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LOANS AND ALLOWANCE FOR LOAN LOSSES
 6 Months Ended
Jun. 30, 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 June 30, 2012 and December 31, 2011 include:

 

($'s in thousands)   June 30,     December 31,  
    2012     2011  
Commercial   $ 76,042     $ 78,112  
Commercial real estate     199,918       187,829  
Agricultural     41,093       38,361  
Residential real estate     85,046       87,656  
Home Equity & Consumer     50,089       50,681  
Leasing     207       216  
Total loans     452,395       442,855  
Less                
Net deferred loan fees, premiums and discounts     (285 )     (301 )
Loans, net of unearned income   $ 452,110     $ 442,554  
Allowance for loan losses   $ (6,618 )   $ (6,529 )

 

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

 

Commercial and Agricultural

 

Commercial and agricultural 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 include a personal guarantee. 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.

 

Commercial Real Estate including Construction

 

Commercial real estate 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 characteristics of properties securing the Bancorp’s commercial real estate portfolio are diverse, but with geographic location almost entirely in the Bancorp’s market area. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In general, the Company avoids financial single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate versus nonowner-occupied loans.

 

Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews and financial analysis of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

 

Residential and Consumer

 

Residential and consumer loans consist of two segments – residential mortgage loans and personal loans. For residential mortgage 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 personal loans are secured by consumer personal assets, such as automobiles or recreational vehicles. Some consumer personal 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.

 

The following table presents the Company’s nonperforming loans at June 30, 2012 and December 31, 2011.

 

($'s in thousands)   June 30,     December 31,  
    2012     2011  
Commercial   $ 1,467     $ 2,393  
Commercial real estate     1,345       1,456  
Agricultural     -       -  
Residential real estate     1,958       2,471  
Home Equity & Consumer     545       580  
Leasing     -       -  
                 
Total nonaccruing loans     5,315       6,900  
                 
Accruing Troubled Debt Restructures (TDR's)     1,837       1,334  
                 
Total Nonperforming Loans   $ 7,152     $ 8,234  

 

 

The following tables present the activity in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method for the three and six months ended June 30, 2012, for the year ended December 31, 2011, and for the six months ended June 30, 2011.

 

          Commercial           Residential     Home Equity                    
($'s in thousands)   Commercial     Real Estate     Agricultural     Real Estate     & Consumer     Other     Unallocated     Total  
                                                 
ALLOWANCE FOR LOAN AND LEASE LOSSES
                                                 
For the Three Months Ended                                    
June 30, 2012                                                
Beginning balance   $ 1,855     $ 2,913     $ 52     $ 1,000     $ 653     $ 135     $ 1     $ 6,609  
Charge Offs     -       (57 )     -       (14 )     (181 )     -       -       (252 )
Recoveries     25       19       -       11       6       -       -       61  
Provision     (363 )     145       43       50       324       1       -       200  
Ending Balance   $ 1,517     $ 3,020     $ 95     $ 1,047     $ 802     $ 136     $ 1     $ 6,618  
                                                                 
For the Six Months Ended                                    
June 30, 2012                                                
Beginning balance   $ 1,914     $ 2,880     $ 51     $ 956     $ 599     $ 139     $ (10 )   $ 6,529  
Charge Offs     (205 )     (99 )     -       (65 )     (341 )     (16 )     -       (726 )
Recoveries     28       42       1       82       8       3       1       165  
Provision     (220 )     197       43       74       536       10       10       650  
Ending Balance   $ 1,517     $ 3,020     $ 95     $ 1,047     $ 802     $ 136     $ 1     $ 6,618  

  

Loans Receivable at June 30, 2012

          Commercial           Residential     Home Equity                    
    Commercial     Real Estate     Agricultural     Real Estate     & Consumer     Other     Unallocated     Total  
Ending balance:                                                                
individually evaluated for impairment   $ 551     $ -     $ 1     $ 353     $ 137     $ -     $ -     $ 1,042  
Ending balance:                                                                
collectively evaluated for impairment   $ 966     $ 3,020     $ 94     $ 694     $ 665     $ 136     $ 1     $ 5,576  
Loans:                                                                
Ending balance:                                                                
individually evaluated for impairment   $ 1,296     $ 1,895     $ 3     $ 2,530     $ 511     $ -     $ -     $ 6,235  
Ending balance:                                                                
collectively evaluated for impairment   $ 74,746     $ 198,023     $ 41,090     $ 82,516     $ 49,578     $ 207     $ -     $ 446,160  

 

ALLOWANCE FOR LOAN AND LEASE LOSSES

 

For the Three Months Ended                                                                 
June 30, 2011                                                                 
Beginning balance   $ 1,766     $ 3,322     $ 18     $ 926     $ 451     $ 108     $ 1     $ 6,593  
Charge Offs     (387 )     (1,108 )     -       (63 )     (63 )     28       -       (1,593 )
Recoveries     409       13       1       114       11       (3 )     -       545  
Provision     (266 )     1,217       8       (83 )     28       (34 )     29       899  
Ending Balance   $ 1,522     $ 3,444     $ 27     $ 894     $ 427     $ 99     $ 30     $ 6,444  

 

For the Six Months Ended 

June 30, 2011   

Beginning balance   $ 1,723     $ 3,774     $ 16     $ 643     $ 401     $ 128     $ 30     $ 6,715  
Charge Offs     (596 )     (1,208 )     -       (166 )     (263 )     1       -       (2,232 )
Recoveries     414       16       2       114       18       (1 )     -       563  
Provision     (19 )     862       9       303       271     $ (29 )     -       1,397  
Ending Balance   $ 1,522     $ 3,444     $ 27     $ 894     $ 427     $ 99     $ 30     $ 6,443  

   

 

Loans Receivable at December 31, 2011

          Commercial           Residential     Home Equity                    
    Commercial     Real Estate     Agricultural     Real Estate     & Consumer     Other     Unallocated     Total  
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  

 

Loans Receivable at June 30, 2011

          Commercial           Residential     Home Equity                    
    Commercial     Real Estate     Agricultural     Real Estate     & Consumer     Other     Unallocated     Total  
Ending balance:                                                                
individually evaluated for impairment   $ 700     $ 813     $ -     $ 226     $ -     $ -     $ -     $ 1,739  
Ending balance:                                                                
collectively evaluated for impairment   $ 822     $ 2,631     $ 27     $ 668     $ 427     $ 99     $ 30     $ 4,704  
Loans:                                                                
Ending balance:                                                                
individually evaluated for impairment   $ 2,426     $ 3,187     $ -     $ 1,216     $ 389     $ -     $ -     $ 7,218  
Ending balance:                                                                
collectively evaluated for impairment   $ 68,315     $ 178,983     $ 38,454     $ 92,252     $ 48,452     $ 3,877     $ -     $ 430,333  

 

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 jeopardize 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 June 30, 2012 and December 31, 2011 ($’s in thousands).

 

June 30, 2012                     Residential     Home Equity              
    Commercial     Commercial RE     Agricultural     Real Estate     & Consumer     Other     Total  
1-2   $ 1,086     $ 116     $ 120     $ -     $ 2     $ -     $ 1,324  
3     23,656       60,773       10,254       73,912       45,416       24       214,035  
4     48,358       124,422       30,665       6,604       3,585       183       213,817  
Total Pass     73,100       185,311       41,039       80,516       49,003       207       429,176  
                                                         
5     64       9,957       3       1,637       232       -       11,893  
6     1,535       3,209       51       819       312       -       5,926  
7     1,343       1,441       -       2,074       542       -       5,400  
8     -       -       -       -       -       -       -  
Total   $ 76,042     $ 199,918     $ 41,093     $ 85,046     $ 50,089     $ 207     $ 452,395  

 

December 31, 2011                 Residential     Home Equity              
    Commercial     Commercial RE     Agricultural     Real Estate     & Consumer     Other     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 June 30, 2012 and December 31, 2011 ($’s in thousands).

 

    30-59 Days     60-89 Days     Greater Than     Total Past           Total Loans  
June 30, 2012   Past Due     Past Due     90 Days     Due     Current     Receivable  
                                     
Commercial   $ 50     $ 199     $ 424     $ 673     $ 75,369     $ 76,042  
Commercial real estate     895       281       1,345       2,521       197,397       199,918  
Agricultural     -       -       -       -       41,093       41,093  
Residential Real Estate     87       294       753       1,134       83,912       85,046  
Home Equity & Consumer     353       5       265       623       49,466       50,089  
Leases     -       -       -       -       207       207  
Loans & Lease     1,385       779       2,787       4,951       447,444       452,395  
Loans held for Sale     -       -       -       -       10,595       10,595  
                                                 
Total   $ 1,385     $ 779     $ 2,787     $ 4,951     $ 458,039     $ 462,990  

 

    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 real estate     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 information as of and for the six and three months ended June 30, 2012 and 2011, and as of the twelve months ended December 31, 2011:

 

          Unpaid        
June 30, 2012   Recorded     Principal     Related  
($'s in thousands)   Investment     Balance     Allowance  
With no related allowance recorded:                        
Commercial   $ 348     $ 2,234     $ -  
Commercial Real Estate     1,895       2,897       -  
Agricultural     -       -       -  
Residential     904       904       -  
Home Equity Consumer & Other     228       261       -  
All Impaired Loans < $100,000     870       870       -  
With a specific allowance recorded:                        
Commercial     948       949       551  
Commercial Real Estate     -       -       -  
Agricultural     3       2       1  
Residential     1,626       1,678       353  
Home Equity Consumer & Other     283       283       137  
Totals:                        
Commercial   $ 1,296     $ 3,183     $ 551  
Commercial Real Estate   $ 1,895     $ 2,897     $ -  
Agricultural   $ 3     $ 2     $ 1  
Residential   $ 2,530     $ 2,582     $ 353  
Home Equity Consumer & Other   $ 511     $ 544     $ 137  
All Impaired Loans < $100,000   $ 870     $ 870     $ -  

 

    Six Months Ended June 30, 2012     Three Months Ended June 30, 2012  
    Average     Interest     Average     Interest  
($'s in thousands)   Recorded     Income     Recorded     Income  
    Investment     Recognized     Investment     Recognized  
                         
With no related allowance recorded:                                
Commercial   $ 2,745     $ -     $ 2,330     $ -  
Commercial Real Estate     2,934       22       2,910       5  
Agricultural     -       -       -       -  
Residential     929       31       926       15  
Home Equity Consumer & Other     396       7       393       5  
All Impaired Loans < $100,000     870       -       870       -  
With a specific allowance recorded:                                
Commercial     950       3       949       (1 )
Commercial Real Estate     -       -       -       -  
Agricultural     3       -       3       -  
Residential     1,668       34       1,665       17  
Home Equity Consumer & Other     292       8       291       4  
Totals:                                
Commercial   $ 3,695     $ 3     $ 3,279     $ (1 )
Commercial Real Estate   $ 2,934     $ 22     $ 2,910     $ 5  
Agricultural   $ 3     $ -     $ 3     $ -  
Residential   $ 2,597     $ 65     $ 2,591     $ 32  
Home Equity Consumer & Other   $ 688     $ 15     $ 684     $ 9  
All Impaired Loans < $100,000   $ 870     $ -     $ 870     $ -  

 

          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  
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     $ -  

 

June 30, 2011         Unpaid        
($'s in thousands)   Recorded     Principal     Related  
    Investment     Balance     Allowance  
With no related allowance recorded:                        
Commercial & Industrial   $ 189     $ 539     $ -  
Commercial RE & Construction     627       1,544       -  
Agricultural & Farmland     -       -       -  
Residential Real Estate     483       492       -  
Home Equity & Consumer     43       43       -  
All Impaired Loans < $100,000     1,016       1,016       -  
With a specific allowance recorded:                        
Commercial & Industrial     2,237       4,074       700  
Commercial RE & Construction     2,560       3,328       813  
Agricultural & Farmland     -       -       -  
Residential Real Estate     733       938       226  
Home Equity & Consumer     346       354       -  
Totals:                        
Commercial & Industrial   $ 2,426     $ 4,613     $ 700  
Commercial RE & Construction   $ 3,187     $ 4,872     $ 813  
Agricultural & Farmland   $ -     $ -     $ -  
Residential Real Estate   $ 1,216     $ 1,430     $ 226  
Home Equity & Consumer   $ 389     $ 397     $ -  
All Impaired Loans < $100,000     1,016       1,016       -  

 

    Six Months Ended     Three Months Ended  
June 30, 2011   Average     Interest     Average     Interest  
($'s in thousands)   Recorded     Income     Recorded     Income  
    Investment     Recognized     Investment     Recognized  
With no related allowance recorded:                                
Commercial & Industrial   $ 210     $ -     $ 210     $ -  
Commercial RE & Construction     993       -       961       -  
Agricultural & Farmland     -       -       -       -  
Residential Real Estate     532       14       531       6  
Home Equity & Consumer     43       -       43       -  
All Impaired Loans < $100,000     1,016       -       1,016       -  
With a specific allowance recorded:                                
Commercial & Industrial     2,663       (2 )     2,664       2  
Commercial RE & Construction     3,188       2       3,192       12  
Agricultural & Farmland     -       -       -       -  
Residential Real Estate     1,189       18       1,188       9  
Home Equity & Consumer     133       4       131       2  
Totals:                                
Commercial & Industrial   $ 2,873     $ (2 )   $ 2,874     $ 2  
Commercial RE & Construction   $ 4,181     $ 2     $ 4,153     $ 12  
Agricultural & Farmland   $ -     $ -     $ -     $ -  
Residential Real Estate   $ 1,721     $ 32     $ 1,719     $ 15  
Home Equity & Consumer   $ 176     $ 4     $ 174     $ 2  
All Impaired Loans < $100,000     1,016       -     $ 1,016     $ -  

 

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 and six months ended June 30, 2012 and the twelve months ended December 31, 2011.

 

    Three Months Ended June 30, 2012  
($'s in thousands)                  
          Pre-Modification     Post-Modification  
    Number of     Recorded     Recorded  
    Contracts     Investment     Investment  
                         
Residential Real Estate     4     $ 159     $ 159  

 

    Six Months Ended June 30, 2012  
($'s in thousands)                  
          Pre-Modification     Post-Modification  
    Number of     Recorded     Recorded  
    Contracts     Investment     Investment  
                         
Residential Real Estate     8     $ 274     $ 274  

 

    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 June 30, 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 $0.74 million of the $6.6 million in loan loss allowance to all TDR loans. All TDRs resulted from a reduction to a borrower’s rate or change in amortization. No principal reductions have been granted.