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Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2014

Loans and Allowance For Loan Losses [Abstract]

Note 4: Loans and Allowance for Loan Losses

Categories of loans at December 31 include:

($ in thousands)	Total Loans						Non-Accrual Loans
	2014			2013			2014		2013
Commercial & Industrial	$	88,485		$	85,642			1,387		2,316
Commercial RE & Construction		217,030			205,301			2,092		532
Agricultural & Farmland		46,217			39,210			-		-
Residential Real Estate		113,214			99,620			992		1,651
Consumer & Other		51,546			47,804			138		345

Total Loans	$	516,492		$	477,577		$	4,609	$	4,844

Unearned Income	$	(156	)	$	(274	)

Total Loans, net of unearned income	$	516,336		$	477,303

Allowance for loan losses	$	(6,771	)	$	(6,964	)

State Bank grants commercial, agri-business, consumer and residential loans to customers throughout the states of Ohio, Indiana, and Michigan. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.

Standby letters of credit are conditional commitments issued by State Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.

Forward sale commitments are commitments to sell groups of residential mortgage loans that the Company originates or purchases as part of its mortgage banking activities. The Company commits to sell the loans at specified prices in a future period, typically within forty-five days. These commitments are acquired to reduce market risk on mortgage loans in the process of origination and mortgage loans held for sales since the Company is exposed to interest rate risk during the period between issuing a loan commitment and the sales of the loan into the secondary market.

Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates. Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. Management uses the same credit policies in granting lines of credit as it does for on-balance-sheet instruments. Listed below is a summary loan commitments, unused lines of credit and standby letters of credit as of December 31, 2014 and 2013.

($ in thousands)	2014		2013
Loan commitments and unused lines of credit	$	105,136	$	93,286
Standby letters of credit		672		1,021
Total	$	105,808	$	94,307

There are various contingent liabilities that are not reflected in the consolidated financial statements, including claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material effect on the Company’s consolidated financial condition or results of operations.

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.

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, 2014 and 2013:

	Commercial			Commercial RE &			Agricultural		Residential			Consumer
($'s in thousands)	& Industrial			Construction			& Farmland		Real Estate			& Other			Total

ALLOWANCE FOR LOAN AND LEASE LOSSES
For the Twelve Months Ended
December 31, 2014
Beginning balance	$	2,175		$	2,708		$	159	$	1,067		$	855		$	6,964
Charge Offs		(607	)		(13	)		-		(92	)		(135	)	$	(847	)
Recoveries		19			125			3		32			25			204
Provision		43			37			46		301			23			450
Ending Balance	$	1,630		$	2,857		$	208	$	1,308		$	768		$	6,771

Loans Receivable at December 31, 2014
Allowance:
Ending balance:
individually evaluated for impairment	$	510		$	1,018		$	-	$	242		$	41		$	1,811
Ending balance:
collectively evaluated for impairment	$	1,120		$	1,839		$	208	$	1,066		$	727		$	4,960
Loans:
Ending balance:
individually evaluated for impairment	$	1,268		$	2,035		$	-	$	1,647		$	481		$	5,431
Ending balance:
collectively evaluated for impairment	$	87,217		$	214,995		$	46,217	$	111,567		$	51,065		$	511,061

	Commercial			Commercial RE &			Agricultural			Residential			Consumer
($'s in thousands)	& Industrial			Construction			& Farmland			Real Estate			& 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		$	942		$	6,811
Charge Offs		(1	)		(111	)		-			(264	)		(443	)	$	(819	)
Recoveries		18			17			4			21			12			72
Provision		597			(232	)		(31	)		222			344			900
Ending Balance	$	2,175		$	2,708		$	159		$	1,067		$	855		$	6,964

Loans Receivable at December 31, 2013
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		$	687		$	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		$	47,214		$	472,237

Credit Risk Profile

The Company categorizes loans into risk categories (loan grades) 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 $100,000 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:

Pass (grades 1 – 4): Loans which management has determined to be performing as expected and in agreement with the terms established at the time of loan origination.

Special Mention (grade 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 (grade 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 (grade 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.

Loss (grade 8): 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 following tables present the credit risk profile of the Company’s loan portfolio based on rating category as of December 31, 2014 and 2013:

December 31, 2014	Commercial		Commercial RE &		Agricultural		Residential		Consumer
Loan Grade	& Industrial		Construction		& Farmland		Real Estate		& Other		Total
($ in thousands)
1-2	$	1,148	$	66	$	61	$	-	$	-	$	1,275
3		23,580		67,779		9,505		105,149		47,795		253,808
4		61,691		136,427		36,651		5,611		3,465		243,845
Total Pass (1 - 4)		86,419		204,272		46,217		110,760		51,260		498,928

Special Mention (5)		83		6,224		-		1,160		84		7,551
Substandard (6)		752		4,422		-		312		55		5,541
Doubtful (7)		1,231		2,112		-		982		147		4,472
Loss (8)		-		-		-		-		-		-
Total Loans	$	88,485	$	217,030	$	46,217	$	113,214	$	51,546	$	516,492

December 31, 2013	Commercial		Commercial RE &		Agricultural		Residential		Consumer
Loan Grade	& Industrial		Construction		& Farmland		Real Estate		& Other		Total
($ in thousands)
1-2	$	1,619	$	81	$	76	$	-	$	87	$	1,863
3		22,328		44,095		6,543		90,606		43,250		206,822
4		56,188		146,861		32,591		5,700		3,782		245,122
Total Pass (1 - 4)		80,135		191,037		39,210		96,306		47,119		453,807

Special Mention (5)		3,159		8,917		-		1,373		86		13,535
Substandard (6)		32		4,815		-		290		84		5,221
Doubtful (7)		2,316		532		-		1,651		515		5,014
Loss (8)		-		-		-		-		-		-
Total Loans	$	85,642	$	205,301	$	39,210	$	99,620	$	47,804	$	477,577

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, 2014 and 2013:

	30-59 Days		60-89 Days		Greater Than		Total Past				Total Loans
December 31, 2014	Past Due		Past Due		90 Days		Due		Current		Receivable
($ in thousands)

Commercial & Industrial	$	-	$	-	$	987	$	987	$	87,498	$	88,485
Commercial RE & Construction		3,660		-		1,747		5,407		211,623		217,030
Agricultural & Farmland		-		-		-		-		46,217		46,217
Residential Real Estate		164		19		377		560		112,654		113,214
Consumer & Other		39		81		-		120		51,426		51,546
Total Loans	$	3,863	$	100	$	3,111	$	7,074	$	509,418	$	516,492

		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
Consumer & Other		22		34		98		154		47,650		47,804
Total Loans	$	446	$	412	$	2,609	$	3,467	$	474,110	$	477,577

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, 2014 and 2013:

Twelve Months Ended December 31, 2014	Recorded		Unpaid Principal		Related		Average Recorded		Interest Income
($'s in thousands)	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial & Industrial	$	316	$	316	$	-	$	316	$	-
Commercial RE & Construction		530		530		-		571		20
Agricultural & Farmland		-		-		-		-		-
Residential Real Estate		567		611		-		734		49
Consumer & Other		110		110		-		124		10
All Impaired Loans < $100,000		565		565		-		565		-
With a specific allowance recorded:
Commercial & Industrial		952		1,552		510		1,605		-
Commercial RE & Construction		1,505		1,505		1,018		1,521		60
Agricultural & Farmland		-		-		-		-		-
Residential Real Estate		1,080		1,080		242		1,146		47
Consumer & Other		371		371		41		402		20
Totals:
Commercial & Industrial	$	1,268	$	1,868	$	510	$	1,921	$	-
Commercial RE & Construction	$	2,035	$	2,035	$	1,018	$	2,092	$	80
Agricultural & Farmland	$	-	$	-	$	-	$	-	$	-
Residential Real Estate	$	1,647	$	1,691	$	242	$	1,880	$	96
Consumer & Other	$	481	$	481	$	41	$	526	$	30
All Impaired Loans < $100,000	$	565	$	565	$	-	$	565	$	-

Twelve Months Ended December 31, 2013		Recorded		Unpaid Principal		Related		Average Recorded		Interest Income
($'s in thousands)		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
Consumer & Other		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
Consumer & Other		338		338		168		371		25
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
Consumer & Other	$	590	$	590	$	168	$	639	$	39
All Impaired Loans < $100,000	$	1,242	$	1,242	$	-	$	1,242	$	-

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 a change that does 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, 2014 and 2013:

	December 31, 2014
($ in thousands)	Number of Loans		Pre- Modification Recorded Balance		Post Modification Recorded Balance

Residential Real Estate		-	$	-	$	-
Consumer & Other		1		16		16

Total Modifications		1	$	16	$	16

($ in thousands)		Interest						Total
		Only		Term		Combination		Modification

Residential Real Estate	$	-	$	-	$	-	$	-
Consumer & Other		-		16		-		16

Total Modifications	$	-	$	16	$	-	$	16

There was no increase in the allowance for loan and lease losses ("ALLL") due to TDRs in the twelve month period ended December 31, 2014.

	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 $0.01 million in the twelve month period ending December 31, 2013.

Troubled Debt Restructurings Modified in 2014 that have Subsequently Defaulted

	Number of		Recorded
($ in thousands)	Contracts		Balance

Residential Real Estate		2	$	197
		2		197

Troubled Debt Restructurings Modified in 2013 that have Subsequently Defaulted

	Number of		Recorded
($ in thousands)	Contracts		Balance

Residential Real Estate		4	$	63
		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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