Loans and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2012

Loans and Allowance for Loan Losses [Abstract]

Loans and Allowance for Loan Losses

Note 4. Loans and Allowance for Loan Losses

Loans at September 30, 2012 and December 31, 2011 consisted of the following:

	September 30, 2012			December 31, 2011
Commercial business	$	8,327		$	6,986
Commercial real estate		41,852			38,348
One-to-four family		158,560			150,613
Home equity		8,730			9,612
Consumer		6,145			8,318
		223,614			213,877
Premiums, net		69			71
Deferred loan costs, net		561			494
Allowance for loan losses		(2,290	)		(1,754	)
	$	221,954		$	212,688

The Bank originates loans to individuals and businesses, geographically concentrated primarily near the Bank’s offices in Dallas and Plano, Texas. Loan balances, interest rates, loan terms and collateral requirements vary according to the type of loan offered and overall credit-worthiness of the potential borrower.

Commercial business. Commercial business loans are made to customers for the purpose of acquiring equipment and other general business purposes. Commercial business loans are made based primarily on the historical and projected cash flow of the borrower and, to a lesser extent, the underlying collateral. Commercial business loans generally carry higher risk of default since their repayment generally depends on the successful operation of the business and the sufficiency of collateral.

Commercial real estate. Commercial real estate loans are secured primarily by office buildings, retail centers, owner-occupied offices, condominiums, developed lots and land. Commercial real estate loans are underwritten based on the economic viability of the property and creditworthiness of the borrower, with emphasis given to projected cash flow as a percentage of debt service requirements. These loans carry significant credit risks as they involve larger balances concentrated with single borrowers or groups of related borrowers. Repayment of loans secured by income-producing properties generally depends on the successful operation of the real estate project and may be subject to a greater extent to adverse market conditions and the general economy.

One-to-four family. One-to-four family loans are underwritten based on the applicant’s employment and credit history and the appraised value of the property.

Home equity. Home equity loans are underwritten similar to one-to-four family loans. Collateral value could be negatively impacted by declining real estate values.

Consumer. Consumer loans include automobile, signature and other consumer loans. Potential credit risks include rapidly depreciable assets, such as automobiles, which could adversely affect the value of the collateral.

Following is an age analysis of past due loans by loan class as of September 30, 2012 and December 31, 2011:

	Commercial Business		Commercial Real Estate		One-to-Four Family		Home Equity		Consumer		Total
At September 30, 2012:
Past Due:
30-59 days	$	—	$	—	$	1,529	$	—	$	3	$	1,532
60-89 days		—		—		758		—		—		758
90 days or more		—		—		—		—		—		—
Total past due		—		—		2,287		—		3		2,290
Current		8,327		41,852		156,273		8,730		6,142		221,324
Total loans	$	8,327	$	41,852	$	158,560	$	8,730	$	6,145	$	223,614
At December 31, 2011
Past Due:
30-59 days	$	—	$	—	$	2,457	$	27	$	16	$	2,500
60-89 days		—		—		161		—		1		162
90 days or more		—		—		207		—		—		207
Total past due		—		—		2,825		27		17		2,869
Current		6,986		38,348		147,788		9,585		8,301		211,008
Total loans	$	6,986	$	38,348	$	150,613	$	9,612	$	8,318	$	213,877

Effective July 1, 2012, the Bank utilizes a ten-point internal risk rating system for commercial real estate and commercial business loans, which provides a comprehensive analysis of the credit risk inherent in each loan. Prior to that date, the Bank utilized a similar nine-point system. The rating system provides for five pass ratings. Rating grades six through ten comprise the adversely rated credits.

The Bank classifies problem and potential problem loans for all loan types using the classifications of special mention, substandard, substandard nonaccrual, doubtful and loss, which for commercial real estate and commercial business loans correspond to the risk ratings of six, seven, eight, nine and ten, respectively. The classifications are updated, when warranted.

A loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard and substandard nonaccrual loans include those characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans or portions of loans classified as loss, are those considered uncollectible and of such little value that their continuance is not warranted. Loans that do not expose the Bank to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve management’s close attention, are required to be designated as special mention.

Following is a summary of loans by grade or classification as of September 30, 2012 and December 31, 2011:

	Commercial Business		Commercial Real Estate		One-to-Four Family		Home Equity		Consumer		Total
At September 30, 2012:
Credit Quality Indicator:
Credit Risk Profile by Grade or Classification:
Pass	$	8,327	$	34,605	$	154,141	$	8,730	$	6,088	$	211,891
Special Mention		—		—		1,036		—		45		1,081
Substandard		—		575		1,692		—		—		2,267
Substandard Nonaccrual		—		6,672		1,691		—		12		8,375
Doubtful		—		—		—		—		—		—
Loss		—		—		—		—		—		—
Total	$	8,327	$	41,852	$	158,560	$	8,730	$	6,145	$	223,614
At December 31, 2011
Credit Quality Indicator:
Credit Risk Profile by Grade or Classification:
Pass	$	6,986	$	31,170	$	148,433	$	9,600	$	8,281	$	204,470
Special Mention		—		—		687		12		37		736
Substandard		—		7,178		1,493		—		—		8,671
Doubtful		—		—		—		—		—		—
Loss		—		—		—		—		—		—
Total	$	6,986	$	38,348	$	150,613	$	9,612	$	8,318	$	213,877

Impaired loans by loan class at September 30, 2012 and December 31, 2011 were summarized as follows:

	Commercial Business		Commercial Real Estate		One-to-Four Family		Home Equity		Consumer		Total
At September 30, 2012:
Impaired loans:
Impaired loans with an allowance for loan losses	$	—	$	2,999	$	388	$	—	$	12	$	3,399
Impaired loans with no allowance for loan losses		—		3,673		1,496		—		8		5,177
Total impaired loans	$	—	$	6,672	$	1,884	$	—	$	20	$	8,576
Unpaid principal balance of impaired loans	$	—	$	6,672	$	1,884	$	—	$	20	$	8,576
Allowance for loan losses on impaired loans	$	—	$	425	$	94	$	—	$	3	$	522
For the three months ended September 30, 2012:
Average recorded investment in impaired loans	$	—	$	5,935	$	1,908	$	—	$	22	$	7,865
Interest income recognized on impaired loans	$	—	$	81	$	19	$	—	$	—	$	100
For the three months ended September 30, 2011:
Average recorded investment in impaired loans	$	319	$	5,523	$	2,516	$	132	$	21	$	8,511
Interest income recognized on impaired loans	$	—	$	77	$	28	$	1	$	—	$	106
For the nine months ended September 30, 2012:
Average recorded investment in impaired loans	$	—	$	5,596	$	1,906	$	6	$	25	$	7,533
Interest income recognized on impaired loans	$	—	$	282	$	57	$	—	$	1	$	340
For the nine months ended September 30, 2011:
Average recorded investment in impaired loans	$	222	$	5,335	$	2,314	$	123	$	35	$	8,029
Interest income recognized on impaired loans	$	3	$	275	$	74	$	5	$	2	$	359
At December 31, 2011
Impaired loans:
Impaired loans with an allowance for loan losses	$	—	$	—	$	16	$	—	$	15	$	31
Impaired loans with no allowance for loan losses		—		5,258		1,741		12		15		7,026
Total impaired loans	$	—	$	5,258	$	1,757	$	12	$	30	$	7,057
Unpaid principal balance of impaired loans	$	—	$	5,258	$	1,757	$	12	$	30	$	7,057
Allowance for loan losses on impaired loans	$	—	$	—	$	14	$	—	$	5	$	19

Nonperforming loans by loan class at September 30, 2012 and December 31, 2011 were summarized as follows:

	Commercial Business		Commercial Real Estate		One-to-Four Family		Home Equity		Consumer		Total
At September 30, 2012:
Nonperforming loans:
Nonaccrual loans	$	—	$	6,672	$	1,691	$	—	$	12	$	8,375
Loans past due 90 days and still accruing		—		—		—		—		—		—
Troubled debt restructurings (not included in nonaccrual loans)		—		—		183		—		14		197
	$	—	$	6,672	$	1,874	$	—	$	26	$	8,572
At December 31, 2011
Nonperforming loans:
Nonaccrual loans	$	—	$	—	$	207	$	—	$	—	$	207
Loans past due 90 days and still accruing		—		—		—		—		—		—
Troubled debt restructurings (not included in nonaccrual loans)		—		5,258		1,497		—		64		6,819
	$	—	$	5,258	$	1,704	$	—	$	64	$	7,026

For the nine months ended September 30, 2012 and 2011, gross interest income that would have been recorded had our nonaccruing loans been current in accordance with their original terms was $492 and $33, respectively. Interest income recognized on such loans for the nine months ended September 30, 2012 and 2011 was $418 and $18, respectively.

Following is a summary of the activity in the allowance for loan losses by loan class for the three and nine months ended September 30, 2012 and 2011 and total investment in loans at September 30, 2012, December 31, 2011 and September 30, 2011:

	Commercial Business		Commercial Real Estate		One-to-Four Family			Home Equity			Consumer			Total
Three Months Ended September 30, 2012
Allowance for Loan Losses:
Balance, beginning of period	$	193	$	974	$	868		$	91		$	60		$	2,186
Provision for loan losses		33		156		(56	)		—			22			155
Loans charged to the allowance		—		—		(23	)		—			(33	)		(56	)
Recoveries of loans previously charged off		—		—		1			1			3			5
Balance, end of period	$	226	$	1,130	$	790		$	92		$	52		$	2,290
Nine Months Ended September 30, 2012
Allowance for Loan Losses:
Balance, beginning of period	$	130	$	624	$	778		$	133		$	89		$	1,754
Provision for loan losses		96		506		273			(15	)		(3	)		857
Loans charged to the allowance		—		—		(263	)		(28	)		(44	)		(335	)
Recoveries of loans previously charged off		—		—		2			2			10			14
Balance, end of period	$	226	$	1,130	$	790		$	92		$	52		$	2,290
At September 30, 2012
Allowance for Loan Losses:
Ending balance: individually evaluated for impairment	$	—	$	425	$	94		$	—		$	3		$	522
Ending balance: collectively evaluated for impairment	$	226	$	705	$	696		$	92		$	49		$	1,768
Loans:
Ending balance	$	8,327	$	41,852	$	158,560		$	8,730		$	6,145		$	223,614
Ending balance individually evaluated for impairment	$	—	$	6,672	$	1,884		$	—		$	20		$	8,576
Ending balance collectively evaluated for impairment	$	8,327	$	35,180	$	156,676		$	8,730		$	6,125		$	215,038
At December 31, 2011:
Allowance for Loan Losses:
Ending balance: individually evaluated for impairment	$	—	$	—	$	14		$	—		$	5		$	19
Ending balance: collectively evaluated for impairment	$	130	$	624	$	764		$	133		$	84		$	1,735
Loans:
Ending balance	$	6,986	$	38,348	$	150,613		$	9,612		$	8,318		$	213,877
Ending balance individually evaluated for impairment	$	—	$	5,258	$	1,757		$	12		$	30		$	7,057
Ending balance collectively evaluated for impairment	$	6,986	$	33,090	$	148,856		$	9,600		$	8,288		$	206,820

	Commercial Business			Commercial Real Estate			One-to-Four Family			Home Equity		Consumer			Total
Three Months Ended September 30, 2011:
Allowance for Loan Losses:
Balance, beginning of period	$	57		$	726		$	917		$	70	$	89		$	1,859
Provision for loan losses		136			74			79			20		—			309
Loans charged to the allowance		—			(230	)		(202	)		—		(9	)		(441	)
Recoveries of loans previously charged off		—			—			—			—		5			5
Balance, end of period	$	193		$	570		$	794		$	90	$	85		$	1,732
Nine Months Ended September 30, 2011:
Allowance for Loan Losses:
Balance, beginning of period	$	131		$	1,081		$	736		$	60	$	128		$	2,136
Provision for loan losses		187			186			333			30		(16	)		720
Loans charged to the allowance		(125	)		(697	)		(275	)		—		(40	)		(1,137	)
Recoveries of loans previously charged off		—			—			—			—		13			13
Balance, end of period	$	193		$	570		$	794		$	90	$	85		$	1,732
At September 30, 2011
Allowance for Loan Losses:
Ending balance: individually evaluated for impairment	$	119		$	—		$	117		$	37	$	—		$	273
Ending balance: collectively evaluated for impairment	$	74		$	570		$	677		$	53	$	85		$	1,459
At September 30, 2011:
Loans:
Ending balance	$	4,719		$	34,388		$	143,080		$	9,586	$	8,786		$	200,559
Ending balance individually evaluated for impairment	$	319		$	5,258		$	2,021		$	151	$	19		$	7,768
Ending balance collectively evaluated for impairment	$	4,400		$	29,130		$	141,059		$	9,435	$	8,767		$	192,791

The $137 increase in the provision for loan losses for the nine months ended September 30, 2012 versus September 30, 2011 was primarily attributable to an increase in the loss experience factors used to determine the general allowance for loan losses.

The Company establishes an allocated allowance when loans are determined to be impaired, including troubled debt restructurings. The allowance is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. The Company has allocated allowance for loan losses of $297 and $5 to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2012 and December 31, 2011. The Company has not committed to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings at September 30, 2012 and December 31, 2011.

During the periods ended September 30, 2012 and 2011, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from nine months to five years. Modifications involving an extension of the maturity date were for periods ranging from three months to five years.

Following is a summary of troubled debt restructurings during the three and nine months ended September 30, 2012 and 2011 and loans that have been restructured during the previous twelve months that subsequently defaulted during the three and nine months ended September 30, 2012 and 2011:

	Commercial Business		Commercial Real Estate		One-to-Four Family		Home Equity		Consumer		Total
Troubled debt restructurings during the three months ended September 30, 2012:
Number of contracts		—		—		—		—		—		—
Pre-restructuring outstanding recorded investment	$	—	$	—	$	—	$	—	$	—	$	—
Post-restructuring outstanding recorded investment	$	—	$	—	$	—	$	—	$	—	$	—
Troubled debt restructurings during the previous twelve months that subsequently defaulted during the three months ended September 30, 2012
Number of contracts		—		—		—		—		—		—
Recorded investment	$	—	$	—	$	—	$	—	$	—	$	—
Troubled debt restructurings during the nine months ended September 30, 2012:
Number of contracts		—				1		—				1
Pre-restructuring outstanding recorded investment	$	—	$	—	$	392	$	—	$	—	$	392
Post-restructuring outstanding recorded investment	$	—	$	—	$	392	$	—	$	—	$	392
Troubled debt restructurings during the previous twelve months that subsequently defaulted during the nine months ended September 30, 2012
Number of contracts		—		—		3		—		—		3
Recorded investment	$	—	$	—	$	1,267	$	—	$	—	$	1,267
Troubled debt restructurings during the three months ended September 30, 2011:
Number of contracts		—		—		2		—		1		3
Pre-restructuring outstanding recorded investment	$	—	$	—	$	483	$	—	$	3	$	486
Post-restructuring outstanding recorded investment	$	—	$	—	$	499	$	—	$	3	$	502
Troubled debt restructurings during the previous twelve months that subsequently defaulted during the three months ended September 30, 2011
Number of contracts		—		—		—		—		—		—
Recorded investment	$	—	$	—	$	—	$	—	$	—	$	—
Troubled debt restructurings during the nine months ended September 30, 2011:
Number of contracts		—		3		2		—		2		7
Pre-restructuring outstanding recorded investment	$	—	$	5,581	$	483	$	—	$	12	$	6,076
Post-restructuring outstanding recorded investment	$	—	$	5,251	$	499	$	—	$	12	$	5,762
Troubled debt restructurings during the previous twelve months that subsequently defaulted during the nine months ended September 30, 2011
Number of contracts		—		—		1		—		—		1
Recorded investment	$	—	$	—	$	71	$	—	$	—	$	71

The Bank originated $59,109 and $34,992 in loans during the nine months ended September 30, 2012 and 2011, respectively, which were placed with various correspondent lending institutions. Proceeds on sales of these loans were $56,930 and $35,239 for the nine months ended September 30, 2012 and 2011, respectively. Gains on sales of these loans were $1,509 and $883 for the nine months ended September 30, 2012 and 2011, respectively. These loans were sold with servicing rights released.

Loans serviced for the benefit of others amounted to $3,216, $3,257 and $2,570 at September 30, 2012, December 31, 2011 and September 30, 2011, respectively.