Loans and Allowance

12 Months Ended

Dec. 31, 2011

Accounts, Notes, Loans and Financing Receivable, Gross, Allowance, and Net [Abstract]

Loans and Allowance

Note 4: Loans and Allowance

The Company’s loan and allowance polices are discussed in Note 1 above.

The following table presents the breakdown of loans as of December 31, 2011 and December 31, 2010.

	December 31, 2011			December 31, 2010
Residential real estate
Construction	$	8,308		$	6,975
One-to-four family residential		111,198			117,616
Multi-family residential		18,582			14,997
Nonresidential real estate and agricultural land		83,284			89,607
Land (not used for agricultural purposes)		19,081			21,016
Commercial		17,349			16,413
Consumer and other		3,840			4,533
		261,642			271,157
Unamortized deferred loan costs		481			485
Undisbursed loans in process		(5,024	)		(2,388	)
Allowance for loan losses		(4,003	)		(3,806	)
Total loans	$	253,096		$	265,448

The risk characteristics of each loan portfolio class are as follows:

Construction

Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the complete 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.

One-to-Four Family Residential and Consumer

With respect to residential loans that are secured by one-to-four family residences and are usually owner occupied, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. This segment also includes residential loans secured by non-owner-occupied one-to-four family residences. Management tracks the level of owner-occupied residential loans versus non-owner-occupied loans as a portion of our recent loss history relates to these loans. Home equity loans are typically secured by a subordinate interest in one-to-four family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer 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 the loans are of smaller individual amounts and spread over a large number of borrowers.

Nonresidential (including agricultural land), Land, and Multi-family Residential Real Estate

These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Nonresidential and multi-family residential 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. Nonresidential and multi-family residential real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s nonresidential and multi-family real estate portfolio are diverse in terms of type and geographic location. Management monitors and evaluates these loans based on collateral, geography and risk grade criteria. As a general rule, 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 real estate loans versus non-owner-occupied loans.

Commercial

Commercial 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 incorporate a personal guarantee; however, some 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.

The following tables present the activity in the allowance for loan losses for the years ended December 31, 2011 and December 31, 2010, and information regarding the breakdown of the balance in the allowance for loan losses and the recorded investment in loans, both presented by portfolio class and impairment method, as of December 31, 2011 and December 31, 2010.

	Residential Construction			1-4 Family			Multi-Family			Nonresidential			Land			Commercial			Consumer			Total
Year Ended December 31, 2011 Balances at beginning of period:	$	35		$	746		$	138		$	1,632		$	976		$	157		$	122		$	3,806
Provision for losses		(7	)		1,844			(37	)		243			836			(87	)		(21	)		2,771
Loans charged off		(5	)		(604	)		(36	)		(1,056	)		(819	)		—			(102	)		(2,622	)
Recoveries on loans		—			—			—			3			—			—			45			48
Balances at end of period	$	23		$	1,986		$	65		$	822		$	993		$	70		$	44		$	4,003
Year Ended December 31, 2010 Balances at beginning of period:	$	52		$	700		$	63		$	1,636		$	83		$	46		$	31		$	2,611
Provision for losses		(13	)		278			83			1,162			893			72			170			2,645
Loans charged off		(4	)		(250	)		(8	)		(1,428	)		—			(405	)		(130	)		(2,225	)
Recoveries on loans		—			18			—			262			—			444			51			775
Balances at end of period	$	35		$	746		$	138		$	1,632		$	976		$	157		$	122		$	3,806

	Residential Construction		1-4 Family		Multi-Family		Nonresidential		Land		Commercial		Consumer		Total
As of December 31, 2011 Allowance for losses:
Individually evaluated for impairment:	$	—	$	913	$	—	$	—	$	519	$	—	$	—	$	1,432
Collectively evaluated for impairment:		23		1,073		65		822		474		70		44		2,571
Balances at end of period	$	23	$	1,986	$	65	$	822	$	993	$	70	$	44	$	4,003
Loans:
Individually evaluated for impairment:	$	—	$	6,331	$	1,966	$	3,705	$	4,972	$	271	$	17	$	17,262
Collectively evaluated for impairment:		8,308		104,867		16,616		79,579		14,109		17,078		3,823		244,380
Balances at end of period	$	8,308	$	111,198	$	18,582	$	83,284	$	19,081	$	17,349	$	3,840	$	261,642
As of December 31, 2010 Allowance for losses:
Individually evaluated for impairment:	$	14	$	200	$	34	$	351	$	578	$	37	$	—	$	1,214
Collectively evaluated for impairment:		21		546		104		1,281		398		120		122		2,592
Balances at end of period	$	35	$	746	$	138	$	1,632	$	976	$	157	$	122	$	3,806
Loans:
Individually evaluated for impairment:	$	278	$	7,769	$	910	$	6,493	$	6,341	$	901	$	—	$	22,692
Collectively evaluated for impairment:		6,697		109,847		14,087		83,114		14,675		15,512		4,533		248,465
Balances at end of period	$	6,975	$	117,616	$	14,997	$	89,607	$	21,016	$	16,413	$	4,533	$	271,157

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category as of December 31, 2011 and December 31, 2010:

December 31, 2011	Total Portfolio		Pass		Special Mention		Substandard		Doubtful
Construction	$	8,308	$	8,308	$	—	$	—	$	—
1-4 family residential		111,198		100,827		2,891		7,429		51
Multi-family residential		18,582		16,616		—		1,966		—
Nonresidential		83,284		75,966		3,441		3,877		—
Land		19,081		13,457		505		5,119		—
Commercial		17,349		16,685		329		335		—
Consumer		3,840		3,796		22		22		—
Total loans	$	261,642	$	235,655	$	7,188	$	18,748	$	51

December 31, 2010	Total Portfolio		Pass		Special Mention		Substandard		Doubtful
Construction	$	6,975	$	6,681	$	16	$	278	$	—
1-4 family residential		117,616		107,010		5,256		5,224		126
Multi-family residential		14,997		14,087		—		334		576
Nonresidential		89,607		81,624		1,471		6,512		—
Land		21,016		14,199		2,845		3,972		—
Commercial		16,413		15,290		230		893		—
Consumer		4,533		4,188		25		320		—
Total loans	$	271,157	$	243,079	$	9,843	$	17,533	$	702

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of the 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 on an ongoing basis by classifying the loans as to credit risk, assigning grade classifications. Loan grade classifications of special mention, substandard, doubtful, or loss are reported to the Company’s board of directors monthly. The Company uses the following definitions for credit risk grade classifications:

Pass: Loans not meeting the criteria below are considered to be pass rated loans.

Special Mention: These assets are currently protected, but potentially weak. They have credit deficiencies deserving a higher degree of attention by management. These assets do not presently exhibit a sufficient degree of risk to warrant adverse classification. Concerns may lie with cash flow, liquidity, leverage, collateral, or industry conditions. These are graded special mention so that the appropriate level of attention is administered to prevent a move to a “substandard” rating.

Substandard: By regulatory definition, “substandard” loans are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged. These types of loans have well defined weaknesses that jeopardize the liquidation of the debt. A distinct possibility exists that the institution will sustain some loss if the deficiencies are not corrected. These loans are considered workout credits. They exhibit at least one of the following characteristics.

· An expected loan payment is in excess of 90 days past due (non-performing), or non-earning.

· The financial condition of the borrower has deteriorated to such a point that close monitoring is necessary. Payments do not necessarily have to be past due.

· Repayment from the primary source of repayment is gone or impaired.

· The borrower has filed for bankruptcy protection.

· The loans are inadequately protected by the net worth and cash flow of the borrower.

· The guarantors have been called upon to make payments.

· The borrower has exhibited a continued inability to reduce principal (although interest payment may be current).

· The Company is considering a legal action against the borrower.

· The collateral position has deteriorated to a point where there is a possibility the Company may sustain some loss. This may be due to the financial condition, improper documentation, or to a reduction in the value of the collateral.

· Although loss may not seem likely, the Company has gone to extraordinary lengths (restructuring with extraordinary lengths) to protect its position in order to maintain a high probability of repayment.

· Flaws in documentation leave the Company in a subordinated or unsecured position.

Doubtful: These loans exhibit the same characteristics as those rated “substandard,” plus weaknesses that make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable. This would include inadequately secured loans that are being liquidated, and inadequately protected loans for which the likelihood of liquidation is high. This classification is temporary. Pending events are expected to materially reduce the amount of the loss. This means that the “doubtful” classification will result in either a partial or complete loss on the loan (write-down or specific reserve), with reclassification of the asset as “substandard,” or removal of the asset from the classified list, as in foreclosure or full loss.

The following tables present the Company’s loan portfolio aging analysis as of December 31, 2011 and December 31, 2010:

December 31, 2011	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivables		Total Loans 90 Days and Accruing
Construction	$	335	$	—	$	—	$	335	$	7,973	$	8,308	$	—
1-4 family residential		1,172		26		2,946		4,144		107,054		111,198		—
Multi-family residential		—		—		—		—		18,582		18,582		—
Nonresidential		949		105		1,831		2,885		80,399		83,284		—
Land		8		—		3,080		3,088		15,993		19,081		—
Commercial		41		—		297		338		17,011		17,349		—
Consumer		44		—		3		47		3,793		3,840		—
	$	2,549	$	131	$	8,157	$	10,837	$	250,805	$	261,642	$	—

December 31, 2010	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivables		Total Loans 90 Days and Accruing
Construction	$	—	$	—	$	165	$	165	$	6,810	$	6,975	$	—
1-4 family residential		132		839		2,304		3,275		114,341		117,616		—
Multi-family residential		—		—		910		910		14,087		14,997		—
Nonresidential		—		—		4,673		4,673		84,934		89,607		—
Land		—		372		1,749		2,121		18,895		21,016		—
Commercial		542		—		265		807		15,606		16,413		—
Consumer		37		—		315		352		4,181		4,533		—
	$	711	$	1,211	$	10,381	$	12,303	$	258,854	$	271,157	$	—

The following table presents the Company’s nonaccrual loans as of December 31, 2011, which includes both nonperforming troubled debt restructured and loans delinquent 90 days or more. At December 31, 2010, the Company had nonaccruing loans totaling $10,381,000 which equaled loans delinquent 90 days or more.

	December 31, 2011
Residential real estate
Construction	$	—
One-to-four family residential		4,304
Multi-family residential		—
Nonresidential real estate and agricultural land		2,161
Land (not used for agricultural purposes)		3,080
Commercial		297
Consumer and other		21
Total nonaccrual loans	$	9,863

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 the Company 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 information pertaining to the principal balances and specific reserve allocations for impaired loans, as well as the average balances of and interest recognized on impaired loans, as December 31, 2011:

	Recorded Investment		Unpaid Principal Balance		Specific Allowance		Average Investment		Interest Income Recognized
Impaired loans without a specific allowance:
Construction	$	—	$	—	$	—	$	159	$	1
1-4 family residential		3,064		3,249		—		2,722		153
Multi-family residential		1,966		1,966		—		2,052		77
Nonresidential		3,705		4,469		—		4,324		143
Land		2,329		2,329		—		3,635		44
Commercial		271		300		—		476		15
Consumer		17		17		—		9		-
	$	11,352	$	12,330	$	-	$	13,377	$	433

	Recorded Investment		Unpaid Principal Balance		Specific Allowance		Average Investment		Interest Income Recognized
Impaired loans with a specific allowance:
Construction	$	—	$	—	$	—		—	$	—
1-4 family residential		3,267		3,267		913		3,232		58
Multi-family residential		—		—		—		—		—
Nonresidential		—		—		—		—		—
Land		2,643		2,643		519		2,436		42
Commercial		—		—		—		—		—
Consumer		—		—		—		—		—
	$	5,910	$	5,910	$	1,432	$	5,668	$	100

	Recorded Investment		Unpaid Principal Balance		Specific Allowance		Average Investment		Interest Income Recognized
Total Impaired Loans:
Construction	$	—	$	—	$	—	$	159	$	1
1-4 family residential		6,331		6,516		913		5,954		211
Multi-family residential		1,966		1,966		—		2,052		77
Nonresidential		3,705		4,469		—		4,324		143
Land		4,972		4,972		519		6,071		86
Commercial		271		300		—		476		15
Consumer		17		17		—		9		—
	$	17,262	$	18,240	$	1,432	$	19,045	$	533

The following tables present information pertaining to the principal balances and specific reserve allocations for impaired loans, as well as the average balances of and interest recognized on impaired loans, as of December 31, 2010:

	Recorded Investment		Unpaid Principal Balance		Specific Allowance		Average Investment		Interest Income Recognized
Impaired loans without a specific allowance:
Construction	$	113	$	113	$	—	$	260	$	9
1-4 family residential		5,834		6,011		—		2,602		67
Multi-family residential		334		334		—		875		16
Nonresidential		5,106		6,405		—		6,125		141
Land		2,856		3,366		—		1,609		51
Commercial		381		410		—		713		32
Consumer		—		—		—		—		—
	$	14,624	$	16,639	$	—	$	12,184	$	316

	Recorded Investment		Unpaid Principal Balance		Specific Allowance		Average Investment		Interest Income Recognized
Impaired loans with a specific allowance:
Construction	$	165	$	165	$	14		165	$	1
1-4 family residential		1,935		1,935		200		1,866		43
Multi-family residential		576		576		34		230		—
Nonresidential		1,387		1,387		351		792		—
Land		3,485		3,485		578		1,779		8
Commercial		520		520		37		520		34
Consumer		—		—		—		—		—
	$	8,068	$	8,068	$	1,214	$	5,352	$	86

	Recorded Investment		Unpaid Principal Balance		Specific Allowance		Average Investment		Interest Income Recognized
Total Impaired Loans:
Construction	$	278	$	278	$	14	$	425	$	10
1-4 family residential		7,769		7,946		200		4,468		110
Multi-family residential		910		910		34		1,105		16
Nonresidential		6,493		7,792		351		6,917		141
Land		6,341		6,851		578		3,388		59
Commercial		901		930		37		1,233		66
Consumer		—		—		—		—		—
	$	22,692	$	24,707	$	1,214	$	17,536	$	402

For 2010 and 2011, interest income recognized on a cash basis included above was immaterial.

Troubled Debt Restructurings

In the course of working with borrowers, the Company may choose to restructure the contractual terms of certain loans. In restructuring the loan, the Company attempts to work out an alternative payment schedule with the borrower in order to optimize collectibility of the loan. Any loans that are modified, whether through a new agreement replacing the old or via changes to an existing loan agreement, are reviewed by the Company to identify if a troubled debt restructuring (“TDR”) has occurred. A troubled debt restructuring occurs when, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status, and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two. If such efforts by the Company do not result in a satisfactory arrangement, the loan is referred to legal counsel, at which time foreclosure proceedings are initiated. At any time prior to a sale of the property at foreclosure, the Company may terminate foreclosure proceedings if the borrower is able to work out a satisfactory payment plan.

As a result of adopting the amendments in Accounting Standards Update No. 2011-02, the Company reassessed all restructurings that occurred on or after January 1, 2011 for identification as troubled debt restructurings. As a result of this reassessment, the Company did not identify as troubled debt restructurings any additional receivables for which the allowance for credit losses had previously been measured under a general allowance for credit losses methodology.

Nonaccrual loans, including TDRs that have not met the six month minimum performance criterion, are reported in this report as non-performing loans. For all loan classes, it is the Company’s policy to have any restructured loans which are on nonaccrual status prior to being restructured remain on nonaccrual status until six months of satisfactory borrower performance, at which time management would consider its return to accrual status. A loan is generally classified as nonaccrual when the Company believes that receipt of principal and interest is questionable under the terms of the loan agreement. Most generally, this is at 90 or more days past due.

The balance of nonaccrual restructured loans, which is included in total nonaccrual loans, was $3,029,000 at December 31, 2011. If the restructured loan is on accrual status prior to being restructured, it is reviewed to determine if the restructured loan should remain on accrual status. The balance of accruing restructured loans was $6,939,000 at December 31, 2011. Loans that are considered TDR are classified as performing, unless they are on nonaccrual status or greater than 90 days past due, as of the end of the most recent quarter. All TDRs are considered impaired by the Company, unless it is determined that the borrower has met the six month satisfactory performance period under the modified terms. On at least a quarterly basis, the Company reviews all TDR loans to determine if the loan meets this criterion.

With regard to determination of the amount of the allowance for credit losses, all accruing restructured loans are considered to be impaired. As a result, the determination of the amount of impaired loans for each portfolio segment within troubled debt restructurings is the same as detailed previously above.

The following table presents information regarding troubled debt restructurings by class as of December 31, 2011 and new troubled debt restructuring for the year ended December 31, 2011.

	At December 31, 2011				For the Year Ended 12/31/2011
	# of Loans		Total Troubled Debt Restructured		# of Loans		Current Balance		Pre-Modification Recorded Balance		Post-Modification Recorded Balance
Residential Real Estate
Construction		—	$	—		—	$	—	$	—	$	—
One-to-four family residential		10		3,551		4		1,358		1,364		1,363
Multi-family residential		1		1,966		1		1,966		1,735		1,987
Nonresidential real estate and agricultural land		5		2,405		2		1,285		1,408		1,285
Land not agricultural		1		1,971		—				—		—
Commercial		2		58		1		23		46		46
Consumer		1		17		1		17		18		19
		20	$	9,968		9	$	4,649	$	4,571	$	4,699

Of the loans restructured during the year ended December 31, 2011, four loans, totaling $1,042,000, were refinanced after bankruptcy or foreclosure based on reaffirmation of the note or a deficiency note. All four were made at market rate or above and are listed as troubled debt due to the borrower’s inability to cash flow. Two loans were refinanced at slightly below market rates, with taxes and insurance escrowed, one of which consolidated 28 individual loans and provided superior collateral coverage to the Company. These two loans totaled $2.9 million. One loan, totaling $329,000, was restructured for a longer term, at or above market rate, to enable the borrower to recover and is listed as troubled debt due to the borrower’s inability to cash flow. This loan was escrowed for taxes and insurance. Finally, two loans, one for an individual as a result of a signed forbearance agreement and the second for an investment property, were refinanced at a below market rate for twelve months to provide an opportunity for the borrowers to sell the properties or recover. The total of these loans was $357,000.

Financial impact of these restructurings was immaterial to the financials of the Company at December 31, 2011.

Three loans totaling $1.3 million, identified and reported as TDR during the year ended December 31, 2011, were considered in default during the period. The Company defines default in this instance as being either past due 90 days or more at the end of the quarter or in the legal process of foreclosure.