Loans and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2012

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 by requiring that loan origination fees be recognized over the life of 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 March 31, 2012 and December 31, 2011.

March 31, 2012
Loans Receivable on Non-Accrual
Commercial	$	3,556
Commercial Real Estate:
Commercial Real Estate - Construction		—
Commercial Real Estate - Other		2,087,243
Consumer:
Consumer Real Estate		67,981
Consumer - Other		—
Total	$	2,158,780

December 31, 2011
Loans Receivable on Non-Accrual
Commercial	$	4,018
Commercial Real Estate:
Commercial Real Estate - Construction		—
Commercial Real Estate - Other		851,672
Consumer:
Consumer Real Estate		67,981
Consumer - Other		—
Total	$	923,671

The following is a schedule of the Bank’s delinquent loans, excluding mortgage loans held for sale and deferred loan fees, as of March 31, 2012 and December 31, 2011.

March 31, 2012
	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	$	8,128		13,519		—		21,647		53,020,591		53,042,238		—
Commercial Real Estate:
Commercial Real Estate - Construction		—		—		—		—		3,250,384		3,250,384		—
Commercial Real Estate -Other		568,807		1,289,527		2,005,285		3,863,619		102,900,841		106,764,460		—
Consumer:
Consumer- Real Estate		26,488		—		—		26,488		44,953,869		44,980,357		—
Consumer-Other		42,209		—				42,209		4,360,934		4,403,143		—
Total	$	645,632		1,303,046		2,005,285		3,953,963		208,486,619		212,440,582		—

December 31, 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	$	50,892		—		—		50,892		55,514,633		55,565,525		—
Commercial Real Estate:
Commercial Real Estate - Construction		—		—		—		—		3,564,327		3,564,327		—
Commercial Real Estate -Other		1,268,321		—		788,167		2,056,488		104,352,133		106,408,621		282,173
Consumer:
Consumer- Real Estate		—		—		—		—		43,185,861		43,185,861		—
Consumer-Other		4,401		30,319		605		35,325		4,949,453		4,984,778		—
Total	$	1,323,614		30,319		788,772		2,142,705		211,566,407		213,709,112		282,173

As of March 31, 2012 and December 31, 2011, loans individually evaluated and considered impaired are presented in the following table:

Impaired and Restructured Loans For the Three Months Ended March 31, 2012
With no related allowance recorded:	Unpaid Principal Balance		Recorded Investments		Related Allowance		Average Recorded Investment		Interest Income Recognized
Commercial	$	83,350	$	3,556	$	—	$	8,335	$	2,194
Commercial Real Estate		8,707,440		7,616,473		—		7,592,247		235,259
Consumer Real Estate		319,536		314,832		—		317,274		27,130
Consumer Other		—		—		—		—		—
Total	$	9,110,326	$	7,934,861	$	—	$	7,917,856	$	264,583
With an allowance recorded:
Commercial	$	1,360,535	$	1,280,962	$	1,280,962	$	1,296,650	$	110,984
Commercial Real Estate		375,000		312,591		203,776		322,231		18,093
Consumer Real Estate		822,750		819,341		345,494		819,427		49,904
Consumer Other		50,000		49,540		49,540		49,663		912
Total	$	2,608,285	$	2,462,434	$	1,879,772	$	2,487,971	$	179,893

Impaired and Restructured Loans For the Year Ended December 31, 2011
With no related allowance recorded:	Unpaid Principal Balance		Recorded Investments		Related Allowance		Average Recorded Investment		Interest Income Recognized
Commercial	$	83,350	$	4,018	$	—	$	8,625	$	315
Commercial Real Estate		4,289,820		4,321,755		—		4,299,045		99,046
Consumer Real Estate		319,536		315,926		—		317,776		12,596
Consumer Other		—		—		—		—		—
Total	$	4,692,706	$	4,641,699	$	—	$	4,625,446	$	111,957
With an allowance recorded:
Commercial	$	1,360,535	$	1,281,462	$	1,281,462	$	1,298,891	$	57,458
Commercial Real Estate		668,950		625,648		187,713		634,511		9,957
Consumer Real Estate		822,750		819,341		345,494		819,423		34,636
Consumer Other		50,000		49,742		49,742		49,742		—
Total	$	2,902,235	$	2,776,193	$	1,864,411	$	2,802,567	$	102,051

The following table illustrates credit risks by category and internally assigned grades at March 31, 2012 and December 31, 2011.

March 31, 2012
	Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Consumer – Real Estate		Consumer – Other
Pass	$	45,765,487	$	3,250,384	$	89,892,401	$	40,177,428	$	3,860,448
Watch		3,263,900		—		2,970,971		2,774,136		220,369
OAEM		1,128,585		—		5,592,365		528,083		186,481
Sub-Standard		2,884,266		—		8,308,723		1,500,710		135,845
Doubtful		—		—		—		—		—
Loss		—		—		—		—		—
Total	$	53,042,238	$	3,250,384	$	106,764,460	$	44,980,357	$	4,403,143

December 31, 2011
	Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Consumer – Real Estate		Consumer – Other
Pass	$	48,160,256	$	3,088,190	$	93,889,871	$	38,551,256	$	4,390,391
Watch		4,000,123		476,137		4,581,885		3,312,679		214,617
OAEM		2,071,137		—		1,905,745		212,545		311,905
Sub-Standard		1,334,009		—		6,031,120		1,109,381		67,865
Doubtful		—		—		—		—		—
Loss		—		—		—		—		—
Total	$	55,565,525	$	3,564,327	$	106,408,621	$	43,185,861	$	4,984,778

The following table sets forth the changes in the allowance and an allocation of the allowance by loan category at March 31, 2012 and December 31, 2011. 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.

March 31, 2012
	Commercial			Commercial Real Estate			Consumer Real Estate		Consumer Other			Unallocated		Total
Allowance for Loan Losses
Beginning Balance	$	1,586,510		$	420,367		$	450,338	$	91,402		$	558,267	$	3,106,884
Charge-offs		(17,152	)		—			—		(230	)		—		(17,382	)
Recoveries		11,380			3,632			10,000		—			—		25,012
Provisions		(5,391	)		(120,786	)		104,000		(5,285	)		147,462		120,000
Ending Balance		1,575,347			303,213			564,338		85,887			705,729		3,234,514
Ending Balances:
Individually evaluated for impairment		1,284,534			7,929,064			1,134,173		49,540			—		10,397,311
Collectively evaluated for impairment	$	51,757,704		$	102,085,780		$	43,846,184	$	4,353,603		$	—	$	202,043,271

December 31, 2011
	Commercial			Commercial Real Estate			Consumer Real Estate			Consumer Other		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	)		(62,368	)		—		—			(383,714	)
Recoveries		42,662			28,838			510			—		—			72,010
Provisions		59,493			566,598			126,060			231,441		(503,592	)		480,000
Ending Balance		1,586,510			420,367			91,402			450,338		558,267			3,106,884
Ending Balances:
Individually evaluated for impairment		1,285,480			4,947,403			49,742			1,135,267		—			7,417,892
Collectively evaluated for impairment	$	54,280,045		$	105,025,545		$	4,935,036		$	42,050,594	$	—		$	206,291,220

Restructured loans (loans, still accruing interest, which have been renegotiated at below-market interest rates or for which other concessions have been granted) were $2,514,709 and $491,153 at March 31, 2012 and December 31, 2011, respectively, and are illustrated in the following table. At March 31, 2012 and December 31, 2011, all restructured loans were performing as agreed. There was one restructured loan at December 31, 2010 in the amount of $153,015 that failed to continue to perform as agreed upon and, as a result, the loan was charged off in March 2011.

Modification
As of March 31, 2012
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Commercial			$		$	—
Commercial Real Estate		3	$	2,399,973	$	2,399,973
Commercial Real Estate Construction		—	$		$	—
Consumer Real Estate –Prime		1	$	114,736	$	114,736
Consumer Real Estate-Subprime		—	$	—	$	—
Consumer Other		—	$	—	$	—
Troubled Debt Restructurings That Subsequently Defaulted
Commercial		—	$	—	$	—
Commercial Real Estate		—	$	—	$	—
Commercial Real Estate Construction		—	$	—	$	—
Consumer Real Estate -Prime		—	$	—	$	—
Consumer Real Estate-Subprime		—	$	—	$	—
Consumer Other		—	$	—	$	—

Modification
As of December 31, 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	$	115,830	$	115,830
Consumer Real Estate-Subprime		—	$	—	$	—
Consumer Other		—	$	—	$	—
Troubled Debt Restructurings That Subsequently Defaulted
Commercial		—	$	—	$	—
Commercial Real Estate		1	$	153,015	$	153,015
Commercial Real Estate Construction		—	$	—	$	—
Consumer Real Estate -Prime		—	$	—	$	—
Consumer Real Estate-Subprime		—	$	—	$	—
Consumer Other		—	$	—	$	—