Loans

6 Months Ended

Jun. 30, 2011

Loans [Abstract]

LOANS

5.	LOANS
	The composition of loans at June 30, 2011, December 31, 2010 and June 30, 2010 is as follows (dollars in thousands):

	June 30,		December 31,		June 30,
	2011		2010		2010
Commercial real estate	$	198,285	$	194,859	$	208,596
Commercial, financial, and agricultural		84,405		68,858		66,413
One to four family residential real estate		79,013		75,074		71,613
Construction:
Commercial		23,062		33,330		27,219
Consumer		4,181		5,682		6,815
Consumer		5,866		5,283		4,183
Total loans	$	394,812	$	383,086	$	384,839

An analysis of the allowance for loan losses for the six months ended June 30, 2011, the year ended December 31, 2010, and the six months ended June 30, 2010 is as follows (dollars in thousands):

	June 30,			December 31,			June 30,
	2011			2010			2010
Balance at beginning of period	$	6,613		$	5,225		$	5,225
Recoveries on loans previously charged off		21			374			33
Loans charged off		(1,079	)		(5,486	)		(2,587	)
Provision for loan losses		600			6,500			3,700
Balance at end of period	$	6,155		$	6,613		$	6,371

In the first half of 2011, net charge off activity was $1.058 million, or .28% of average loans outstanding compared to net charge-offs of $2.554 million, or .67% of average loans, in the same period in 2010. In the first half of 2011, the Corporation recorded a $.600 million provision for loan loss compared to $3.700 million in the first half of 2010. The Corporation’s allowance for loan loss reserve policy calls for a measurement of the adequacy of the reserve at each quarter end. This process includes an analysis of the loan portfolio to take into account increases in loans outstanding and portfolio composition, historical loss rates, and specific reserve requirements of nonperforming loans.

A breakdown of the allowance for loan losses and recorded balances in loans at June 30, 2011 is as follows (dollars in thousands):

				Commercial,						One to four
	Commercial			financial and			Commercial			family residential			Consumer
	real estate			agricultural			construction			real estate			construction		Consumer			Unallocated			Total
Allowance for loan loss reserve:
Beginning balance ALLR	$	3,460		$	1,018		$	389		$	1,622		$	—	$	—		$	124		$	6,613
Charge-offs		(344	)		(407	)		(62	)		(255	)		—		(11	)					(1,079	)
Recoveries		14			2			—			—			—		5			—			21
Provision		(178	)		541			(64	)		419			—		6			(124	)		600
Ending balance ALLR	$	2,952		$	1,154		$	263		$	1,786		$	—	$	—		$	—		$	6,155
Loans:
Ending balance	$	198,285		$	84,405		$	23,062		$	79,013		$	4,181	$	5,866		$	—		$	394,812
Ending balance ALLR		(2,952	)		(1,154	)		(263	)		(1,786	)		—		—			—			(6,155	)
Net loans	$	195,333		$	83,251		$	22,799		$	77,227		$	4,181	$	5,866		$	—		$	388,657
Ending balance ALLR
Individually evaluated	$	1,144		$	361		$	39		$	845		$	—	$	—		$	—		$	2,389
Collectively evaluated		1,808			793			224			941			—		—			—			3,766
Total	$	2,952		$	1,154		$	263		$	1,786		$	—	$	—		$	—		$	6,155

A breakdown of the allowance for loan losses and recorded balances in loans at December 31, 2010 is as follows (dollars in thousands):

				Commercial,						One to four
	Commercial			financial and			Commercial			family residential			Consumer
	real estate			agricultural			construction			real estate			construction Consumer		Unallocated			Total
Allowance for loan loss reserve:
Beginning balance ALLR	$	3,284		$	1,135		$	386		$	23		$	—	$	13		$	384		$	5,225
Charge-offs		(2,426	)		(1,804	)		(720	)		(416	)		—		(9	)		(111	)		(5,486	)
Recoveries		18			260			67			—			—		15			14			374
Provision		2,584			1,427			656			2,015			—		(19	)		(163	)		6,500
Unallocated assignment		—			—			—			—			—		—			—			—
Ending balance ALLR	$	3,460		$	1,018		$	389		$	1,622		$	—	$	—		$	124		$	6,613
Loans:
Ending balance	$	194,859		$	68,858		$	33,330		$	75,074		$	5,682	$	5,283		$	—		$	383,086
Ending balance ALLR (3,		460	)		(1,018	)		(389	)		(1,622	)		—		—			(124	)		(6,613	)
Net loans	$	191,399		$	67,840		$	32,941		$	73,452		$	5,682	$	5,283		$	(124	)	$	376,473
Ending balance ALLR
Individually evaluated	$	1,601		$	330		$	39		$	696		$	—	$	—		$	—		$	2,666
Collectively evaluated		1,859			688			350			926			—		—			124			3,947
Total	$	3,460		$	1,018		$	389		$	1,622		$	—	$	—		$	124		$	6,613

As part of the management of the loan portfolio, risk ratings are assigned to all commercial loans. Through the loan review process, ratings are modified as believed to be appropriate to reflect changes in the credit. Our ability to manage credit risk depends in large part on our ability to properly identify and manage problem loans. To do so, we operate a credit risk rating system under which our credit management personnel assign a credit risk rating to each loan at the time of origination and review loans on a regular basis to determine each loan’s credit risk rating on a scale of 1 through 8, with higher scores indicating higher risk. The credit risk rating structure used is shown below.

In the context of the credit risk rating structure, the term Classified is defined as a problem loan which may or may not be in a nonaccrual status, dependent upon current payment status and collectability.

Excellent (1)

Borrower is not vulnerable to sudden economic or technological changes and is in a non-seasonal business or industry. These loans generally would be characterized by having good experienced management and a strong liquidity position with minimal leverage.

Good (2)

Borrower shows limited vulnerability to sudden economic change with modest seasonal effect. Borrower has “above average” financial statements and an acceptable repayment history with minimal leverage and a profitability that exceeds peers.

Average (3)

Generally, a borrower rated as average may be susceptible to unfavorable changes in the economy and somewhat affected by seasonal factors. Some product lines may be affected by technological change. Borrowers in this category exhibit stable earnings, with a satisfactory payment history.

Acceptable (4)

The loan is an otherwise acceptable credit that warrants a higher level of administration due to various underlying weaknesses. These weaknesses, however, have not and may never deteriorate to the point of a Special Mention rating or Classified status. This rating category may include new businesses not yet having established a firm performance record.

Special Mention (5)

The loan is not considered as a Classified status, however may exhibit material weaknesses that, if not corrected, may cause future problems. Borrowers in this category warrant special attention but have not yet reached the point of concern for loss. The borrower may have deteriorated to the point that they would have difficulty refinancing elsewhere. Similarly, purchasers of these businesses would not be eligible for bank financing unless they represent a significantly lessened credit risk.

Substandard (6)

The loan is Classified and exhibits a number of well-defined weaknesses that jeopardize normal repayment. The assets are no longer adequately protected due to declining net worth, lack of earning capacity or insufficient collateral offering the distinct possibility of the loss of a portion of the loan principal. Loans within this category clearly represent troubled and deteriorating credit situations requiring constant supervision and an action plan must be developed and approved by the appropriate officers to mitigate the risk.

Doubtful (7)

Loans in this category exhibit the same weaknesses used to describe the substandard credit; however, the traits are more pronounced. Loans are frozen with collection improbable. Such loans are not yet rated as Charge-off because certain actions may yet occur which would salvage the loan.

Charge-off/Loss (8)

Loans in this category are largely uncollectible and should be charged against the loan loss reserve immediately.

General Reserves:

For loans with a credit risk rating of 5 or better and any loans with a risk rating of 6 or 7 with no specific reserve, reserves are established based on the type of loan collateral, if any, and the assigned credit risk rating. Determination of the allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogenous loans based on historical loss experience, and consideration of current environmental factors and economic trends, all of which may be susceptible to significant change.

Using a historical average loss by loan type as a base, each loan graded as higher risk is assigned a specific percentage. Within the commercial loan portfolio, the historical loss rates are used for specific industries such as hospitality, gaming, petroleum, and forestry. The residential real estate and consumer loan portfolios are assigned a loss percentage as a homogenous group. If, however, on an individual loan the projected loss based on collateral value and payment histories are in excess of the computed allowance, the allocation is increased for the higher anticipated loss. These computations provide the basis for the allowance for loan losses as recorded by the Corporation.

Below is a breakdown of loans by risk category as of June 30, 2011 (dollars in thousands):

	(1)		(2)		(3)		(4)		(5)		(6)		(7)		(8)		Rating
	Excellent		Good		Average		Acceptable		Sp. Mention		Substandard		Doubtful		Loss		Unassigned		Total
Commercial real estate	$	6,223	$	16,963	$	43,625	$	115,724	$	5,109	$	7,934	$	2,576	$	—	$	131	$	198,285
Commercial, financial and agricultural		2,821		11,501		29,121		38,223		211		2,136		—		—		392		84,405
Commercial construction		514		559		5,250		12,022		1,715		—		—		—		3,002		23,062
One to four family residential real estate		—		3,330		3,084		5,412		—		3,904		—		—		63,283		79,013
Consumer construction		—		—		—		—		—		—		—		—		4,181		4,181
Consumer		—		38		87		473		—		27		—		—		5,241		5,866
Total loans	$	9,558	$	32,391	$	81,167	$	171,854	$	7,035	$	14,001	$	2,576	$	—	$	76,230	$	394,812

Below is a breakdown of loans by risk category as of December 31, 2010 (dollars in thousands):

	(1)		(2)		(3)		(4)		(5)		(6)		(7)		Rating
	Excellent		Good		Average		Acceptable		Sp. Mention		Substandard		Doubtful		Unassigned		Total
Commercial real estate	$	4,745	$	16,975	$	44,408	$	109,911	$	3,789	$	10,997	$	3,956	$	78	$	194,859
Commercial, financial and agricultural		3,726		5,275		16,466		39,844		259		2,636		—		652		68,858
Commercial construction		—		579		4,416		22,280		1,921		568		—		3,566		33,330
One-to-four family residential real estate		33		3,589		3,146		4,271		1,464		3,941		—		58,630		75,074
Consumer construction		—		—		—		—		—		—		—		5,682		5,682
Consumer		—		—		34		368		—		—		—		4,881		5,283
Total loans	$	8,504	$	26,418	$	68,470	$	176,674	$	7,433	$	18,142	$	3,956	$	73,489	$	383,086

The breakdown of loans by risk category for the period ended June 30, 2010 is not available. This disclosure was not required on June 30, 2010, and the Corporation no longer has this detail available for historical periods.

Impaired Loans

Nonperforming loans are those which are contractually past due 90 days or more as to interest or principal payments, on nonaccrual status, or loans, the terms of which have been renegotiated to provide a reduction or deferral on interest or principal. The interest income recorded during impairment and that which would have been recognized were $.068 million and $.271 million for the six months ended June 30, 2011. For the six months ended June 30, 2010, the amounts were $7,000 and $.328 million.

The accrual of interest on loans is discontinued when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Loans are considered impaired when, based on current information and events, it is probable the Corporation will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loans basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

The following is a summary of impaired loans and their effect on interest income (dollars in thousands):

									Interest Income		Interest Income
	Nonaccrual		Accrual		Average		Related		Recognized		on
For the six months ended:	Basis		Basis		Investment		Valuation Reserve		During Impairment		Accrual Basis
June 30, 2011
With no valuation reserve:
Commercial real estate	$	78	$	600	$	2,726	$	—	$	67	$	14
Commercial, financial and agricultural		48		1,098		521		—		—		2
Commercial construction		—		—		327		—		—		11
One to four family residential real estate		34		—		33		—		—		2
Consumer construction		—		—		7		—		—		—
Consumer		—		—		—		—		—		—
With a valuation reserve:
Commercial real estate	$	3,038	$	—	$	2,906	$	1,170	$	—	$	87
Commercial, financial and agricultural		542		—		862		251		—		33
Commercial construction		—		—		—		—		—		—
One to four family residential real estate		3,872		104		3,199		834		1		122
Consumer construction		—		—		—		—		—		—
Consumer		27		—		4		27		—		—
Total:
Commercial real estate	$	3,116	$	600	$	5,632	$	1,170	$	67	$	101
Commercial, financial and agricultural		590		1,098		1,383		251		—		35
Commercial construction		—		—		327		—		—		11
One to four family residential real estate		3,906		104		3,232		834		1		124
Consumer construction		—		—		7		—		—		—
Consumer		27		—		4		27		—		—
Total	$	7,639	$	1,802	$	10,585	$	2,282	$	68	$	271
For the year ended:
December 31, 2010
With no valuation reserve:
Commercial real estate	$	960	$	—	$	987	$	—	$	—	$	71
Commercial, financial and agricultural		51		—		13		—		—		1
Commercial construction		458		—		1,186		—		11		33
One to four family residential real estate		362		105		237		—		1		13
Consumer construction		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
With a valuation reserve:
Commercial real estate	$	2,562	$	4,537	$	6,531	$	1,258	$	117	$	306
Commercial, financial and agricultural		709		—		1,660		279		—		95
Commercial construction		—		—		—		—		—		21
One to four family residential real estate		767		—		730		230		12		39
Consumer construction		52		—		52		1		—		4
Consumer		—		—		—		—		—		—
Total:
Commercial real estate	$	3,522	$	4,537	$	7,518	$	1,258	$	117	$	377
Commercial, financial and agricultural		760		—		1,673		279		—		96
Commercial construction		458		—		1,186		—		11		54
One to four family residential real estate		1,129		105		967		230		13		52
Consumer construction		52		—		52		1		—		4
Consumer		—		—		—		—		—		—
Total	$	5,921	$	4,642	$	11,396	$	1,768	$	141	$	583

									Interest Income		Interest Income
	Nonaccrual		Accrual		Average		Related		Recognized		on
For the six months ended	Basis		Basis		Investment		Valuation Reserve		During Impairment		Accrual Basis
June 30, 2010
With no valuation reserve:
Commercial real estate	$	4,326	$	869	$	5,544	$	—	$	7	$	134
Commercial, financial and agricultural		88		—		1,291		—		—		45
Commercial construction		382		—		458		—		—		13
One to four family residential real estate		486		—		371		—		—		13
Consumer construction		52		—		52		—		—		2
Consumer		—		—		—		—		—		—
With a valuation reserve:
Commercial real estate	$	2,514	$	—	$	1,754	$	1,135	$	—	$	80
Commercial, financial and agricultural		1,677		—		1,780		838		—		24
Commercial construction		437		—		437		50		—		16
One to four family residential real estate		212		—		30		—		—		1
Consumer construction		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Total:
Commercial real estate	$	6,840	$	869	$	7,298	$	1,135	$	7	$	214
Commercial, financial and agricultural		1,765		—		3,071		838		—		69
Commercial construction		819		—		895		50		—		29
One to four family residential real estate		698		—		401		—		—		14
Consumer construction		52		—		52		—		—		2
Consumer		—		—		—		—		—		—
Total	$	10,174	$	869	$	11,717	$	2,023	$	7	$	328

A summary of past due loans at June 30, 2011, December 31, 2010 and June 30, 2010 is as follows (dollars in thousands):

	June 30,						December 31,						June 30,
	2011						2010						2010
	30-89 days		90+ days				30-89 days		90+ days				30-89 days		90+ days
	Past Due		Past Due/				Past Due		Past Due/				Past Due		Past Due/
	(accruing)		Nonaccrual		Total		(accruing)		Nonaccrual		Total		(accruing)		Nonaccrual		Total
Commercial real estate	$	1,473	$	3,101	$	4,574	$	19	$	3,522	$	3,541	$	713	$	6,840	$	7,553
Commercial, financial and agricultural		62		605		667		382		760		1,142		—		1,765		1,765
Commercial construction		20		—		20		—		458		458		—		870		870
One to four family residential real estate		96		3,906		4,002		923		1,129		2,052		50		699		749
Consumer construction		—		—		—		—		52		52		—		—		—
Consumer		—		27		27		20		—		20		1		—		1
Total past due loans	$	1,651	$	7,639	$	9,290	$	1,344	$	5,921	$	7,265	$	764	$	10,174	$	10,938

     A roll-forward of nonaccrual activity for the first six months ended June 30, 2011 (dollars in thousands):

	For the Six Months Ended June 30, 2011
				Commercial,						One to four
	Commercial			Financial and			Commercial			family residential			Consumer
	Real Estate			Agricultural			Construction			real estate			Construction			Consumer		Total
NONACCRUAL
Beginning balance	$	3,522		$	760		$	458		$	1,129		$	52		$	—	$	5,921
Principal payments		(938	)		(155	)		(14	)		(445	)		—			—		(1,552	)
Charge-offs		(326	)		(407	)		(62	)		(90	)		—			—		(885	)
Advances		—			—			—			—			—			—		—
Class transfers		—			—			—			—			—			—		—
Transfers to OREO		(989	)		—			(382	)		(332	)		(52	)		—		(1,755	)
Transfers to accruing		(892	)		—			—			—			—			—		(892	)
Transfers from accruing		2,724			389			—			3,631			—			27		6,771
Other		15			3			—			13			—			—		31
Ending balance	$	3,116		$	590		$	—		$	3,906		$	—		$	27	$	7,639

A roll-forward of nonaccrual activity for the first six months ended June 30, 2010 (dollars in thousands):

	For the Six Months Ended June 30, 2010
				Commercial,						One to four
	Commercial			Financial and			Commercial			family residential			Consumer
	Real Estate			Agricultural			Construction			real estate			Construction		Consumer			Total
NONACCRUAL
Beginning balance	$	8,290		$	2,644		$	1,919		$	1,461		$	52	$	2		$	14,368
Principal payments		(4,478	)		(690	)		(83	)		(22	)		—		(2	)		(5,275	)
Charge-offs		(1,119	)		(751	)		(19	)		(1,121	)		—		—			(3,010	)
Advances		—			—			—			—			—		—			—
Class transfers		—			—			—			—			—		—			—
Transfers to OREO		(466	)		(102	)		(1,003	)		(226	)		—		—			(1,797	)
Transfers to accruing		(55	)		—			—			—			—		—			(55	)
Transfers from accruing		4,636			662			—			602			—		—			5,900
Other		32			2			4			5			—		—			43
Ending balance	$	6,840		$	1,765		$	818		$	699		$	52	$	—		$	10,174

Troubled Debt Restructuring

The Corporation, at June 30, 2011, had loans totaling $1.802 million for which repayment terms were modified to the extent that they were deemed to be “restructured” loans. The Corporation will, in accordance with generally accepted accounting principles and per recently enacted accounting standard updates, evaluate any loan modifications to determine the fair value impact of the underlying asset. As of June 30, 2011, this evaluation showed no material impact related to the current balances of restructured loans.

Insider Loans

The Bank, in the ordinary course of business, grants loans to the Corporation’s executive officers and directors, including their families and firms in which they are principal owners. Activity in such loans is summarized below (dollars in thousands):

	June 30,			December 31,			June 30,
	2011			2010			2010
Loans outstanding beginning of period	$	9,532		$	8,552		$	8,552
New loans		705			5,243			1,267
Net activity on revolving lines of credit		124			2,065			2,068
Repayment		(1,216	)		(6,328	)		(2,267	)
Loans outstanding, end of period	$	9,145		$	9,532		$	9,620

There were no loans to related parties classified substandard at June 30, 2011, December 31, 2010 or June 30, 2010, respectively. In addition to the outstanding balances above, there were unused commitments of $.405 million to related parties at June 30, 2011.