Loans and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2011

Loans And Allowance For Loan Losses

Loans and Allowance for Loan Losses

NOTE 5: Loans and Allowance for Loan Losses:

Loans are carried at principal amounts outstanding.  Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment to yield.  Interest income on all loans is recorded on an accrual basis.  The accrual of interest is generally discontinued on loans which become 90 days past due as to principal or interest.  The accrual of interest on some loans, however, may continue even though they are 90 days past due if the loans are well secured, in the process of collection, and management deems it appropriate.  Non-accrual loans are reviewed individually by management to determine if they should be returned to accrual status. The Company defines past due loans based on contractual payment and maturity dates.

The Company accounts for nonrefundable fees and costs associated with originating or acquiring loans and direct costs of leases by requiring that loan origination fees be recognized over the life on the related loan as an adjustment on the loan’s yield.  Certain direct loan origination costs shall be recognized over the life of the related loan as a reduction of the loan’s yield.  This statement changed the practice of recognizing loan origination and commitment fees prior to inception of the loan.

The Company accounts for impaired loans by requiring that all loans for which it is estimated that the Company will be unable to collect all amounts due according to the terms of the loan agreement be recorded at the loan's fair value.  Fair value may be determined based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if the loan is collateral dependent.

Additional accounting guidance allows the Company to use existing methods for recognizing interest income on an impaired loan and by requiring additional disclosures about how the Company estimates interest income related to impaired loans.

When the ultimate collectability of an impaired loan's principal is in doubt, wholly or partially, all cash receipts are applied to principal.  Once the recorded principal balance has been reduced to zero, future cash receipts are applied to interest income, to the extent that any interest has been foregone.  Further cash receipts are recorded as recoveries of any amounts previously charged off.  When this doubt does not exist, cash receipts are applied under the contractual terms of the loan agreement first to interest income and then to principal.

A loan is also considered impaired if its terms are modified in a troubled debt restructuring.  For these accruing impaired loans, cash receipts are typically applied to principal and interest receivable in accordance with the terms of the restructured loan agreement.  Interest income is recognized on these loans using the accrual method of accounting, provided they are performing in accordance with their restructured terms.

Management believes that the allowance is adequate to absorb inherent losses in the loan portfolio; however, assessing the adequacy of the allowance is a process that requires considerable judgment.  Management’s judgments are based on numerous assumptions about current events which management believes to be reasonable, but which may or may not be valid.  Thus there can be no assurance that loan losses in future periods will not exceed the current allowance amount or that future increases in the allowance will not be required.  No assurance can be given that management’s ongoing evaluation of the loan portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the allowance, thus adversely affecting the operating results of the Company.

The allowance is also subject to examination by regulatory agencies, which may consider such factors as the methodology used to determine adequacy and the size of the allowance relative to that of peer institutions, and other adequacy tests.  In addition, such regulatory agencies could require the Company to adjust its allowance based on information available to them at the time of their examination.

The methodology used to determine the reserve for unfunded lending commitments, which is included in other liabilities, is inherently similar to that used to determine the allowance for loan losses adjusted for factors specific to binding commitments, including the probability of funding and historical loss ratio.

The following is a summary of the non-accrual loans as of September 30, 2011 and December 31, 2010.

Loans Receivable on Non-Accrual at September 30, 2011
Commercial	$	4,953
Commercial Real Estate:
Commercial  Real Estate -   Construction		-
Commercial Real Estate - Other		842,239
Consumer  Real Estate		67,981
Total	$	915,173

Loans Receivable on Non-Accrual at December 31, 2010
Commercial	$	6,702
Commercial Real Estate:
Commercial Real Estate -   Construction		-
Commercial Real Estate - Other		938,626
Total	$	945,328

The following schedules summarize the Bank’s delinquent loans, excluding mortgage loans held for sale and deferred loan fees, as of September 30, 2011 and December 31, 2010.

September 30, 2011	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Recorded Investment > 90 Days and Accruing
Commercial	$	46,160		-		128,322		174,482		54,076,447		54,250,929		128,322
Commercial Real Estate:
Commercial Real Estate		99,987		-		763,561		863,548		105,443,145		106,306,693		270,000
Commercial Real Estate -Construction		-		-		-		-		3,499,067		3,499,067		-
Consumer:
Consumer-Real Estate		-		-		72,269		72,269		41,014,484		41,086,753		-
Consumer-Other		48,217		-		-		48,217		5,116,089		5,164,306		72,269
Total	$	194,364		-		964,152		1,158,516		209,149,232		210,307,748		470,591

December 31, 2010	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Recorded Investment > 90 Days and Accruing
Commercial	$	7,056		8,038		-		15,094		50,603,851		50,618,945		-
Commercial Real Estate:
Commercial Real Estate -Construction		-		-		-		-		-		-		-
Commercial Real Estate -Other		134,072				589,225		723,297		107,281,613		108,004,910		-
Consumer:
Consumer-Other		309,684		5,864				315,548		49,086,261		49,401,809		-
Total	$	450,812		13,902		589,225		1,053,939		206,971,725		208,025,664		-

As of September 30, 2011 and December 31, 2010 loans individually evaluated and considered impaired are presented in the following tables:

Impaired and Restructured Loans For the Nine Months Ended September 30, 2011
With no related allowance recorded:	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
Commercial	$	83,350	$	4,953	$	-	$	8,918	$	34,215
Commercial Real Estate		4,019,820		4,027,149		-		4,014,085		269,308
Consumer Real Estate		349,786		346,767		-		348,300		52,367
Total	$	4,452,956	$	4,378,869	$	-	$	4,371,303	$	355,890
With an allowance recorded:
Commercial	$	1,211,163	$	1,190,663	$	1,190,663	$	1,204,663	$	80,223
Commercial Real Estate		126,000		86,959		86,084		94,064		21,921
Consumer Real Estate		792,500		789,523		293,081		789,402		280,121
Total	$	2,129,663	$	2,067,145	$	1,569,828	$	2,088,129	$	382,265

Impaired Loans For the Year Ended December 31, 2010
With no related allowance recorded:	Unpaid Principal Balance		Recorded  Investment		Related Allowance		Average  Recorded Investment		Interest Income Recognized
Commercial	$	83,350	$	6,702	$	-	$	12,230	$	33,997
Commercial Real Estate		2,317,543		2,020,682		-		833,939		391,574
Consumer Real Estate		230,250		230,022		-		836,169		425,571
Total	$	2,631,143	$	2,257,406	$	-	$	1,682,338	$	851,142
With an allowance recorded
Commercial	$	1,211,163	$	1,207,163	$	1,207,163	$	807,846	$	41,714
Commercial Real Estate		126,000		94,959		86,084		87,431		17,702
Consumer Real Estate		-		-		-		-		-
Total	$	1,337,163	$	1,302,122	$	1,293,247	$	895,277	$	59,416

The following tables illustrate credit risks by category and internally assigned grades at September 30, 2011 and December 31, 2010.

September 30, 2011	Commercial		Commercial Real Estate Construction		Commercial Real Estate		Residential – Real Estate		Consumer – Other
Pass	$	48,875,128	$	3,025,792	$	94,778,261		39,384,436		4,460,691
Watch		2,049,845		-		3,807,198		261,095		343,649
OAEM		2,067,364		473,275		1,693,789		214,914		253,938
Sub-Standard		1,258,592		-		6,027,445		1,226,308		105,327
Doubtful		-		-		-		-		701
Loss		-		-		-		-		-
						-		-		-
Total	$	54,250,929	$	3,499,067	$	106,306,693		41,086,753		5,164,306

December, 31, 2010	Commercial		Commercial Real Estate Construction		Commercial Real Estate		Residential – Real Estate		Consumer – Other
Pass	$	44,264,102	$	2,226,325	$	97,949,596		42,017,198		4,915,583
Watch		3,070,186		475,225		3,516,001		338,614		363,798
OAEM		1,934,919		-		116,277		379,092		234,007
Sub-Standard		1,349,738		-		3,721,487		1,071,100		79,985
Doubtful		-		-		-		-		2,431
Loss		-		-		-		-		-
						-		-		-
Total	$	50,618,945	$	2,701,550	$	105,303,361		43,806,004		5,595,804

The following tables set forth the changes in the allowance and an allocation of the allowance by loan category at September 30, 2011 and December 31, 2010.  The allocation of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.  The allowance consists of specific and general components.  The specific component relates to loans that are individually classified as impaired.  The general component covers non-impaired loans and is based on historical loss experience adjusted for current economic factors described above.

September 30, 2011	Commercial			Commercial Real Estate		Consumer		Residential		Unallocated			Total
Allowance for Loan Losses
Beginning Balance	$	1,502,298		$	128,334	$	27,200	$	218,897	$	1,061,859		$	2,938,588
Charge-offs		17,943			303,403		59,013		-		-			380,359
Recoveries		29,804			25,482		100		-		-			55,386
Provisions		(11,221	)		381,285		56,976		236,448		(303,488	)		360,000
Ending Balance		1,502,938			231,698		25,263		455,345		758,371			2,973,615
Ending Balances:
Individually evaluated for impairment		1,195,616			4,114,108		-		1,136,290		-			6,446,014
Collectively evaluated for impairment	$	53,092,936		$	105,665,179	$	4,962,095	$	40,141,524	$			$	203,861,734

December 31, 2010	Commercial		Commercial Real Estate		Consumer		Residential		Unallocated			Total
Allowance for Loan Losses
Beginning Balance	$	1,456,332	$	42,448	$	15,651	$	197,428	$	1,315,138		$	3,026,997
Charge-offs		417,078		21,356		55,257		285,128		-			778,819
Recoveries		14,427		5,484		500		-		-			20,411
Provisions		448,617		101,758		66,306		306,597		(253,279	)		669,999
Ending Balance		1,502,298		128,334		27,200		218,897		1,061,859			2,938,588
Ending Balances:
Individually evaluated for impairment		1,213,865		2,115,641		-		230,022		-			3,559,528
Collectively evaluated for impairment	$	49,405,080	$	105,889,270	$	5,595,804	$	43,575,982	$	-		$	204,466,136

Restructured loans (loans, still accruing interest, which have been renegotiated at below-market interest rates or for which other concessions have been granted) were $492,144 and $153,015 at September 30, 2011 and December 31, 2010, respectively, and are illustrated in the following table.  At September 30, 2011 and December 31, 2011, all restructured loans were performing as agreed.  Although the restructured loan of $153,015 was performing as agreed at December, 31, 2010, failure to continue to perform as agreed resulted in its charge off in March 2011.

Modification
As of September 30, 2011
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Commercial			$		$	-
Commercial Real Estate		1	$	375,323	$	375,323
Commercial Real Estate Construction		-	$		$	-
Consumer Real Estate –Prime		1	$	119,536	$	119,536
Consumer Real Estate-Subprime		-	$	-	$
Consumer Other		-	$	-	$	-
Troubled Debt Restructurings That Subsequently Defaulted	Number of Contracts		Recorded Investment
Commercial		-	$	-
Commercial Real Estate		1	$	153,015
Commercial Real Estate Construction		-	$	-
Consumer Real Estate -Prime		-	$	-
Consumer Real Estate-Subprime		-	$	-
Consumer Other		-	$	-

Modification
As of December 31, 2010
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Commercial			$		$	-
Commercial Real Estate		1	$	153,015	$	153,015
Commercial Real Estate Construction		-	$	-	$	-
Consumer Real Estate –Prime		-	$	-	$	-
Consumer Real Estate-Subprime		-	$	-	$	-
Consumer Other		-	$	-	$	-
Troubled Debt Restructurings That Subsequently Defaulted	Number of Contracts		Recorded Investment
Commercial		-	$	-
Commercial Real Estate		-	$	-
Commercial Real Estate Construction		-	$	-
Consumer Real Estate -Prime		-	$	-
Consumer Real Estate-Subprime		-	$	-
Consumer Other		-	$	-