Loans and Allowance for Loan Losses

9 Months Ended

Sep. 30, 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 and the amortization of net loan fees are generally discontinued on loans which 1) are maintained on a cash basis because of deterioration in the financial condition of the borrower; 2) for which payment in full of principal is not expected; or 3) upon which principal or interest has been in default for a period of 90 days or more. The accrual of interest however, may continue on these loans if they 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.

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, 2012 and December 31, 2011.

September 30, 2012
Loans Receivable on Non-Accrual
Commercial	$	5,298
Commercial Real Estate:
Commercial Real Estate - Construction		—
Commercial Real Estate - Other		3,385,122
Consumer:
Consumer Real Estate		97,980
Consumer - Other		—
Total	$	3,488,400

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, as of September 30, 2012 and December 31, 2011.

September 30, 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	$	521,970		34,357		—		556,327		52,788,518		53,344,845		—
Commercial Real Estate:
Commercial   Real Estate -Construction		—		—		—		—		3,978,339		3,978,339		—
Commercial Real Estate - Other		594,626		—		2,829,543		3,424,169		104,257,691		107,681,860		—
Consumer:
Consumer- Real Estate		—		—		29,999		29,999		44,479,518		44,509,517		—
Consumer-Other		11,658		—		—		11,658		4,172,675		4,184,333		—
Total	$	1,128,254		34,357		2,859,542		4,022,153		209,676,741		213,698,894		—

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 September 30, 2012 and December 31, 2011, loans individually evaluated and considered impaired are presented in the following table:

Impaired and Restructured Loans For the Nine Months Ended September 30, 2012
With no related allowance recorded:	Unpaid Principal Balance		Recorded  Investments		Related Allowance		Average Recorded Investment		Interest Income Recognized
Commercial	$	296,350	$	149,374	$	—	$	155,147	$	48,884
Commercial Real Estate		10,929,309		8,792,695		—		8,771,634		1,832,821
Consumer Real Estate		319,536		313,154		—		316,312		57,798
Consumer Other		—		—		—		—		—
Total	$	11,545,195	$	9,255,223	$	—	$	9,243,093	$	1,939,503
With an allowance recorded:
Commercial	$	1,360,535	$	1,251,462	$	1,251,462	$	1,290,779	$	153,646
Commercial Real Estate		486,000		436,291		208,479		447,950		122,047
Consumer Real Estate		852,750		849,271		337,513		849,359		334,492
Consumer Other		50,000		49,540		49,540		49,589		5,181
Total	$	2,749,285	$	2,586,564	$	1,846,994	$	2,637,677	$	615,366
Grand Total		14,294,480		11,841,787		1,846,994		11,880,770		2,554,869

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
Grand Total		7,594,941		7,417,892		1,864,411		7,428,013		214,008

The following table illustrates credit risks by category and internally assigned grades at September 30, 2012 and December 31, 2011.

September 30, 2012
		Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Consumer – Real Estate		Consumer– Other		Total
	Pass	$	46,699,781	$	3,507,472	$	92,858,906	$	39,151,473	$	3,560,897	$	185,778,529
	Watch		2,798,810		—		2,632,371		3,361,909		201,472		8,994,562
	OAEM		957,183		470,867		5,013,420		653,947		236,139		7,331,556
	Sub-Standard		2,889,071		—		7,177,163		1,342,188		185,825		11,594,247
	Doubtful		—		—		—		—		—		—
	Loss		—		—		—		—		—		—
	Total	$	53,344,845	$	3,978,339	$	107,681,860	$	44,509,517	$	4,184,333	$	213,698,894

December 31, 2011
		Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate		Consumer– Other		Total
	Pass	$	48,160,256	$	3,088,190	$	93,889,871	$	38,551,256	$	4,390,391	$	188,079,964
	Watch		4,000,123		476,137		4,581,885		3,312,679		214,617		12,585,441
	OAEM		2,071,137		—		1,905,745		212,545		311,905		4,501,332
	Sub-Standard		1,334,009		—		6,031,120		1,109,381		67,865		8,542,375
	Doubtful		—		—		—		—		—		—
	Loss		—		—		—		—		—		—
	Total	$	55,565,525	$	3,564,327	$	106,408,621	$	43,185,861	$	4,984,778	$	213,709,112

The following table sets forth the changes in the allowance and an allocation of the allowance by loan category at September 30, 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.

September 30, 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		(60,035	)		(43,734	)		(26,488	)		(11,125	)		—		(141,382	)
Recoveries		107,633			10,229			10,000			15,451			—		143,313
Provisions		(294,127	)		(68,312	)		137,655			(15,109	)		519,893		280,000
Ending Balance		1,339,981			318,550			571,505			80,619			1,078,160		3,388,815
Ending Balances:
Individually evaluated for impairment		1,400,836			9,228,986			1,162,425			49,540			—		11,841,787
Collectively evaluated for impairment	$	51,944,009		$	102,431,213		$	43,347,092		$	4,134,793		$	—	$	201,857,107

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		$	218,897	$	27,200		$	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			231,441		126,060			(503,592	)		480,000
Ending Balance		1,586,510			420,367			450,338		91,402			558,267			3,106,884
Ending Balances:
Individually evaluated for impairment		1,285,480			4,947,403			1,135,267		49,742			—			7,417,892
Collectively evaluated for impairment	$	54,280,045		$	105,025,545		$	42,050,594	$	4,935,036		$	—		$	206,291,220

Restructured (trouble debt restructuring-TDR’s) loans (loans, still accruing interest, which have been renegotiated at below-market interest rates or for which other concessions have been granted) were $2,655,556 and $491,153 at September 30, 2012 and December 31, 2011, respectively, and are illustrated in the following table. At September 30, 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 September 30, 2012
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Commercial		1	$	141,667	$	141,667
Commercial Real Estate		3	$	2,400,797	$	2,400,797
Commercial Real Estate Construction		—	$	—	$	—
Consumer Real Estate –Prime		1	$	113,092	$	113,092
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		—	$	—	$	—