balance		     Unpaid
Principal
Balance		     Specific
Allowance		     Average
Balance		     Interest
Income		  
Loans without a specific valuation allowance                                        
Residential real estate loans   $ 2,244     $ 2,604     $ —     $ 2,145     $ 7  
Commercial real estate loans     —       —       —       —       —  
Commercial loans     —       —       —       —       —  
Consumer loans     350       582       —       365       —  
Total     2,594       3,186       —       2,510       7  
Loans with a specific valuation allowance                                        
Residential real estate loans     28       35       11       232       —  
Commercial real estate loans     2,465       2,924       680       2,466       1  
Commercial loans     —       —       —       —       —  
Consumer loans     126       193       64       110       —  
Total     2,619       3,152       755       2,808       1  
Total impaired loans                                        
Residential real estate loans     2,272       2,639       11       2,377       7  
Commercial real estate loans     2,465       2,924       680       2,466       1  
Commercial loans     —       —       —       —       —  
Consumer loans     476       775       64       475       —  
Total   $ 5,213     $ 6,338     $ 755     $ 5,318     $ 8  

 

    December 31, 2012     March 31, 2012  
    Recorded
Balance		     Unpaid
Principal
Balance		     Specific
Allowance		     Average
Balance		     Interest
Income		  
Loans without a specific valuation allowance                                        
Residential real estate loans   $ 2,047     $ 2,357     $ —     $ 1,112     $ —  
Commercial real estate loans     —       —       —       —       —  
Commercial loans     —       —       —       —       —  
Consumer loans     380       577       —       361       —  
Total     2,427       2,934       —       1,473       —  
Loans with a specific valuation allowance                                        
Residential real estate loans     435       442       206       645       5  
Commercial real estate loans     2,467       2,925       682       7,634       2  
Commercial loans     —       —       —       —       —  
Consumer loans     94       206       54       88       —  
Total     2,996       3,573       942       8,367       7  
Total impaired loans                                        
Residential real estate loans     2,482       2,799       206       1,757       5  
Commercial real estate loans     2,467       2,925       682       7,634       2  
Commercial loans     —       —       —       —       —  
Consumer loans     474       783       54       449       —  
Total   $ 5,423     $ 6,507     $ 942     $ 9,840     $ 7  

 

Troubled Debt Restructurings (TDR)

 

The loan portfolio includes TDRs which are loans that have been modified to grant economic concessions to borrowers who have experienced financial difficulties. These concessions typically result from loss mitigation efforts and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructuring and typically are returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally not less than six months.

 

When loans are modified in a TDR, any possible impairment similar to other impaired loans is evaluated based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, or use the current fair value of the collateral, less selling costs for collateral dependent loans. If it is determined that the value of the modified loan is less than the recorded balance of the loan, impairment is recognized through a specific allowance or charge-off to the allowance. In periods subsequent to modification, all TDRs, including those that have payment defaults, are evaluated for possible impairment, and impairment is recognized through the allowance.

 

In the course of working with troubled borrowers, the Company may choose to restructure the contractual terms of certain loans in an effort to work out an alternative payment schedule with the borrower in order to optimize the collectability of the loan. Any loan modified is reviewed by the Company to identify if a TDR has occurred (when the Company grants a concession to the borrower that it would not otherwise consider based on economic or legal reasons related to a borrower’s financial difficulties). Terms may be modified to fit the ability of the borrower to repay in line with its current financial status or the loan may be restructured to secure additional collateral and/or guarantees to support the debt, or a combination of the two.

 

Loans classified as a TDR during the three months ended March 31, 2013 consisted of two consumer loans with a recorded balance of $2 before and after the modification. There were no loans classified as a TDR during the three months ended March 31, 2012. The 2013 modifications consisted solely of maturity date concessions. Payment extensions have proven to be successful in optimizing the overall collectability of the loan by increasing the period of time that the borrower is able to make required payments to the Company.

 

There were no TDR loans which had payment defaults during the three months ended March 31, 2013 and 2012. Default occurs when a loan is 90 days or more past due or transferred to nonaccrual within 12 months of restructuring.