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ALLOWANCE FOR LOAN LOSSES
 3 Months Ended
Mar. 31, 2013
Allowance For Loan Losses [Abstract]  
Allowance For Loan Losses [Text Block]

5. ALLOWANCE FOR LOAN LOSSES

The Company separates its loan portfolio into segments to perform the calculation and analysis of the allowance for loan losses. The six segments analyzed are Agriculture and Agricultural Real Estate, Commercial, Commercial Real Estate, Construction Real Estate, Residential Real Estate, and Consumer and Other. The Agriculture and Agricultural Real Estate segment includes all loans to finance agricultural production and all loans secured by agricultural real estate. This segment does not include loans to finance agriculture that are secured by residential real estate, which are included in the Residential Real Estate segment. The Commercial segment includes loans to finance commercial and industrial businesses that are not secured by real estate. The Commercial Real Estate segment includes loans secured by non-farm, non-residential real estate. The Construction Real Estate segment includes loans to finance construction and land development. This includes residential and commercial construction and land development. The Residential Real Estate segment includes all loans, other than construction loans, that are secured by single family and multi family residential real estate properties. The Consumer and Other segment includes all loans not included in any other segment. These are primarily loans to consumers for household, family, and other personal expenditures, such as autos, boats, and recreational vehicles.

Activity in the allowance for loan losses during the three months ended March 31, 2013 was as follows (000s omitted):

 

    Agriculture
and
Agricultural
Real Estate		     Commercial     Commercial
Real Estate		     Construction
Real Estate		     Residential
Real Estate		     Consumer and
Other		     Total  
                                           
Allowance for loan losses: For the three months ended March 31, 2013                          
Beginning Balance   $ 76     $ 2,224     $ 7,551     $ 2,401     $ 4,715     $ 332     $ 17,299  
Charge-offs     -       (202 )     (813 )     (18 )     (433 )     (121 )     (1,587 )
Recoveries     -       236       64       274       80       33       687  
Provision     (6 )     (105 )     1,106       (188 )     746       (53 )     1,500  
Ending balance   $ 70     $ 2,153     $ 7,908     $ 2,469     $ 5,108     $ 191     $ 17,899  
                                                         
Allowance for loan losses as of March 31, 2013                                    
Ending balance individually evaluated for impairment   $ -     $ 1,330     $ 2,312     $ 1,863     $ 2,084     $ 100     $ 7,689  
Ending balance collectively   evaluated for impairment     70       823       5,596       606       3,024       91       10,210  
Ending balance   $ 70     $ 2,153     $ 7,908     $ 2,469     $ 5,108     $ 191     $ 17,899  
                                                         
Loans as of March 31, 2013                                                        
Ending balance individually evaluated for impairment   $ 420     $ 4,193     $ 35,960     $ 6,225     $ 18,668     $ 346     $ 65,812  
Ending balance collectively   evaluated for impairment     11,815       56,873       238,580       10,853       216,655       14,170       548,946  
Ending balance   $ 12,235     $ 61,066     $ 274,540     $ 17,078     $ 235,323     $ 14,516     $ 614,758  

 

Activity in the allowance for loan losses during the three months ended March 31, 2012 was as follows (000s omitted):

 

    Agriculture
and
Agricultural
Real Estate		     Commercial     Commercial
Real Estate		     Construction
Real Estate		     Residential
Real Estate		     Consumer and
Other		     Total  
                                           
Allowance for loan losses: For the three months ended March 31, 2012                              
Beginning Balance   $ 64     $ 2,184     $ 9,351     $ 2,632     $ 6,227     $ 407     $ 20,865  
Charge-offs     -       (96 )     (1,573 )     (462 )     (654 )     (47 )     (2,832 )
Recoveries     -       66       9       37       50       36       198  
Provision     5       586       1,519       113       7       20       2,250  
Ending balance   $ 69     $ 2,740     $ 9,306     $ 2,320     $ 5,630     $ 416     $ 20,481  
                                                         
Allowance for loan losses as of March 31, 2012                                          
Ending balance individually evaluated for impairment   $ 69     $ 1,477     $ 3,408     $ 1,257     $ 2,453     $ 73     $ 8,737  
Ending balance collectively evaluated for impairment     -       1,263       5,898       1,063       3,177       343       11,744  
Ending balance   $ 69     $ 2,740     $ 9,306     $ 2,320     $ 5,630     $ 416     $ 20,481  
                                                         
Loans as of March 31, 2012                                                        
Ending balance individually evaluated for impairment   $ 1,051     $ 3,975     $ 36,492     $ 8,449     $ 19,568     $ 236     $ 69,771  
Ending balance collectively evaluated for impairment     14,042       60,632       265,417       13,492       230,415       12,884       596,882  
Ending balance   $ 15,093     $ 64,607     $ 301,909     $ 21,941     $ 249,983     $ 13,120     $ 666,653  

 

Activity in the allowance for loan losses during the year ended December 31, 2012 was as follows (000s omitted):

 

    Agriculture
and
Agricultural
Real Estate		     Commercial     Commercial
Real Estate		     Construction
Real Estate		     Residential
Real Estate		     Consumer and
Other		     Total  
                                           
Allowance for loan losses: For the year ended December 31, 2012                              
Beginning Balance   $ 64     $ 2,184     $ 9,351     $ 2,632     $ 6,227     $ 407     $ 20,865  
Charge-offs     (97 )     (499 )     (8,156 )     (1,036 )     (2,031 )     (196 )     (12,015 )
Recoveries     -       347       80       240       274       158       1,099  
Provision     109       192       6,276       565       245       (37 )     7,350  
Ending balance   $ 76     $ 2,224     $ 7,551     $ 2,401     $ 4,715     $ 332     $ 17,299  
                                                         
Allowance for loan losses as of December 31, 2012                                          
Ending balance individually evaluated for impairment   $ -     $ 1,316     $ 2,084     $ 1,820     $ 1,994     $ 124     $ 7,338  
Ending balance collectively evaluated for impairment     76       908       5,467       581       2,721       208       9,961  
Ending balance   $ 76     $ 2,224     $ 7,551     $ 2,401     $ 4,715     $ 332     $ 17,299  
                                                         
Loans as of December 31, 2012                                                        
Ending balance individually evaluated for impairment   $ 409     $ 4,519     $ 36,471     $ 7,410     $ 18,051     $ 389     $ 67,249  
Ending balance collectively evaluated for impairment     11,595       53,675       246,543       11,009       222,281       14,897       560,000  
Ending balance   $ 12,004     $ 58,194     $ 283,014     $ 18,419     $ 240,332     $ 15,286     $ 627,249  

 

Each period the provision for loan losses in the income statement results from the combination of an estimate by Management of loan losses that occurred during the current period and the ongoing adjustment of prior estimates of losses occurring in prior periods.

 

The provision for loan losses increases the allowance for loan losses, a valuation account which appears on the consolidated balance sheets. As the specific customer and amount of a loan loss is confirmed by gathering additional information, taking collateral in full or partial settlement of the loan, bankruptcy of the borrower, etc., the loan is charged off, reducing the allowance for loan losses. If, subsequent to a charge off, the Bank is able to collect additional amounts from the customer or sell collateral worth more than earlier estimated, a recovery is recorded.

 

To serve as a basis for making this provision, the Bank maintains an extensive credit risk monitoring process that considers several factors including: current economic conditions affecting the Bank’s customers, the payment performance of individual loans and pools of homogeneous loans, portfolio seasoning, changes in collateral values, and detailed reviews of specific loan relationships.

  

The Company utilizes an internal loan grading system to assign a risk grade to all commercial loans, all renegotiated loans, and each commercial credit relationship. Grades 1 through 4 are considered “pass” credits and grades 5 through 9 are considered “watch” credits and are subject to greater scrutiny. Loans with grades 6 and higher are considered substandard and most are evaluated for impairment. A description of the general characteristics of each grade is as follows:

· Grade 1 – Excellent – Loans secured by marketable collateral, with adequate margin, or supported by strong financial statements. Probability of serious financial deterioration is unlikely. Possess a sound repayment source and a secondary source. This classification will also include all loans secured by certificates of deposit or cash equivalents.
· Grade 2 – Satisfactory – Loans that have less than average risk and clearly demonstrate adequate debt service coverage. These loans may have some vulnerability, but are sufficiently strong to have minimal deterioration if adverse factors are encountered, and are expected to be fully collectable.
· Grade 3 – Average – Loans that have a reasonable amount of risk and may exhibit vulnerability to deterioration if adverse factors are encountered. These loans should demonstrate adequate debt service coverage but warrant a higher level of monitoring to ensure that weaknesses do not advance.
· Grade 4 – Pass/Watch – Loans that are considered “pass credits” yet appear on the “watch list”. Credit deficiency or potential weakness may include a lack of current or complete financial information. The level of risk is considered acceptable so long as the loan is given additional management supervision.
· Grade 5 – Watch – Loans that possess some credit deficiency or potential weakness that if not corrected, could increase risk in the future. The source of loan repayment is sufficient but may be considered inadequate by the Bank’s standards.

· Grade 6 – Substandard – Loans that exhibit one or more of the following characteristics: (1) uncertainty of repayment from primary source and financial deterioration currently underway; (2) inadequate current net worth and paying capacity of the obligor; (3) reliance on secondary source of repayment such as collateral liquidation or guarantees; (4) distinct possibility the Bank will sustain loss if deficiencies are not corrected; (5) unusual courses of action are needed to maintain probability of repayment; (6) insufficient cash flow to repay principal but continuing to pay interest; (7) the Bank is subordinated or unsecured due to flaws in documentation; (8) loans are restructured or are on nonaccrual status due to concessions to the borrower when compared to normal terms; (9) the Bank is contemplating foreclosure or legal action due to deterioration in the loan; or (10) there is deterioration in conditions and the borrower is highly vulnerable to these conditions.
· Grade 7 – Doubtful – Loans that exhibit one or more of the following characteristics: (1) loans with the weaknesses of Substandard loans and collection or liquidation is not probable to result in payment in full; (2) the primary source of repayment is gone and the quality of the secondary source is doubtful; or (3) the possibility of loss is high, but important pending factors may strengthen the loan.
· Grades 8 & 9 - Loss – Loans are considered uncollectible and of such little value that carrying them on the Bank’s financial statements is not feasible.

 

The assessment of compensating factors may result in a rating plus or minus one grade from those listed above. These factors include, but are not limited to collateral, guarantors, environmental conditions, history, plan/projection reasonableness, quality of information, and payment delinquency.

 

The portfolio segments in each credit risk grade as of March 31, 2013 are as follows (000s omitted):

 

    Agriculture
and
Agricultural
Real Estate		     Commercial     Commercial
Real Estate		     Construction
Real Estate		     Residential
Real Estate		     Consumer and
Other		     Total  
Not Rated   $ 162     $ 729     $ -     $ 2,985     $ 151,673     $ 10,094     $ 165,643  
1     -       3,453       -       -       -       -       3,453  
2     48       103       1,784       -       697       -       2,632  
3     864       5,020       9,497       147       1,764       4       17,296  
4     10,232       37,508       166,200       3,106       42,172       1       259,219  
5     315       5,943       43,183       4,210       12,106       4,093       69,850  
6     614       8,310       53,876       6,630       26,911       324       96,665  
7     -       -       -       -       -       -       -  
8     -       -       -       -       -       -       -  
9     -       -       -       -       -       -       -  
Total   $ 12,235     $ 61,066     $ 274,540     $ 17,078     $ 235,323     $ 14,516     $ 614,758  
                                                         
Performing   $ 11,731     $ 56,651     $ 238,419     $ 10,629     $ 213,906     $ 13,969     $ 545,305  
Nonperforming     504       4,415       36,121       6,449       21,417       547       69,453  
Total   $ 12,235     $ 61,066     $ 274,540     $ 17,078     $ 235,323     $ 14,516     $ 614,758  

 

The portfolio segments in each credit risk grade as of December 31, 2012 are as follows (000s omitted):

 

    Agriculture
and
Agricultural
Real Estate		     Commercial     Commercial
Real Estate		     Construction
Real Estate		     Residential
Real Estate		     Consumer and
Other		     Total  
Not Rated   $ 126     $ 4,182     $ -     $ 2,927     $ 159,743     $ 10,706     $ 177,684  
1     -       2,977       -       -       -       -       2,977  
2     48       114       1,850       82       731       -       2,825  
3     880       4,894       10,735       163       1,885       7       18,564  
4     9,907       29,935       167,207       3,184       40,392       16       250,641  
5     322       9,713       45,262       5,086       8,426       3,940       72,749  
6     721       6,379       57,960       6,977       29,155       617       101,809  
7     -       -       -       -       -       -       -  
8     -       -       -       -       -       -       -  
9     -       -       -       -       -       -       -  
Total   $ 12,004     $ 58,194     $ 283,014     $ 18,419     $ 240,332     $ 15,286     $ 627,249  
                                                         
Performing   $ 11,397     $ 54,730     $ 246,107     $ 10,783     $ 219,753     $ 14,675     $ 557,445  
Nonperforming     607       3,464       36,907       7,636       20,579       611       69,804  
Total   $ 12,004     $ 58,194     $ 283,014     $ 18,419     $ 240,332     $ 15,286     $ 627,249  

 

Loans are considered past due when contractually required payment of interest or principal has not been received. The amount classified as past due is the entire principal balance outstanding of the loan, not just the amount of payments that are past due. The following is a summary of past due loans as of March 31, 2013 and December 31, 2012 (000s omitted):

 

March 31, 2013   30-59 Days
Past Due		     60-89 Days
Past Due		     >90 Days Past
Due		     Total Past Due     Current     Total Loans     Recorded
Investment >90
Days Past Due
and Accruing		  
                                           
Agriculture and Agricultural Real Estate   $ 201     $ -     $ 80     $ 281     $ 11,954     $ 12,235     $ -  
Commercial     608       187       855       1,650       59,416       61,066       3  
Commercial Real Estate     3,104       2,962       7,102       13,168       261,372       274,540       -  
Construction Real Estate     955       782       1,564       3,301       13,777       17,078       -  
Residential Real Estate     5,663       860       3,425       9,948       225,375       235,323       311  
Consumer and Other     99       57       58       214       14,302       14,516       -  
Total   $ 10,630     $ 4,848     $ 13,084     $ 28,562     $ 586,196     $ 614,758     $ 314  

 

December 31, 2012   30-59 Days
Past Due		     60-89 Days
Past Due		     >90 Days Past
Due		     Total Past Due     Current     Total Loans     Recorded
Investment >90
Days Past Due
and Accruing		  
                                           
Agriculture and Agricultural Real Estate   $ 208     $ -     $ 145     $ 353     $ 11,651     $ 12,004     $ -  
Commercial     927       19       1,100       2,046       56,148       58,194       1  
Commercial Real Estate     1,789       930       11,350       14,069       268,945       283,014       -  
Construction Real Estate     127       1,437       1,867       3,431       14,988       18,419       -  
Residential Real Estate     5,738       978       3,121       9,837       230,495       240,332       -  
Consumer and Other     222       61       164       447       14,839       15,286       -  
Total   $ 9,011     $ 3,425     $ 17,747     $ 30,183     $ 597,066     $ 627,249     $ 1  

 

Loans are placed on non-accrual status when, in the opinion of Management, the collection of additional interest is doubtful. Loans are automatically placed on non-accrual status upon becoming ninety days past due, however, loans may be placed on non-accrual status regardless of whether or not they are past due. All cash received on non-accrual loans is applied to the principal balance. Loans are considered for return to accrual status on an individual basis when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The following is a summary of non-accrual loans as of March 31, 2013 and December 31, 2012 (000s omitted):

 

    March 31, 2013     December 31, 2012  
Agriculture and Agricultural Real Estate   $ 84     $ 198  
Commercial     3,153       1,578  
Commercial Real Estate     17,415       17,950  
Construction Real Estate     2,496       3,438  
Residential Real Estate     8,165       7,870  
Consumer and Other     245       309  
Total   $ 31,558     $ 31,343  

 

For loans deemed to be impaired due to an expectation that all contractual payments will probably not be received, impairment is measured by comparing the Bank’s recorded investment in the loan to the present value of expected cash flows discounted at the loan’s effective interest rate, the fair value of the collateral, or the loan’s observable market price.

 

The following is a summary of impaired loans as of March 31, 2013 and 2012 (000s omitted):

 

March 31, 2013   Recorded
Investment		     Unpaid
Principal
Balance		     Related
Allowance		     Average
Recorded
Investment for
the Three
Months Ended		     Interest
Income
Recognized in
the Three
Months
Ended		  
                               
With no related allowance recorded:                                        
Agriculture and Agricultural Real Estate   $ 420     $ 923     $ -     $ 423     $ 12  
Commercial     682       752       -       775       9  
Commercial Real Estate     17,383       22,113       -       18,234       191  
Construction Real Estate     1,529       2,545       -       1,950       37  
Residential Real Estate     9,186       10,478       -       10,376       128  
Consumer and Other     -       -       -       -       -  
                                         
With an allowance recorded:                                        
Agriculture and Agricultural Real Estate     -       -       -       -       -  
Commercial     3,511       3,894       1,330       3,513       44  
Commercial Real Estate     18,577       24,502       2,312       20,045       160  
Construction Real Estate     4,696       5,666       1,863       4,744       41  
Residential Real Estate     9,482       10,108       2,084       9,705       85  
Consumer and Other     346       341       100       346       5  
                                         
Total:                                        
Agriculture and Agricultural Real Estate   $ 420     $ 923     $ -     $ 423     $ 12  
Commercial     4,193       4,646       1,330       4,288       53  
Commercial Real Estate     35,960       46,615       2,312       38,279       351  
Construction Real Estate     6,225       8,211       1,863       6,694       78  
Residential Real Estate     18,668       20,586       2,084       20,081       213  
Consumer and Other     346       341       100       346       5  

 

March 31, 2012   Recorded
Investment		     Unpaid
Principal
Balance		     Related
Allowance		     Average
Recorded
Investment for
the Three
Months Ended		     Interest
Income
Recognized in
the Three
Months Ended		  
                               
With no related allowance recorded:                                        
Agriculture and Agricultural Real Estate   $ 430     $ 978     $ -     $ 478     $ 17  
Commercial     198       376       -       344       7  
Commercial Real Estate     11,126       13,764       -       11,721       93  
Construction Real Estate     730       1,039       -       762       6  
Residential Real Estate     6,603       8,989       -       7,599       136  
Consumer and Other     88       89       -       89       1  
                                         
With an allowance recorded:                                        
Agriculture and Agricultural Real Estate     621       621       69       618       1  
Commercial     3,777       4,179       1,477       3,833       56  
Commercial Real Estate     25,366       33,357       3,408       25,832       184  
Construction Real Estate     7,719       11,469       1,257       8,337       80  
Residential Real Estate     12,965       15,629       2,453       13,297       145  
Consumer and Other     148       148       73       149       3  
                                         
Total:                                        
Agriculture and Agricultural Real Estate   $ 1,051     $ 1,599     $ 69     $ 1,096     $ 18  
Commercial     3,975       4,555       1,477       4,177       63  
Commercial Real Estate     36,492       47,121       3,408       37,553       277  
Construction Real Estate     8,449       12,508       1,257       9,099       86  
Residential Real Estate     19,568       24,618       2,453       20,896       281  
Consumer and Other     236       237       73       238       4  

 

The following is a summary of impaired loans as of December 31, 2012 (000s omitted):

 

December 31, 2012   Recorded
Investment		     Unpaid
Principal
Balance		     Related
Allowance		     Average
Recorded
Investment for
the Year
Ended		     Interest
Income
Recognized in
the Year
Ended		  
                               
With no related allowance recorded:                                        
Agriculture and Agricultural Real Estate   $ 409     $ 923     $ -     $ 469     $ 54  
Commercial     2,540       2,961       -       2,968       220  
Commercial Real Estate     17,153       21,317       -       18,313       924  
Construction Real Estate     1,007       1,375       -       1,284       201  
Residential Real Estate     9,013       10,390       -       10,213       373  
Consumer and Other     -       -       -       -       -  
                                         
With an allowance recorded:                                        
Agriculture and Agricultural Real Estate     -       -       -       -       -  
Commercial     1,979       2,157       1,316       2,032       88  
Commercial Real Estate     19,318       26,508       2,084       22,119       918  
Construction Real Estate     6,403       9,060       1,820       6,946       211  
Residential Real Estate     9,038       9,520       1,994       9,189       413  
Consumer and Other     389       383       124       393       26  
                                         
Total:                                        
Agriculture and Agricultural Real Estate   $ 409     $ 923     $ -     $ 469     $ 54  
Commercial     4,519       5,118       1,316       5,000       308  
Commercial Real Estate     36,471       47,825       2,084       40,432       1,842  
Construction Real Estate     7,410       10,435       1,820       8,230       412  
Residential Real Estate     18,051       19,910       1,994       19,402       786  
Consumer and Other     389       383       124       393       26  

 

The Bank may agree to modify the terms of a loan in order to improve the Bank’s ability to collect amounts due. These modifications may include reduction of the interest rate, extension of the loan term, or in some cases, reduction of the principal balance. Modifications that are performed due to the debtor’s financial difficulties are considered Troubled Debt Restructurings (“TDRs”).

 

Loans that have been classified as TDRs during the three month periods ended March 31, 2013 and March 31, 2012 are as follows (000s omitted from dollar amounts):

 

    Three months ended     Three months ended  
    March 31, 2013     March 31, 2012  
    Number of
Contracts		     Pre-
Modification
Recorded
Principal
Balance		     Post-
Modification
Recorded
Principal
Balance		     Number of
Contracts		     Pre-
Modification
Recorded
Principal
Balance		     Post-
Modification
Recorded
Principal
Balance		  
Agriculture and Agricultural Real Estate     -     $ -     $ -       -     $ -     $ -  
Commercial     3       173       172       6       782       433  
Commercial Real Estate     3       1,461       1,449       8       2,969       1,884  
Construction Real Estate     -       -       -       5       2,686       2,677  
Residential Real Estate     11       986       944       3       515       515  
Consumer and Other     2       249       13       2       27       26  
Total     19     $ 2,869     $ 2,578       24     $ 6,979     $ 5,535  

 

The Bank considers TDRs that become 90 days or more past due under the modified terms as defaulted. There were no loans that became TDRs during the three month periods ended March 31, 2013 and March 31, 2012 that subsequently defaulted during the three month periods ended March 31, 2013 and March 31, 2012, respectively.