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Loans Receivable and Related Allowance for Loan Losses
 12 Months Ended
Dec. 31, 2012
Loans Notes Trade and Other Receivables Disclosure [Abstract]  
Loans, Notes, Trade and Other Receivables Disclosure [Text Block]
5. Loans Receivable and Related Allowance for Loan Losses

 

The following table summarizes the Corporation’s loans receivable as of December 31:

 

(Dollar amounts in thousands)   2012     2011  
             
Mortgage loans on real estate:                
Residential first mortgages   $ 97,246     $ 93,610  
Home equity loans and lines of credit     85,615       71,238  
Commercial real estate     98,823       94,765  
      281,684       259,613  
Other loans:                
Commercial business     45,581       43,826  
Consumer     11,886       12,642  
      57,467       56,468  
Total loans, gross     339,151       316,081  
                 
Less allowance for loan losses     5,350       3,536  
                 
Total loans, net   $ 333,801     $ 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 December 31:

 

(Dollar amounts in thousands)                                    
    Impaired Loans with  
    Specific Allowance  
                      For the year ended  
    As of December 31, 2012     December 31, 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     4,242       4,068       1,448       2,075       186       16  
Commercial business     -       -       -       -       -       -  
Consumer     -       -       -       -       -       -  
Total   $ 4,242     $ 4,068     $ 1,448     $ 2,075     $ 186     $ 16  

 

    Impaired Loans with  
    No Specific Allowance  
                For the year ended  
    As of December 31, 2012     December 31, 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     730       505       690       12       12  
Commercial business     394       369       368       5       5  
Consumer     1,650       1,650       1,774       -       -  
Total   $ 2,774     $ 2,524     $ 2,832     $ 17     $ 17  

 

    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 December 31, 2012 and 2011, the Corporation had $2.3 million and $794,000, respectively, of loans classified as TDR’s, which are included in impaired loans above. At December 31, 2012 and 2011, the Corporation had $36,000 and $35,000, respectively, of the allowance for loan losses allocated to these specific loans.

 

During the year ended December 31, 2012, the Corporation recognized a consumer installment loan to one borrower with a pre- and post-modification recorded investment of $1.6 million as a TDR due to the discharge of the debtor in bankruptcy. The loan is secured by a lien on the primary residence of a separate borrower. Due to the estimated value of the lien on the property, at December 31, 2012, the Corporation did not have any of the allowance for loan losses allocated to this specific loan.

 

During the year ended December 31, 2011, the Corporation restructured two commercial real estate loans to one borrower with a pre- and post-modification recorded investment of $352,000. These loans were modified by forbearing the interest amounts then outstanding and establishing a new repayment date and amortization schedule. At December 31, 2012 and 2011, the Corporation had $36,000 and $35,000, respectively, of the allowance for loan losses allocated to these specific loans.

 

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. There were no defaults on loans classified as TDRs during the years ended December 31, 2012 and 2011.

 

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 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.

 

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 December 31, 2012 and 2011:

 

(Dollar amounts in thousands)                                    
                Special                    
    Not Rated     Pass     Mention     Substandard     Doubtful     Total  
December 31, 2012:                                                
Residential first mortgages   $ 96,713     $ -     $ -     $ 533     $ -     $ 97,246  
Home equity and lines of credit     85,443       -       -       172       -       85,615  
Commercial real estate     -       88,944       1,658       6,870       1,351       98,823  
Commercial business     -       42,417       2,157       1,007       -       45,581  
Consumer     10,236       -       -       1,650       -       11,886  
Total   $ 192,392     $ 131,361     $ 3,815     $ 10,232     $ 1,351     $ 339,151  
                                                 
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 nonperforming loans as of December 31, 2012 and 2011:

 

(Dollar amounts in thousands)                                    
    Performing     Nonperforming        
    Accruing     Accruing     Accruing     Acccruing              
    Loans Not     30-59 Days     60-89 Days     90 Days +           Total  
    Past Due     Past Due     Past Due     Past Due     Nonaccrual     Loans  
                                     
December 31, 2012:                                                
Residential first mortgages   $ 95,001     $ 1,272     $ 440     $ -     $ 533     $ 97,246  
Home equity and lines of credit     84,592       669       157       -       197       85,615  
Commercial real estate     94,485       50       49       21       4,218       98,823  
Commercial business     44,915       297       -       -       369       45,581  
Consumer     10,172       41       23       -       1,650       11,886  
Total loans   $ 329,165     $ 2,329     $ 669     $ 21     $ 6,967     $ 339,151  
                                                 
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 December 31, 2012 and 2011:

 

(Dollar amounts in thousands)                              
    Not     30-59 Days     60-89 Days     90 Days +     Total  
    Past Due     Past Due     Past Due     Past Due     Loans  
                               
December 31, 2012:                                        
Residential first mortgages   $ -     $ -     $ -     $ 533     $ 533  
Home equity and lines of credit     -       25       -       172       197  
Commercial real estate     469       3,386       10       353       4,218  
Commercial business     78       -       -       291       369  
Consumer     1,650       -       -       -       1,650  
Total loans   $ 2,197     $ 3,411     $ 10     $ 1,349     $ 6,967  
                                         
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 nonperforming 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.

 

Following is an analysis of the changes in the ALL for the years ended December 31:

 

(Dollar amounts in thousands)   2012     2011  
Balance at the beginning of the year   $ 3,536     $ 3,525  
Provision for loan losses     2,154       100  
Charge-offs     (498 )     (117 )
Recoveries     158       28  
Balance at the end of the year   $ 5,350     $ 3,536  

 

The following table details activity in the ALL and the recorded investment by portfolio segment based on impairment method at December 31, 2012 and 2011:

 

(Dollar amounts in thousands)                                    
          Home Equity                          
    Residential     & Lines     Commercial     Commercial              
    Mortgages     of Credit     Real Estate     Business     Consumer     Total  
                                                 
December 31, 2012:                                                
Beginning Balance   $ 832     $ 320     $ 1,737     $ 590     $ 57     $ 3,536  
Charge-offs     (90 )     (222 )     (35 )     (50 )     (101 )     (498 )
Recoveries     84       27       8       15       24       158  
Provision     2       605       1,380       81       86       2,154  
Ending Balance   $ 828     $ 730     $ 3,090     $ 636     $ 66     $ 5,350  
                                                 
Ending ALL balance attributable to loans:                                                
Individually evaluated for impairment     -       -       1,448       -       -       1,448  
Collectively evaluated for impairment     828       730       1,642       636       66       3,902  
                                                 
Total loans:                                                
Individually evaluated for impairment     -       -       4,573       369       1,650       6,592  
Collectively evaluated for impairment     97,246       85,615       94,250       45,212       10,236       332,559  
                                                 
December 31, 2011:                                                
Beginning Balance   $ 398     $ 572     $ 1,707     $ 1,323     $ 132     $ 4,132  
Charge-offs     (224 )     (188 )     (200 )     (415 )     (67 )     (1,094 )
Recoveries     3       1       -       63       11       78  
Provision     655       (65 )     230       (381 )     (19 )     420  
Ending Balance   $ 832     $ 320     $ 1,737     $ 590     $ 57     $ 3,536  
                                                 
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  

 

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.