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Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2015

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:

		Total Loans								Non-Accrual Loans
($ in thousands)		Dec. 2015				Dec. 2014				Dec. 2015				Dec. 2014
Commercial & Industrial		$	86,542			$	88,485				188				1,387
Commercial RE & Construction			242,208				217,030				5,670				2,092
Agricultural & Farmland			43,835				46,217				7				-
Residential Real Estate			130,806				113,214				749				992
Consumer & Other			54,224				51,546				32				138

Total Loans		$	557,615			$	516,492			$	6,646			$	4,609

Unearned Income		$	44			$	(156	)

Total Loans, net of unearned income		$	557,659			$	516,336

Allowance for loan losses		$	(6,990	)		$	(6,771	)

State Bank makes 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, 2015 and 2014.

($ in thousands)		2015				2014
Loan commitments and unused lines of credit		$	126,902			$	105,136
Standby letters of credit			1,026				672

Total		$	127,928			$	105,808

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, 2015 and 2014:

		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, 2015
Beginning balance		$	1,630			$	2,857			$	208			$	1,308			$	768			$	6,771
Charge Offs			(497	)			(303	)			-				(56	)			(96	)		$	(952	)
Recoveries			26				3				3				29				10				71
Provision			(245	)			1,329				(7	)			31				(8	)			1,100
Ending Balance		$	914			$	3,886			$	204			$	1,312			$	674			$	6,990

Loans Receivable at December 31, 2015
Allowance:
Ending balance:
individually evaluated for impairment		$	-			$	1,759			$	-			$	167			$	37			$	1,963
Ending balance:
collectively evaluated for impairment		$	914			$	2,127			$	204			$	1,145			$	637			$	5,027
Loans:
Ending balance:
individually evaluated for impairment		$	126			$	5,754			$	-			$	1,713			$	464			$	8,057
Ending balance:
collectively evaluated for impairment		$	86,416			$	236,454			$	43,835			$	129,093			$	53,760			$	549,558

		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			$	769			$	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			$	728			$	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

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, 2015 and 2014:

December 31, 2015		Commercial				Commercial RE				Agricultural				Residential				Consumer
($ in thousands)		& Industrial				& Construction				& Farmland				Real Estate				& Other				Total
1-2		$	709			$	767			$	47			$	-			$	15			$	1,538
3			23,362				79,915				8,195				118,463				50,745				280,680
4			61,799				149,473				35,593				10,418				3,223				260,506
Total Pass (1 - 4)			85,870				230,155				43,835				128,881				53,983				542,724

Special Mention (5)			330				5,260				-				756				70				6,416
Substandard (6)			110				1,072				-				420				139				1,741
Doubtful (7)			232				5,721				-				749				32				6,734
Loss (8)			-				-				-				-				-				-
Total Loans		$	86,542			$	242,208			$	43,835			$	130,806			$	54,224			$	557,615

December 31, 2014		Commercial				Commercial RE				Agricultural				Residential				Consumer
($ in thousands)		& Industrial				& Construction				& Farmland				Real Estate				& Other				Total
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

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, 2015 and 2014:

($ in thousands)		30-59 Days				60-89 Days				Greater Than				Total Past								Total Loans
December 31, 2015		Past Due				Past Due				90 Days				Due				Current				Receivable

Commercial & Industrial		$	-			$	60			$	188			$	248			$	86,294			$	86,542
Commercial RE & Construction			99				-				5,280				5,379				236,829				242,208
Agricultural & Farmland			-				-				-				-				43,835				43,835
Residential Real Estate			98				198				156				452				130,354				130,806
Consumer & Other			64				-				2				66				54,158				54,224
Total Loans		$	261			$	258			$	5,626			$	6,145			$	551,470			$	557,615

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

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

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, 2015 and 2014:

Twelve Months Ended December 31, 2015		Recorded				Unpaid Principal				Related				Average Recorded				Interest Income
($'s in thousands)		Investment				Balance				Allowance				Investment				Recognized
With no related allowance recorded:
Commercial & Industrial		$	126			$	1,214			$	-			$	1,388			$	-
Commercial RE & Construction			1,110				1,110				-				1,206				27
Agricultural & Farmland			-				-				-				-				-
Residential Real Estate			657				657				-				862				52
Consumer & Other			90				90				-				107				9
All Impaired Loans < $100,000			131				131				-				131				-
With a specific allowance recorded:
Commercial & Industrial			-				-				-				-				-
Commercial RE & Construction			4,643				4,893				1,759				5,006				90
Agricultural & Farmland			-				-				-				-				-
Residential Real Estate			1,013				1,013				167				1,084				45
Consumer & Other			374				374				37				385				22
Totals:
Commercial & Industrial		$	126			$	1,214			$	-			$	1,388			$	-
Commercial RE & Construction		$	5,753			$	6,003			$	1,759			$	6,212			$	117
Agricultural & Farmland		$	-			$	-			$	-			$	-			$	-
Residential Real Estate		$	1,670			$	1,670			$	167			$	1,946			$	97
Consumer & Other		$	464			$	464			$	37			$	492			$	31
All Impaired Loans < $100,000		$	131			$	131			$	-			$	131			$	-

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			11				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		$	382			$	481			$	41			$	526			$	30
All Impaired Loans < $100,000		$	565			$	565			$	-			$	565			$	-

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, 2015 and 2014:

		December 31, 2015
($ in thousands)		Number of Loans				Pre- Modification Recorded Balance				Post Modification Recorded Balance

Residential Real Estate			1			$	22			$	22
Commercial			1				314				314
Consumer & Other			1				39				39

Total Modifications			3			$	375			$	375

($ in thousands)		Interest												Total
		Only				Term				Combination				Modification

Residential Real Estate		$	-			$	22			$	-			$	22
Commercial			-				314				-				314
Consumer & Other			-				39				-				39

Total Modifications		$	-			$	375			$	-			$	375

There was no increase in the allowance for loan losses due to TDR's in the twelve month period ended December 31, 2015.

		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 losses due to TDR's in the twelve month period ended December 31, 2014.

There were no TDR's modified during 2015 that have subsequently defaulted.

TDR's modified in 2014 that have subsequently defaulted

		Number of				Recorded
($ in thousands)		Contracts				Balance

Residential Real Estate			2			$	197

			2				197