Note 4.  Loans

The major classifications of loans follow:

 

	Aggregate Principal Amount
	June 30, 2012			December 31, 2011
Commercial	$	62,697		$	63,982
Agricultural & AGRE		38,418			39,128
Construction, land & development		35,618			42,008
Commercial RE		298,387			288,068
1-4 family mortgages		130,252			146,767
Consumer		2,536			2,442
Total Loans	$	567,908		$	582,395
Allowance for loan losses		(18,234)			(21,232)
Loans, net	$	549,674		$	561,163

 

There were $0.2 million and $1.8 million of loans held for sale at June 30, 2012 and December 31, 2011, respectively.

The credit quality indicator utilized by the Company to internally analyze the loan portfolio is the internal risk rating.  Internal risk ratings of 0 to 5 are considered pass credits, a risk rating of a 6 is special mention, a risk rating of a 7 is substandard, and a risk rating of an 8 is doubtful.  Loans classified as pass credits have no identified material weaknesses and are performing as agreed.  Loans classified as special mention have a potential weakness that deserves management's close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.  Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that

Note 4.  Loans (Continued)

the institution will sustain some loss if the deficiencies are not corrected.  Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

The following table presents the commercial loan portfolio by internal risk rating:

 

 

 

 

The retail residential loan portfolio is generally unrated.  Delinquency is a typical factor in adversely risk rating a credit to a special mention or substandard.  The following table presents the retail residential loan portfolio by internal risk rating:

 

 

 

Note 4.  Loans (Continued)

 

 

An analysis of the activity in the allowance for loan losses for the three months ended June 30, 2012 and 2011 follows:

 

 

 

 

An analysis of the activity in the allowance for loan losses for the six months ended June 30, 2012 and 2011 follows:

 

 

Note 4.  Loans (Continued)

 

 

 

The following is an analysis on the balance in the allowance for loan losses and the recorded investment in impaired loans by portfolio segment based on impairment method as of June 30, 2012 and December 31, 2011:

 

 

 

 

Note 4.  Loans (Continued)

Troubled Debt Restructurings: 

The Company had troubled debt restructurings (“TDRs”) of $4.3 million and $7.1 million as of June 30, 2012 and December 31, 2011, respectively.  Specific reserves of $0.3 million and $0.95 million were allocated to TDRs as of June 30, 2012 and December 31, 2011, respectively.  At June 30, 2012, nonaccrual TDR loans were $4.3 million, as compared to $6.0 million at December 31, 2011.  At June 30, 2012 there were $0.03 million of TDRs on accrual status compared to December 31, 2011, when $1.1 million was on accrual.  The Company has not committed to lend any additional amounts to customers with outstanding loans that are classified as TDRs as of June 30, 2012.

At June 30, 2012, the Company held loans whose terms had been modified as troubled debt restructuring.  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 to a below market rate or the payment modification to interest only.  Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from 6 months to 16 months. During the six month period ending June 30, 2012, there was one TDR added in the amount of $0.9 million during the first quarter. It was subsequently removed in the second quarter as the collateral was sold, specific provision charged-off and the remaining loan balance paid-off.  

 

 

 

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.  There were no loans modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the three or six month period ending June 30, 2011 or 2012.

The Company evaluates loan modifications to determine if the modification constitutes a troubled debt restructure.  A loan modification constitutes a troubled debt restructure if the borrower is experiencing financial difficulty and the Company grants a concession it would not otherwise consider.  In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its loans with the Company’s debt in the foreseeable future without the modification.  This evaluation is performed under the Company’s internal underwriting guidelines.  TDRs are separately identified for impairment disclosures.  If a loan is considered to be collateral dependent loan, the TDR is reported, net, at the fair value of the collateral.

 

Note 4.  Loans (Continued)

The following tables present data on impaired loans:

 

 

 

 

Note 4.  Loans (Continued)

 

 

Due to the economic conditions facing many of its customers, the Company determined that there were $22.3 million and $28.6 million of loans that were classified as impaired but were considered to be performing loans at June 30, 2012 and December 31, 2011, respectively.

 

Note 4.  Loans (Continued)

The following tables represent activity related to loan portfolio aging:

 

 

 

 

 

Note 4.  Loans (Continued)

The following table represents data for nonaccrual loans:

 

		For the period ended
		June 30, 2012				December 31, 2011
Commercial
Closed-end		$	1,554			$	95
Line of credit			1,216				1,222
Agricultural & AG RE			85				65
Construction, land & development			18,082				23,738
CRE - all other
Owner occupied			6,472				8,633
Non-owner occupied			7,296				6,572
1-4 family residential
Senior lien			4,434				3,588
Jr. lien & lines of credit			651				806
Consumer			-				4
Total		$	39,790			$	44,723

 

Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.