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LOANS AND ALLOWANCE FOR LOAN LOSSES
 3 Months Ended
Mar. 31, 2012
Receivables [Abstract]  
Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

NOTE D – LOANS AND ALLOWANCE FOR LOAN LOSSES

 

Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoffs, are reported at their outstanding principal balances adjusted for any charge-offs, the allowance for loan losses, any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Generally, loans are placed on non-accrual status not later than 90 days past due, unless the loan is well-secured and in the process of collection. All interest accrued, but not collected for loans that are placed on non-accrual or charged-off, is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the non-collectability of a loan balance is probable. Subsequent recoveries, if any, are credited to the allowance.

 

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as new information becomes available.

 

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected on the historical loss or risk rating data.

 

A loan is considered impaired when, based on current information and events, it is probable that State Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration each of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial, agricultural, and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

 

When State Bank moves a loan to non-accrual status, total unpaid interest accrued to date is reversed from income. Subsequent payments are applied to the outstanding principal balance with the interest portion of the payment recorded on the balance sheet as a contra-loan. Interest received on impaired loans may be realized once all contractual principal amounts are received or when a borrower establishes a history of six consecutive timely principal and interest payments. It is at the discretion of management to determine when a loan is placed back on accrual status upon receipt of six consecutive timely payments.

 

Large groups of smaller balance homogenous loans are collectively evaluated for impairment. Accordingly, State Bank does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

 

Categories of loans at March 31, 2012 and December 31, 2011 include:

 

($'s in thousands)   March 31,     December 31,  
    2012     2011  
Commercial   $ 78,450     $ 78,112  
Commercial real estate     188,984       187,829  
Agricultural     37,741       38,361  
Residential real estate     84,771       87,656  
Home Equity & Consumer     49,855       50,681  
Leasing     207       216  
Total loans     440,008       442,855  
Less                
Net deferred loan fees, premiums and discounts     (287 )     (301 )
Loans, net of unearned income   $ 439,721     $ 442,554  
Allowance for loan losses   $ (6,609 )   $ (6,529 )

 

The following table presents the Company’s nonperforming loans at March 31, 2012 and December 31, 2011.

 

($'s in thousands)   March 31,     December 31,  
    2012     2011  
Commercial   $ 2,021     $ 2,393  
Commercial real estate     1,481       1,456  
Agricultural     113       -  
Residential real estate     1,840       2,471  
Home Equity & Consumer     1,056       580  
Leasing     -       -  
                 
Total nonaccruing loans     6,511       6,900  
                 
Accruing Troubled Debt Restructures (TDR's)     1,593       1,334  
                 
Total Nonperforming Loans   $ 8,104     $ 8,234  

 
The following tables present the balance of the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of March 31, 2012, December 31, 2011 and March 31, 2011.

 

March 31, 2012         Commercial           Residential     Home Equity                    
($'s in thousands)   Commercial     Real Estate     Agricultural     First Mortgage     & Consumer     Other     Unallocated     Total  
                                                 
ALLOWANCE FOR LOAN AND LEASE LOSSES                                                
                                                                 
Beginning balance   $ 1,914     $ 2,880     $ 51     $ 956     $ 599     $ 139     $ (10 )   $ 6,529  
Charge Offs     (205 )     (42 )     -       (51 )     (160 )     (16 )     -       (474 )
Recoveries     2       23       1       71       2       3       1       104  
Provision     144       52       -       24       212       9       9       450  
Ending Balance   $ 1,855     $ 2,913     $ 53     $ 1,000     $ 653     $ 135     $ -     $ 6,609  
                                                                 
Ending balance:                                                                
individually evaluated for  impairment   $ 517     $ 231     $ 3     $ 403     $ 178     $ -     $ -     $ 1,332  
Ending balance:                                                                
collectively evaluated for  impairment   $ 1,338     $ 2,682     $ 50     $ 597     $ 475     $ 135     $ -     $ 5,277  
                                                                 
Loans:                                                                
Ending balance:                                                                
individually evaluated for  impairment   $ 1,945     $ 2,035     $ 115     $ 2,375     $ 518     $ -     $ -     $ 6,988  
Ending balance:                                                                
collectively evaluated for  impairment   $ 76,505     $ 186,949     $ 37,626     $ 82,396     $ 49,337     $ 207     $ -     $ 433,020  

 

 

December 31, 2011         Commercial           Residential     Home Equity                    
($'s in thousands)   Commercial     Real Estate     Agricultural     First Mortgage     & Consumer     Other     Unallocated     Total  
                                                 
ALLOWANCE FOR LOAN AND LEASE LOSSES                                                
                                                                 
Beginning balance   $ 1,723     $ 3,774     $ 16     $ 643     $ 401     $ 128     $ 30     $ 6,715  
Charge Offs     (642 )     (2,057 )     -       (248 )     (460 )     -       -       (3,407 )
Recoveries     465       32       3       700       21       6       -       1,227  
Provision     368       1,131       32       (139 )     637       5       (40 )     1,994  
Ending Balance   $ 1,914     $ 2,880     $ 51     $ 956     $ 599     $ 139     $ (10 )   $ 6,529  
                                                                 
Ending balance:                                                                
individually evaluated for  impairment   $ 1,017     $ 19     $ 5     $ 280     $ 212     $ -     $ -     $ 1,533  
Ending balance:                                                                
collectively evaluated for  impairment   $ 897     $ 2,861     $ 46     $ 676     $ 387     $ 139     $ (10 )   $ 4,996  
                                                                 
Loans:                                                                
Ending balance:                                                                
individually evaluated for  impairment   $ 3,283     $ 2,473     $ 5     $ 2,074     $ 543     $ -     $ -     $ 8,378  
Ending balance:                                                                
collectively evaluated for  impairment   $ 74,829     $ 185,356     $ 38,356     $ 85,582     $ 50,138     $ 216     $ -     $ 434,477  

 

March 31, 2011         Commercial           Residential     Home Equity                    
($'s in thousands)   Commercial     Real Estate     Agricultural     First Mortgage     & Consumer     Other     Unallocated     Total  
                                                 
ALLOWANCE FOR LOAN AND LEASE LOSSES                                                 
                                                                 
Beginning balance   $ 1,723     $ 3,774     $ 16     $ 643     $ 401     $ 128     $ 30     $ 6,715  
Charge Offs     (209 )     (100 )     -       (103 )     (200 )     (27 )     -       (639 )
Recoveries     5       3       1       -       7       2       -       18  
Provision     247       (354 )     1       386       243       5       (29 )     499  
Ending Balance   $ 1,766     $ 3,322     $ 18     $ 926     $ 451     $ 108     $ 1     $ 6,593  
                                                                 
Ending balance:                                                                
individually evaluated for impairment   $ 901     $ 935     $ -     $ 219     $ 32     $ -     $ -     $ 2,087  
Ending balance:                                                                
collectively evaluated for impairment   $ 865     $ 2,387     $ 18     $ 707     $ 419     $ 108     $ 1     $ 4,506  
                                                                 
Loans:                                                                
Ending balance:                                                                
individually evaluated for impairment   $ 2,842     $ 6,174     $ -     $ 1,409     $ 175     $ -     $ -     $ 10,600  
Ending balance:                                                                
collectively evaluated for impairment   $ 67,777     $ 175,576     $ 37,206     $ 81,026     $ 50,077     $ 182     $ -     $ 411,845  

 

Credit Risk Profile

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with an outstanding balance greater than $100 thousand and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:

 

Special Mention (5): Assets have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. Ordinarily, special mention credits have characteristics which corrective management action would remedy.

 

Substandard (6): Loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardized the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

 

Doubtful (7): Loans classified as doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current known facts, conditions and values, highly questionable and improbable.

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass (1-4) rated loans.


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, 2012 and December 31, 2011 ($’s in thousands).

 

March 31, 2012           Commercial RE           Residential     Home Equity              
      Commercial     & Construction     Agricultural     Real Estate     & Consumer     Leases     Total  
1-2     $ 825     $ 123     $ 122     $ -     $ 2     $ -     $ 1,072  
3       24,185       60,257       10,836       72,933       44,732       24       212,967  
4       49,534       113,642       26,617       7,601       3,562       183       201,139  
Total Pass       74,544       174,022       37,575       80,534       48,296       207       415,178  
                                                             
5       74       10,075       115       1,569       441       -       12,274  
6       1,924       3,310       51       949       42       -       6,276  
7       1,908       1,577       -       1,719       1,076       -       6,280  
8       -       -       -       -       -       -       -  
Total     $ 78,450     $ 188,984     $ 37,741     $ 84,771     $ 49,855     $ 207     $ 440,008  

  

December 31, 2011           Commercial RE           Residential     Home Equity              
      Commercial     & Construction     Agricultural     Real Estate     & Consumer     Leases     Total  
1-2     $ 909     $ 188     $ 152     $ 1,548     $ 127     $ 140     $ 3,064  
3       24,375       62,506       13,203       78,122       43,814       -       222,020  
4       48,004       110,633       24,950       1,576       6,095       76       191,334  
Total Pass       73,288       173,327       38,305       81,246       50,036       216       416,418  
                                                             
5       610       9,703       5       1,666       72       -       12,056  
6       2,037       3,358       51       1,834       92       -       7,372  
7       2,177       1,441       -       2,910       481       -       7,009  
8       -       -       -       -       -       -       -  
Total     $ 78,112     $ 187,829     $ 38,361     $ 87,656     $ 50,681     $ 216     $ 442,855  

 

The following tables present the Company’s loan portfolio aging analysis as of March 31, 2012 and December 31, 2011 ($’s in thousands).

 

    30-59 Days     60-89 Days     Greater Than     Total Past           Total Loans  
March 31, 2012   Past Due     Past Due     90 Days     Due     Current     Receivable  
                                     
Commercial   $ 11     $ -     $ 2,021     $ 2,032     $ 76,418     $ 78,450  
Commercial RE     -       -       1,481       1,481       187,503       188,984  
Agricultural     -       -       113       113       37,628       37,741  
Residential Real Estate     149       276       806       1,231       83,540       84,771  
Home Equity & Consumer     111       18       505       634       49,221       49,855  
Leases     -       -       -       -       207       207  
Loans & Lease     271       294       4,926       5,491       434,517       440,008  
Loans held for Sale     -       -       -       -       11,384       11,384  
                                                 
Total   $ 271     $ 294     $ 4,926     $ 5,491     $ 445,901     $ 451,392  

 

    30-59 Days     60-89 Days     Greater Than     Total Past           Total Loans  
December 31, 2011   Past Due     Past Due     90 Days     Due     Current     Receivable  
                                     
Commercial   $ 58     $ -     $ 2,334     $ 2,392     $ 75,720     $ 78,112  
Commercial RE     67       -       1,656       1,723       186,106       187,829  
Agricultural     -       -       -       -       38,361       38,361  
Residential Real Estate     412       784       569       1,765       85,891       87,656  
Home Equity & Consumer     465       194       505       1,164       49,517       50,681  
Leases     -       -       -       -       216       216  
Loans & Lease     1,002       978       5,064       7,044       435,811       442,855  
                                                 
Loans held for Sale     -       -       -       -       5,238       5,238  
                                                 
Total   $ 1,002     $ 978     $ 5,064     $ 7,044     $ 441,049     $ 448,093  

 

All loans past due 90 days are systematically placed on nonaccrual status.

 
The following tables present impaired loan activity for the three months ended March 31, 2012 and 2011, and for the twelve months ended December 31, 2011:

 

Three Months Ended         Unpaid           Average     Interest  
March 31, 2012   Recorded     Principal     Related     Recorded     Income  
($'s in thousands)   Investment     Balance     Allowance     Investment     Recognized  
With no related allowance recorded:                                        
Commercial   $ 118     $ 468     $ -     $ 127     $ -  
Commercial Real Estate     1,032       1,992       -       2,037       6  
Agricultural     112       112       -       113       -  
Residential     675       675       -       772       14  
Home Equity Consumer & Other     211       244       -       315       4  
All Impaired Loans < $100,000     1,157       1,157       -       1,157       -  
With a specific allowance recorded:                                        
Commercial     1,827       3,887       517       1,896       -  
Commercial Real Estate     1,003       2,192       231       1,145       -  
Agricultural     3       3       3       113       -  
Residential     1,700       1,710       403       1,768       21  
Home Equity Consumer & Other     307       307       178       251       2  
All Impaired Loans < $100,000     -       -       -       -       -  
Totals:                                        
Commercial   $ 1,945     $ 4,355     $ 517     $ 2,023     $ -  
Commercial Real Estate   $ 2,035     $ 4,184     $ 231     $ 3,182     $ 6  
Agricultural   $ 115     $ 115     $ 3     $ 226     $ -  
Residential   $ 2,375     $ 2,385     $ 403     $ 2,540     $ 35  
Home Equity Consumer & Other   $ 518     $ 551     $ 178     $ 566     $ 6  
All Impaired Loans < $100,000   $ 1,157     $ 1,157     $ -     $ 1,157     $ -  

  

Twelve Months Ended         Unpaid        
December 31, 2011   Recorded     Principal     Related  
($'s in thousands)   Investment     Balance     Allowance  
With no related allowance recorded:                        
Commercial   $ 1,206     $ 1,856     $ -  
Commercial Real Estate     1,061       2,149       -  
Agricultural     -       -       -  
Residential     581       581       -  
Home Equity Consumer & Other     189       217       -  
All Impaired Loans < $100,000     1,065       1,065       -  
With a specific allowance recorded:                        
Commercial     2,077       3,787       1,017  
Commercial Real Estate     1,412       2,827       19  
Agricultural     5       5       5  
Residential     1,493       1,596       280  
Home Equity Consumer & Other     354       354       212  
All Impaired Loans < $100,000     -       -       -  
Totals:                        
Commercial   $ 3,283     $ 5,643     $ 1,017  
Commercial Real Estate   $ 2,473     $ 4,976     $ 19  
Agricultural   $ 5     $ 5     $ 5  
Residential   $ 2,074     $ 2,177     $ 280  
Home Equity Consumer & Other   $ 543     $ 571     $ 212  
All Impaired Loans < $100,000   $ 1,065     $ 1,065     $ -  

 

Three Months Ended         Unpaid           Average     Interest  
March 31, 2011   Recorded     Principal     Related     Recorded     Income  
($'s in thousands)   Investment     Balance     Allowance     Investment     Recognized  
With no related allowance recorded:                                        
Commercial   $ 349     $ 698     $ -     $ 360     $ (2 )
Commercial Real Estate     2,058       2,920       -       2,917       (3 )
Agricultural     -       -       -       -       -  
Residential     410       460       -       462       3  
Home Equity Consumer & Other     91       91       -       93       1  
With a specific allowance recorded:                                        
Commercial     2,493       4,142       901       2,877       (5 )
Commercial Real Estate     4,116       4,215       935       5,144       (1 )
Agricultural     -       -       -       -       -  
Residential     999       1,237       219       1,231       8  
Home Equity Consumer & Other     84       84       32       32       1  
Totals:                                        
Commercial   $ 2,842     $ 4,841     $ 901     $ 3,238     $ (7 )
Commercial Real Estate   $ 6,174     $ 7,136     $ 935     $ 8,061     $ (4 )
Agricultural   $ -     $ -     $ -     $ -     $ -  
Residential   $ 1,409     $ 1,698     $ 219     $ 1,693     $ 11  
Home Equity Consumer & Other   $ 175     $ 175     $ 32     $ 126     $ 2  

 

Impaired loans less than $100,000 are included in groups of homogenous loans. These loans are evaluated based on delinquency status.

 

Interest income recognized on a cash basis does not materially differ from interest income recognized on an accrual basis.

 

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable State Bank will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include non-performing 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.

 

Troubled Debt Restructured (TDR) Loans

TDRs are modified loans where a concession was provided to a borrower experiencing financial difficulties. Loan modifications are considered TDRs when the concessions provided are not available to the borrower through either normal channels or other sources. However, not all loan modifications are TDRs.

 

TDR Concession Types

 

The Company’s standards relating to loan modifications consider, among other factors, minimum verified income requirements, cash flow analysis, and collateral valuations. Each potential loan modification is reviewed individually and the terms of the loan are modified to meet a borrower’s specific circumstances at a point in time. All loan modifications, including those classified as TDRs, are reviewed and approved. The types of concessions provided to borrowers include:

 

· Interest rate reduction: A reduction of the stated interest rate to a nonmarket rate for the remaining original life of the debt. The Company also may grant interest rate concessions for a limited timeframe on a case by case basis.
· Amortization or maturity date change beyond what the collateral supports, including any of the following:

 

(1) Lengthens the amortization period of the amortized principal beyond market terms. This concession reduces the minimum monthly payment and increases the amount of the balloon payment at the end of the term of the loan. Principal is generally not forgiven.

 

(2) Reduces the amount of loan principal to be amortized. This concession also reduces the minimum monthly payment and increases the amount of the balloon payment at the end of the term of the loan. Principal is generally not forgiven.

 

(3) Extends the maturity date or dates of the debt beyond what the collateral supports. This concession generally applies to loans without a balloon payment at the end of the term of the loan. In addition, there may be instances where renewing loans potentially require non-market terms and would then be reclassified as TDRs.

 

· Other: A concession that is not categorized as one of the concessions described above. These concessions include, but are not limited to: principal forgiveness, collateral concessions, covenant concessions, and reduction of accrued interest. Principal forgiveness may result from any TDR modification of any concession type.

 

The table below presents the activity of TDRs during the three months ended March 31, 2012 and the twelve months ended December 31, 2011.

 

    Three Months Ended March 31, 2012  
($'s in thousands)                  
          Pre-Modification     Post-Modification  
    Number of     Recorded     Recorded  
    Contracts     Investment     Investment  
                         
Residential Real Estate     4     $ 116     $ 116  

 

    Twelve Months Ended December 31, 2011  
                   
          Pre-Modification     Post-Modification  
    Number of     Recorded     Recorded  
    Contracts     Investment     Investment  
                         
Residential Real Estate     14     $ 1,011     $ 1,011  

 

Of the TDRs entered into during 2012, none had subsequently defaulted as of March 31, 2012. Redefaults are defined as loans that were performing TDRs that became 90 days or more past due post restructuring. The Company has specifically allocated $0.8 million of the $6.6 million in loan loss allowance to all TDR loans. All TDRs resulted from a reduction to a borrowers rate or change in amortization. No principal reductions have been granted.