Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2013

Loans and Allowance For Loan Losses [Abstract]

Note 4: Loans and Allowance for Loan Losses

Categories of loans at December 31 include:

	Total Loans						Non-Accrual Loans
($ in thousands)	Dec. 2013			Dec. 2012			Dec. 2013		Dec. 2012
Commercial & Industrial	$	85,642		$	81,767			2,316		1,246
Commercial RE & Construction		205,301			201,392			532		782
Agricultural & Farmland		39,210			42,276			-		-
Residential Real Estate		99,620			87,859			1,651		2,631
Home Equity & Consumer		47,717			50,223			345		646
Other		87			148			-		-
Total loans		477,577			463,665		$	4,844	$	5,305
Less
Net deferred loan fees, premiums and discounts		(274	)		(276	)
Loans, net of unearned income	$	477,303		$	463,389
Allowance for loan losses	$	(6,964	)	$	(6,811	)

The following tables present the balance of the allowance for loan losses ("ALLL") and the recorded investment in loans based on portfolio segment and impairment method as of December 31, 2013 and 2012:

	Commercial			Commercial RE			Agricultural			Residential			Home Equity
($'s in thousands)	& Industrial			& Construction			& Farmland			Real Estate			& Consumer			Other			Total
ALLOWANCE FOR LOAN AND LEASE LOSSES

For the Twelve Months Ended December 31, 2013
Beginning balance	$	1,561		$	3,034		$	186		$	1,088		$	839		$	103		$	6,811
Charge Offs		(1	)		(111	)		-			(264	)		(426	)		(17	)	$	(819	)
Recoveries		18			17			4			21			11			1			72
Provision		597			(232	)		(31	)		222			360			(16	)		900
Ending Balance	$	2,175		$	2,708		$	159		$	1,067		$	784		$	71		$	6,964

Loans Receivable at December 31, 2013


	Commercial		Commercial RE		Agricultural		Residential		Home Equity
($'s in thousands)	& Industrial		& Construction		& Farmland		Real Estate		& Consumer		Other		Total
Allowance:
Ending balance:
individually
evaluated for
impairment	$	1,079	$	56	$	-	$	192	$	168			$	1,495
Ending balance:
collectively
evaluated for
impairment	$	1,096	$	2,652	$	159	$	875	$	616	$	71	$	5,469
Loans:
Ending balance:
individually
evaluated for
impairment	$	2,116	$	649	$	-	$	1,985	$	590			$	5,340
Ending balance:
collectively
evaluated for
impairment	$	83,526	$	204,652	$	39,210	$	97,635	$	47,127	$	87	$	472,237

	Commercial			Commercial RE			Agricultural			Residential			Home Equity
($'s in thousands)	& Industrial			& Construction			& Farmland			Real Estate			& Consumer			Other			Total
ALLOWANCE FOR LOAN AND LEASE LOSSES

For the Twelve Months Ended
December 31, 2012
Beginning balance	$	1,914		$	2,880		$	51		$	956		$	599		$	129		$	6,529
Charge Offs		(390	)		(287	)		(10	)		(129	)		(484	)		(28	)		(1,328	)
Recoveries		41			50			7			86			69			7			260
Provision		(4	)		391			138			175			655		$	(6	)		1,350
Ending Balance	$	1,561		$	3,034		$	186		$	1,088		$	839		$	102		$	6,811

Loans Receivable at December 31, 2012
Allowance:
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		$	102		$	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

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, 2013 and 2012:

December 31, 2013	Commercial		Commercial RE		Agricultural		Residential		Home Equity
Loan Grade	& Industrial		& Construction		& Farmland		Real Estate		& Consumer		Other		Total
($ in thousands)
1-2	$	1,706	$	81	$	76	$	-	$	-	$	-	$	1,863
3		22,319		44,095		6,543		90,606		43,250		9		206,822
4		56,110		146,861		32,591		5,700		3,782		78		245,122
Total Pass		80,135		191,037		39,210		96,306		47,032		87		453,807

Special Mention		3,159		8,917		-		1,373		86		-		13,535
Substandard		32		4,815		-		290		84		-		5,221
Doubtful		2,316		532		-		1,651		515		-		5,014
Loss		-		-		-		-		-		-		-
Total Loans	$	85,642	$	205,301	$	39,210	$	99,620	$	47,717	$	87	$	477,577

December 31, 2012	Commercial		Commercial RE		Agricultural		Residential		Home Equity
Loan Grade	& Industrial		& Construction		& Farmland		Real Estate		& 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 Loans	$	81,767	$	201,392	$	42,276	$	87,859	$	50,223	$	148	$	463,665

The Company evaluates the loan risk grading system definitions and allowance for loan loss methodology on an ongoing basis. The Company uses a three-year average of historical losses for the general component of the allowance for loan loss calculation. No 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, 2013 and 2012:

	30-59 Days		60-89 Days		Greater Than		Total Past				Total Loans
December 31, 2013	Past Due		Past Due		90 Days		Due		Current		Receivable
($ in thousands)

Commercial & Industrial	$	-	$	-	$	1,890	$	1,890	$	83,752	$	85,642
Commercial RE & Construction		424		364		168		956		204,345		205,301
Agricultural & Farmland		-		-		-		-		39,210		39,210
Residential Real Estate		-		14		453		467		99,153		99,620
Home Equity & Consumer		22		34		98		154		47,563		47,717
Other		-		-		-		-		87		87
Total Loans	$	446	$	412	$	2,609	$	3,467	$	474,110	$	477,577

	30-59 Days		60-89 Days		Greater Than		Total Past				Total Loans
December 31, 2012	Past Due		Past Due		90 Days		Due		Current		Receivable
($ in thousands)

Commercial & Industrial	$	26	$	2	$	497	$	525	$	81,242	$	81,767
Commercial RE & Construction		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
Total Loans	$	2,058	$	537	$	2,508	$	5,103	$	458,562	$	463,665

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, 2013 and 2012:

Twelve Months Ended
December 31, 2013
($'s in thousands)	Recorded		Unpaid Principal		Related		Average Recorded		Interest Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial & Industrial	$	316	$	316	$	-	$	335	$	13
Commercial RE & Construction		389		442		-		579		16
Agricultural & Farmland		-		-		-		-		-
Residential Real Estate		1,131		1,131		-		1,315		65
Home Equity & Consumer		252		252		-		268		14
All Impaired Loans < $100,000		1,242		1,242		-		1,242		-
With a specific allowance recorded:
Commercial & Industrial		1,800		1,800		1,079		1,780		44
Commercial RE & Construction		260		260		56		318		14
Agricultural & Farmland		-		-		-		-		-
Residential Real Estate		854		854		192		921		41
Home Equity & Consumer		338		338		168		371		25
All Impaired Loans < $100,000		-		-		-		-		-
Totals:
Commercial & Industrial	$	2,116	$	2,116	$	1,079	$	2,115	$	57
Commercial RE & Construction	$	649	$	702	$	56	$	897	$	30
Agricultural & Farmland	$	-	$	-	$	-	$	-	$	-
Residential Real Estate	$	1,985	$	1,985	$	192	$	2,236	$	106
Home Equity & Consumer	$	590	$	590	$	168	$	639	$	39
All Impaired Loans < $100,000	$	1,242	$	1,242	$	-	$	1,242	$	-

Twelve Months Ended
December 31, 2012
($'s in thousands)	Recorded		Unpaid Principal		Related		Average Recorded		Interest Income
	Investment		Balance		Allowance		Investment		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	$	-

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

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 tables below present the activity of TDRs during the years ended December 31, 2013 and 2012:

	December 31, 2013

($ in thousands)	Number of Loans		Pre-Modification Recorded Balance		Post Modification Recorded Balance

Residential Real Estate		1	$	12	$	12
Home Equity & Consumer		1		10		10

Total Modifications		2	$	22	$	22


($ in thousands)	Interest						Total
	Only		Term		Combination		Modification

Residential Real Estate	$	-	$	12	$	-	$	12
Home Equity & Consumer		-		10		-		10

Total Modifications	$	-	$	22	$	-	$	22

The loans described above increased the allowance for loan and lease losses ("ALLL") by $10.0 in the twelve month period ending December 31, 2013.

	December 31, 2012

($ in thousands)	Number of Loans		Pre-Modification Recorded Balance		Post Modification Recorded Balance

Residential Real Estate		14	$	660	$	660
Home Equity & Consumer		2		21		21
Commercial Real Estate		1		198		198

Total Modifications		17	$	879	$	879


	Interest						Total
($ in thousands)	Only		Term		Combination		Modification

Residential Real Estate	$	-	$	419	$	241	$	660
Home Equity & Consumer		-		21		-		21
Commercial Real Estate		-		198		-		198

Total Modifications	$	-	$	638	$	241	$	879

The loans described above increased the allowance for loan and lease losses ("ALLL") by $257.0 in the twelve month period ending December 31, 2012.

Troubled Debt Restructurings Modified in the Past 12 Months that have Subsequently Defaulted

	Number of		Recorded
($ in thousands)	Contracts		Balance

Residential Real Estate		4	$	63
Home Equity & Consumer		-		-
		4	$	63

- Definition

The entire disclosure for claims held for amounts due a entity, excluding financing receivables. Examples include, but are not limited to, trade accounts receivables, notes receivables, loans receivables. Includes disclosure for allowance for credit losses.

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