Loans Receivable and Related Allowance for Loan Losses

9 Months Ended

Sep. 30, 2012

Receivables [Abstract]

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

6. Loans Receivable and Related Allowance for Loan Losses

The Corporation’s loans receivable as of the respective dates are summarized as follows:

(Dollar amounts in thousands)	September 30,		December 31,
	2012		2011
Mortgage loans on real estate:
Residential first mortgages	$	96,031	$	93,610
Home equity loans and lines of credit		80,635		71,238
Commercial real estate		96,786		94,765
		273,452		259,613
Other loans:
Commercial business		50,791		43,826
Consumer		12,211		12,642
		63,002		56,468
Total loans, gross		336,454		316,081
Less allowance for loan losses		5,023		3,536
Total loans, net	$	331,431	$	312,545

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of September 30, 2012:

(Dollar amounts in thousands)
	Impaired Loans with Specific Allowance
							For the three months
	As of September 30, 2012						ended September 30, 2012
											Cash Basis
	Unpaid						Average		Interest Income		Interest
	Principal		Recorded		Related		Recorded		Recognized		Recognized
	Balance		Investment		Allowance		Investment		in Period		in Period
Residential first mortgages	$	-	$	-	$	-	$	-	$	-	$	-
Home equity and lines of credit		-		-		-		-		-		-
Commercial real estate		4,310		4,136		1,579		2,423		203		10
Commercial business		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
Total	$	4,310	$	4,136	$	1,579	$	2,423	$	203	$	10

	For the nine months
	ended September 30, 2012
					Cash Basis
	Average		Interest Income		Interest
	Recorded		Recognized		Recognized
	Investment		in Period		in Period
Residential first mortgages	$	-	$	-	$	-
Home equity and lines of credit		-		-		-
Commercial real estate		1,577		240		47
Commercial business		47		-		-
Consumer		-		-		-
Total	$	1,624	$	240	$	47

	Impaired Loans with No Specific Allowance
					For the three months
	As of September 30, 2012				ended September 30, 2012
									Cash Basis
	Unpaid				Average		Interest Income		Interest
	Principal		Recorded		Recorded		Recognized		Recognized
		Balance		Investment		Investment		in Period		in Period
Residential first mortgages	$	-	$	-	$	-	$	-	$	-
Home equity and lines of credit		-		-		-		-		-
Commercial real estate		750		525		530		8		8
Commercial business		399		374		376		-		-
Consumer		1,712		1,712		1,742		35		35
Total	$	2,861	$	2,611	$	2,648	$	43	$	43

	For the nine months
	ended September 30, 2012
					Cash Basis
	Average		Interest Income		Interest
	Recorded		Recognized		Recognized
	Investment		in Period		in Period
Residential first mortgages	$	-	$	-	$	-
Home equity and lines of credit		-		-		-
Commercial real estate		736		37		37
Commercial business		367		10		10
Consumer		1,806		117		117
Total	$	2,909	$	164	$	164

During the three and nine month periods ended September 30, 2011, impaired loans averaged $4.5 million and $3.7 million, respectively, and the Corporation recognized interest income on impaired loans of approximately $65,000 and $143,000, respectively, on a cash basis.

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of December 31, 2011:

(Dollar amounts in thousands)
	Impaired Loans with
	Specific Allowance
							For the year ended
	As of December 31, 2011						December 31, 2011
											Cash Basis
	Unpaid						Average		Interest Income		Interest
	Principal		Recorded		Related		Recorded		Recognized		Recognized
	Balance		Investment		Allowance		Investment		in Period		in Period
Residential first mortgages	$	-	$	-	$	-	$	-	$	-	$	-
Home equity and lines of credit		-		-		-		-		-		-
Commercial real estate		524		524		142		616		39		26
Commercial business		128		128		22		771		7		2
Consumer		-		-		-		-		-		-
Total	$	652	$	652	$	164	$	1,387	$	46	$	28

	Impaired Loans with
	No Specific Allowance
					For the year ended
	As of December 31, 2011				December 31, 2011
									Cash Basis
	Unpaid				Average		Interest Income		Interest
	Principal		Recorded		Recorded		Recognized		Recognized
	Balance		Investment		Investment		in Period		in Period
Residential first mortgages	$	-	$	-	$	-	$	-	$	-
Home equity and lines of credit		-		-		-		-		-
Commercial real estate		1,518		1,154		862		81		81
Commercial business		357		332		122		27		6
Consumer		1,905		1,905		2,018		138		138
Total	$	3,780	$	3,391	$	3,002	$	246	$	225

Unpaid principal balance includes any loans that have been partially charged off but not forgiven. Accrued interest is not included in the recorded investment in loans based on the amounts not being material.

Troubled debt restructurings (TDR). The Corporation has certain loans that have been modified in order to maximize collection of loan balances. If, for economic or legal reasons related to the customer’s financial difficulties, management grants a concession compared to the original terms and conditions of the loan that it would not have otherwise considered, the modified loan is classified as a TDR. Concessions related to TDRs generally do not include forgiveness of principal balances. The Corporation generally does not extend additional credit to borrowers with loans classified as TDRs.

At September 30, 2012 and December 31, 2011, the Corporation had $791,000 and $794,000, respectively, of loans classified as TDRs, which are included in impaired loans above. At September 30, 2012 and December 31, 2011, the Corporation had $36,000 and $35,000, respectively, of the allowance for loan losses allocated to these specific loans.

During the nine month period ended September 30, 2012, the Corporation did not modify any additional loans as TDRs.

During the nine month period ended September 30, 2012, the Corporation did not have any loans which were modified as TDRs for which there was a payment default within twelve months following the modification.

Credit Quality Indicators. Management categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors.

Commercial real estate and commercial business loans not identified as impaired are evaluated as risk rated pools of loans utilizing a risk rating practice that is supported by a quarterly special asset review. In this review process, strengths and weaknesses are identified, evaluated and documented for each criticized and classified loan and borrower, strategic action plans are developed, risk ratings are confirmed and the loan’s performance status is reviewed.

Management has determined certain portions of the loan portfolio to be homogeneous in nature and assigns like reserve factors for the following loan pool types: residential real estate, home equity loans and lines of credit, and consumer installment and personal lines of credit.

The reserve allocation for risk rated loan pools is developed by applying the following factors:

Historic: Management utilizes a computer model to develop the historical net charge-off experience which is used to formulate the assumptions employed in the migration analysis applied to estimate future losses in the portfolio. Outstanding balance and charge-off information are input into the model and historical loss migration rate assumptions are developed to apply to pass, special mention, substandard and doubtful risk rated loans. A twelve-quarter rolling weighted-average is utilized to anticipate probable incurred losses in the portfolios.

Qualitative: Qualitative adjustment factors for pass, special mention, substandard and doubtful ratings are developed and applied to risk rated loans to allow for: quality of lending policies and procedures; national and local economic and business conditions; changes in the nature and volume of the portfolio; experiences, ability and depth of lending management; changes in trends, volume and severity of past due, nonaccrual and classified loans and loss and recovery trends; quality of loan review systems; concentrations of credit and other external factors.

Management uses the following definitions for risk ratings:

Pass: Loans classified as pass typically exhibit good payment performance and have underlying borrowers with acceptable financial trends where repayment capacity is evident. These borrowers typically would have a sufficient cash flow that would allow them to weather an economic downturn and the value of any underlying collateral could withstand a moderate degree of depreciation due to economic conditions.

Special Mention: Loans classified as special mention are characterized by potential weaknesses that could jeopardize repayment as contractually agreed. These loans may exhibit adverse trends such as increasing leverage, shrinking profit margins and/or deteriorating cash flows. These borrowers would inherently be more vulnerable to the application of economic pressures.

Substandard: Loans classified as substandard exhibit weaknesses that are well-defined to the point that repayment is jeopardized. Typically, the Corporation is no longer adequately protected by both the apparent net worth and repayment capacity of the borrower.

Doubtful: Loans classified as doubtful have advanced to the point that collection or liquidation in full, on the basis of currently ascertainable facts, conditions and value, is highly questionable or improbable.

The following table presents the classes of the loan portfolio summarized by the aggregate pass and the criticized categories of special mention, substandard and doubtful within the Corporation’s internal risk rating system as of September 30, 2012 and December 31, 2011:

(Dollar amounts in thousands)
					Special
	Not Rated		Pass		Mention		Substandard		Doubtful		Total
September 30, 2012:
Residential first mortgages	$	95,570	$	-	$	-	$	461	$	-	$	96,031
Home equity and lines of credit		80,516		-		-		119		-		80,635
Commercial real estate		-		87,006		3,736		5,952		92		96,786
Commercial business		-		49,370		686		735		-		50,791
Consumer		10,499		-		-		1,712		-		12,211
Total	$	186,585	$	136,376	$	4,422	$	8,979	$	92	$	336,454
December 31, 2011:
Residential first mortgages	$	92,612	$	-	$	-	$	998	$	-	$	93,610
Home equity and lines of credit		71,064		-		-		174		-		71,238
Commercial real estate		-		88,006		3,625		3,134		-		94,765
Commercial business		-		41,864		832		1,130		-		43,826
Consumer		10,737		-		-		1,905		-		12,642
Total	$	174,413	$	129,870	$	4,457	$	7,341	$	-	$	316,081

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and non-performing loans as of September 30, 2012 and December 31, 2011:

(Dollar amounts in thousands)
	Performing						Nonperforming
	Accruing		Accruing		Accruing		Accruing
	Loans Not		30-59 Days		60-89 Days		90 Days +				Total
	Past Due		Past Due		Past Due		Past Due		Nonaccrual		Loans
September 30, 2012:
Residential first mortgages	$	93,919	$	1,198	$	453	$	-	$	461	$	96,031
Home equity and lines of credit		79,951		375		164		-		145		80,635
Commercial real estate		92,067		58		-		-		4,661		96,786
Commercial business		49,996		406		15		-		374		50,791
Consumer		10,438		59		2		-		1,712		12,211
Total loans	$	326,371	$	2,096	$	634	$	-	$	7,353	$	336,454
December 31, 2011:
Residential first mortgages	$	91,400	$	1,059	$	153	$	66	$	932	$	93,610
Home equity and lines of credit		70,506		431		127		-		174		71,238
Commercial real estate		92,632		302		-		-		1,831		94,765
Commercial business		43,338		7		10		-		471		43,826
Consumer		10,488		55		8		-		2,091		12,642
Total loans	$	308,364	$	1,854	$	298	$	66	$	5,499	$	316,081

The following table presents the Corporation’s nonaccrual loans by aging category as of September 30, 2012 and December 31, 2011:

(Dollar amounts in thousands)
	Not		30-59 Days		60-89 Days		90 Days +		Total
	Past Due		Past Due		Past Due		Past Due		Loans
September 30, 2012:
Residential first mortgages	$	-	$	-	$	-	$	461	$	461
Home equity and lines of credit		-		-		26		119		145
Commercial real estate		4,283		-		11		367		4,661
Commercial business		83		-		-		291		374
Consumer		1,712		-		-		-		1,712
Total loans	$	6,078	$	-	$	37	$	1,238	$	7,353
December 31, 2011:
Residential first mortgages	$	-	$	-	$	-	$	932	$	932
Home equity and lines of credit		-		-		-		174		174
Commercial real estate		1,087		92		-		652		1,831
Commercial business		471		-		-		-		471
Consumer		2,091		-		-		-		2,091
Total loans	$	3,649	$	92	$	-	$	1,758	$	5,499

An allowance for loan losses (ALL) is maintained to absorb probable incurred losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience and the amount of non-performing loans.

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.

The following table details activity in the ALL and the recorded investment by portfolio segment based on impairment method:

(Dollar amounts in thousands)
				Home Equity
	Residential			& Lines			Commercial			Commercial
	Mortgages			of Credit			Real Estate			Business			Consumer			Total
Three months ended September 30, 2012:
Allowance for loan losses:
Beginning Balance	$	852		$	468		$	1,835		$	496		$	64		$	3,715
Charge-offs		(13	)		-			-			(5	)		(41	)		(59	)
Recoveries		1			-			1			-			6			8
Provision		(26	)		104			1,229			12			40			1,359
Ending Balance	$	814		$	572		$	3,065		$	503		$	69		$	5,023
Nine months ended September 30, 2012:
Allowance for loan losses:
Beginning Balance	$	832		$	320		$	1,737		$	590		$	57		$	3,536
Charge-offs		(78	)		(40	)		(36	)		(14	)		(79	)		(247	)
Recoveries		84			27			5			15			16			147
Provision		(24	)		265			1,359			(88	)		75			1,587
Ending Balance	$	814		$	572		$	3,065		$	503		$	69		$	5,023
At September 30, 2012:
Ending ALL balance attributable to loans:
Individually evaluated for impairment		-			-			1,579			-			-			1,579
Collectively evaluated for impairment		814			572			1,486			503			69			3,444
Total loans:
Individually evaluated for impairment		-			-			4,661			374			1,712			6,747
Collectively evaluated for impairment		96,031			80,635			92,125			50,417			10,499			329,707
At December 31, 2011:
Ending ALL balance attributable to loans:
Individually evaluated for impairment		-			-			22			142			-			164
Collectively evaluated for impairment		832			320			1,715			448			57			3,372
Total loans:
Individually evaluated for impairment		-			-			1,678			460			1,905			4,043
Collectively evaluated for impairment		93,610			71,238			93,087			43,366			10,737			312,038
Three months ended September 30, 2011:
Allowance for loan losses:
Beginning Balance	$	493		$	207		$	1,653		$	1,166		$	43		$	3,562
Charge-offs		(39	)		(34	)		-			(37	)		(16	)		(126	)
Recoveries		-			1			-			5			3			9
Provision		360			150			30			(489	)		29			80
Ending Balance	$	814		$	324		$	1,683		$	645		$	59		$	3,525
Nine months ended September 30, 2011:
Allowance for loan losses:
Beginning Balance	$	398		$	572		$	1,707		$	1,323		$	132		$	4,132
Charge-offs		(220	)		(161	)		(200	)		(355	)		(41	)		(977	)
Recoveries		-			1			-			40			9			50
Provision		636			(88	)		176			(363	)		(41	)		320
Ending Balance	$	814		$	324		$	1,683		$	645		$	59		$	3,525

The allowance for loan losses is based on estimates, and actual losses will vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date.