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Loans and Allowance for Loan Losses
 12 Months Ended
Dec. 31, 2012
Loans and Allowance For Loan Losses [Abstract]  
Loans and Allowance for Loan Losses
Note 4:  
Loans and Allowance for Loan Losses
 
Categories of loans at December 31 include:
 
($ in thousands)
  
Total Loans
    
Non-Accrual Loans
    
Non-Accrual Percentage
  
   
2012
    
2011
    
2012
    
2011
    
2012
    
2011
  
Commercial
   $ 81,767     $ 78,112       1,246       2,393       1.52 %     3.06 %
Commercial real estate
     201,392       187,829       782       1,456       0.39 %     0.78 %
Agricultural
     42,276       38,361       -       -       0.00 %     0.00 %
Residential real estate
     87,859       87,656       2,631       2,471       2.99 %     2.82 %
Consumer
     50,223       50,681       646       580       1.29 %     1.14 %
Leasing
     148       216       -       -       0.00 %     0.00 %
Total loans
     463,665       442,855     $ 5,305     $ 6,900       1.14 %     1.56 %
Less
                                                
Net deferred loan fees, premiums and discounts
     (276 )     (301 )                                
Loans, net of unearned income
   $ 463,389     $ 442,554                                  
Allowance for loan losses
   $ (6,811 )   $ (6,529 )                                
 
 
 
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 December 31, 2012 and 2011:
 
For the Year Ended
December 31, 2012
 
Commercial
    
Commercial 
RE &
    
Agricultural
    
Residential
    
Home Equity
                    
($'s in thousands)
  
& Industrial
    
Construction
    
& Farmland
    
Real Estate
    
& Consumer
    
Other
    
Unallocated
    
Total
  
Allowance for load losses:
                                                
                                                 
Beginning balance
   $ 1,914     $ 2,880     $ 51     $ 956     $ 599     $ 139     $ (10 )   $ 6,529  
Charge Offs
     (390 )     (287 )     (10 )     (129 )     (484 )     (28 )     -       (1,328 )
Recoveries
     41       50       7       86       69       6       1       260  
Provision
     (4 )     391       138       175       655     $ (14 )     8       1,350  
Ending Balance
   $ 1,561     $ 3,034     $ 186     $ 1,088     $ 839     $ 103     $ (1 )   $ 6,811  
                                                                 
Ending balance:
                                                                
individually evaluated for impairment
   $ 485     $ 55     $ -     $ 386     $ 195                     $ 1,121  
Ending balance:
                                                                
collectively evaluated for
impairment
   $ 1,076     $ 2,979     $ 186     $ 702     $ 644     $ 103     $ (1 )   $ 5,690  
                                                                 
Loans:
                                                                
Ending balance:
                                                                
individually evaluated for
impairment
   $ 1,232     $ 725     $ -     $ 2,683     $ 682                     $ 5,322  
Ending balance:
                                                                
collectively evaluated for
impairment
   $ 80,535     $ 200,667     $ 42,276     $ 85,176     $ 49,541     $ 148     $ -     $ 458,343  
 
For the Year Ended
December 31, 2011
  
Commercial
    
Commercial
RE &
    
Agricultural
    
Residential
    
Home Equity
                    
($'s in thousands)
  
& Industrial
    
Construction
    
& Farmland
    
Real Estate
    
& Consumer
    
Other
    
Unallocated
    
Total
  
Allowance for load 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  
 
 
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:  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:  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:  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.
 
Loss: Loans are considered uncollectable and of such little value that continuing to carry them as assets on the Company’s financial statement is not feasible.  Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.
 
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 Company’s commercial real estate portfolio are diverse, but with geographic location almost entirely in the Company’s market area.  Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria.  In general, the Company avoids financing 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 completed 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.  Residential mortgage loans are secured by 1-4 family residences and are generally owner-occupied, and 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 these loans are of smaller individual amounts and spread over a large number of borrowers.
 
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.
 
The following tables present the credit risk profile of the Company’s loan portfolio based on rating category as of December 31, 2012 and 2011:
 
Dec. 31, 2012 Loan Grade
  
Commercial
& Industrial
    
Comm. RE
& Construction
    
Agricultural
& Farmland
    
Residential Real Estate
    
Home Equity & Consumer
    
Other
    
Total
  
($ in thousands)
                                          
  1-2     $ 1,108     $ 101     $ 109     $ -     $ -     $ -     $ 1,318  
  3       23,028       55,175       7,938       77,221       45,063       17       208,442  
  4       54,871       129,846       34,195       6,285       4,223       131       229,551  
Total Pass
     79,007       185,122       42,242       83,506       49,286       148       439,311  
Special Mention
     88       12,370       -       1,186       190       -       13,834  
Substandard
     1,429       3,024       34       699       144       -       5,330  
Doubtful
     1,243       876       -       2,468       603       -       5,190  
Loss
     -       -       -       -       -       -       -  
Total
   $ 81,767     $ 201,392     $ 42,276     $ 87,859     $ 50,223     $ 148     $ 463,665  

Dec. 31, 2011 Loan Grade
  
Commercial
& Industrial
    
Comm. RE
& Construction
    
Agricultural
& Farmland
    
Residential Real Estate
    
Home Equity & Consumer
    
Other
    
Total
  
($ in thousands)
                                          
  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  
Special Mention
     610       9,703       5       1,666       72       -       12,056  
Substandard
     2,037       3,358       51       1,834       92       -       7,372  
Doubtful
     2,177       1,441       -       2,910       481       -       7,009  
Loss
     -       -       -       -       -       -       -  
Total
   $ 78,112     $ 187,829     $ 38,361     $ 87,656     $ 50,681     $ 216     $ 442,855  
 
The Company evaluates the loan risk grading system definitions and allowance for loan loss methodology on an ongoing basis. Beginning January 1, 2011, the Company began using a three-year average of historical losses for the general component of the allowance for loan loss calculation. The Company had previously used a five-year average. No other significant changes were made to the loan risk grading system definitions and allowance for loan loss methodology during the periods presented.
 
The following tables present the Company’s loan portfolio aging analysis as of December 31, 2012 and 2011:
 
December 31, 2012
  
30-59 Days
    
60-89 Days
    
Greater Than
    
Total Past
          
Total Loans
  
($ in thousands)
  
Past Due
    
Past Due
    
90 Days
    
Due
    
Current
    
Receivable
  
Commercial & Industrial
   $ 26     $ 2     $ 497     $ 525     $ 81,242     $ 81,767  
Commercial RE
     1,623       320       264       2,207       199,185       201,392  
Agricultural & Farmland
     -       -       -       -       42,276       42,276  
Residential Real Estate
     90       139       1,467       1,696       86,163       87,859  
Home Equity & Consumer
     319       76       280       675       49,548       50,223  
Other
     -       -       -       -       148       148  
Loans
     2,058       537       2,508       5,103       458,562       463,665  
Loans held for Sale
     -       -       -       -       6,147       6,147  
Total
   $ 2,058     $ 537     $ 2,508     $ 5,103     $ 464,709     $ 469,812  
 
December 31, 2011
  
30-59 Days
    
60-89 Days
    
Greater Than
    
Total Past
          
Total Loans
  
($ in thousands)
  
Past Due
    
Past Due
    
90 Days
    
Due
    
Current
    
Receivable
  
Commercial & Industrial
   $ 58     $ -     $ 2,334     $ 2,392     $ 75,720     $ 78,112  
Commercial RE
     67       -       1,656       1,723       186,106       187,829  
Agricultural & Farmland
     -       -       -       -       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  
Other
     -       -       -       -       216       216  
Loans
     1,002       978       5,064       7,044       435,811       442,855  
Loansheld 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.
 
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.
 
The following tables present impaired loan activity for the twelve months ended December 31, 2012 and 2011:
 
Twelve Months Ended
December 31, 2012
                              
($'s in thousands)
  
Recorded Investment
    
Unpaid
Principal
 Balance
    
Related Allowance
    
Average Recorded Investment
    
Interest
Income
Recognized
  
With no related allowance recorded:
                              
Commercial & Industrial
   $ 394     $ 2,280     $ -     $ 2,419     $ -  
Commercial RE & Construction
     527       1,529       -       1,610       15  
Agricultural  & Farmland
     -       -       -       -       -  
Residential Real Estate
     1,122       1,204       -       1,284       57  
Home Equity & Consumer
     228       260       -       272       10  
All Impaired Loans < $100,000
     1,336       1,336       -       1,336       -  
With a specific allowance recorded:
                                        
Commercial & Industrial
     838       944       485       949       6  
Commercial RE & Construction
     198       198       55       198       -  
Agricultural & Farmland
     -       -       -       -       -  
Residential Real Estate
     1,561       1,561       386       1,530       62  
Home Equity & Consumer
     454       454       195       471       20  
All Impaired Loans < $100,000
     -       -       -       -       -  
Totals:
                                        
Commercial & Industrial
   $ 1,232     $ 3,224     $ 485     $ 3,368     $ 6  
Commercial RE & Construction
   $ 725     $ 1,727     $ 55     $ 1,808     $ 15  
Agricultural & Farmland
   $ -     $ -     $ -     $ -     $ -  
Residential Real Estate   $ 2,683     $ 2,765     $ 386     $ 2,814     $ 119  
Home Equity & Consumer   $ 682     $ 714     $ 195     $ 743     $ 30  
All Impaired Loans < $100,000   $ 1,336     $ 1,336     $ -     $ 1,336     $ -  
 
Twelve Months Ended
December 31, 2011
                              
($'s in thousands)
  
Recorded Investment
    
Unpaid
Principal
 Balance
    
Related Allowance
    
Average Recorded Investment
    
Interest
Income
Recognized
  
With no related allowance recorded:
                              
Commercial & Industrial
   $ 1,206     $ 1,856     $ -     $ 1,737     $ 89  
Commercial RE & Construction
     1,061       2,149       -       2,264       4  
Agricultural  & Farmland
     -       -       -       -       -  
Residential Real Estate
     581       581       -       678       42  
Home Equity & Consumer
     189       217       -       191       2  
All Impaired Loans < $100,000
     1,065       1,065       -       1,065       -  
With a specific allowance recorded:
                                        
Commercial & Industrial
     2,077       3,787       1,017       2,528       -  
Commercial RE & Construction
     1,412       2,827       19       2,029       21  
Agricultural & Farmland
     5       5       5       5       1  
Residential Real Estate
     1,493       1,596       280       1,655       66  
Home Equity & Consumer
     354       354       212       365       8  
All Impaired Loans < $100,000
     -       -       -       -       -  
Totals:
                                        
Commercial & Industrial
   $ 3,283     $ 5,643     $ 1,017     $ 4,265     $ 89  
Commercial RE & Construction
   $ 2,473     $ 4,976     $ 19     $ 4,293     $ 25  
Agricultural & Farmland
   $ 5     $ 5     $ 5     $ 5     $ 1  
Residential Real Estate   $ 2,074     $ 2,177     $ 280     $ 2,333     $ 108  
Home Equity & Consumer   $ 543     $ 571     $ 212     $ 556     $ 10  
All Impaired Loans < $100,000   $ 1,065     $ 1,065     $ -     $ 1,065     $ -  
 
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.
 
Troubled Debt Restructured (TDR) Loans
 
TDR’s are modified loans where a concession was provided to a borrower experiencing financial difficulties.  Loan modifications are considered TDR’s when the concessions provided are not available to the borrower through either normal channels or other sources.  However, not all loan modifications are TDR’s.
 
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 TDR’s, 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 tables below present the activity of TDR’s during the years ended December 31, 2012 and 2011:
 
    2012  
   
Number of
    
Pre-Modification 
Recorded
    
Post-Modification 
Recorded
  
($ in thousands)
  
Contracts
    
Investment
    
Investment
  
Residential Real Estate
     14     $ 660     $ 660  
Consumer
     2       21       21  
Commercial Real Estate
     1       198       198  
Total
     17     $ 879     $ 879  
 
Of the TDRs entered into during 2012, two had subsequently defaulted as of December 31, 2012. Both defaults during the year were residential real estate loans with a total defaulted balance of $0.19 million. Redefaults are defined as loans that were performing TDRs that became 90 days or more past due post restructuring.  The Company has specifically allocated $0.9 million of the $6.8 million in loan loss allowance to TDR loans.  All TDRs resulted from a reduction to a borrowers rate, or an extension of the prior maturity date.  No principal reductions have been granted.
 
    2011  
   
Number of
Contracts
    
Pre-Modification
Recorded
Investment
    
Post-Modification
Recorded
Investment
  
Residential Real Estate
     14     $ 1,011     $ 1,011