v2.3.0.9
Loans and Allowance for Loan Losses
9 Months Ended
Dec. 31, 2011
Loans and Allowance For Loan Losses [Abstract]  
Loans and Allowance For Loan Losses [Text Block]

7.      Loans and Allowance for Loan Losses

 

Classes of loans, including loans held for sale, at December 31, 2011 and March 31 include:

  

    December 31,
2011
    March 31,
2011
 
    (In thousands)  
Mortgage loans on real estate:            
Residential:                
1-4 Family   $ 45,518     $ 41,954  
Second mortgages     1,345       1,542  
Construction     4,624       5,362  
Equity lines of credit     3,993       3,761  
Commercial and farmland     37,570       33,898  
Total mortgage loans on real estate     93,050       86,517  
Commercial loans and agricultural finance     18,941       19,132  
Consumer/other loans     17,218       15,852  
States and municipal government loans     1,326       764  
Total Loans     130,535       122,265  
                 
Less                
Net deferred loan fees, premiums and discounts     17       12  
Undisbursed portion of loans     1,271       590  
Allowance for loan losses     1,290       1,145  
                 
Net loans   $ 127,957     $ 120,518  

 

The Company is a community-oriented financial institution that seeks to serve the financial needs of the residents and businesses in its market area. The Company considers Crawford County and surrounding counties in Illinois and Knox County and surrounding counties in Indiana as its market area. The principal business of the Company has historically consisted of attracting retail deposits from the general public and primarily investing those funds in one- to four-family residential real estate loans, commercial, multi-family and agricultural real estate loans, consumer loans, and commercial business and agricultural finance loans. For the most part, loans are collateralized by assets, primarily real estate, of the borrowers and guaranteed by individuals. Repayment of the loans is expected to come from cash flows of the borrowers or from proceeds from the sale of selected assets of the borrowers.

 

Loan originations are developed from continuing business with (i) depositors and borrowers, (ii) real estate broker referrals, (iii) auto dealer referrals, and (iv) walk-in customers. All of the Company’s lending is subject to its written underwriting standards and loan origination procedures. Upon receipt of a loan application, it is first reviewed by a loan officer in the loan department who checks applications for accuracy and completeness. The Company’s underwriting department then gathers the required information to assess the borrower’s ability to repay the loan, the adequacy of the proposed collateral, the employment stability and the credit-worthiness of the borrower. The financial resources of the borrower and the borrower’s credit history, as well as the collateral securing the loan, are considered an integral part of each risk evaluation prior to approval. A credit report is obtained to verify specific information relating to the applicant’s employment and credit standing. Income is verified using W-2 information, tax returns or pay-stubs of the potential borrower. In the case of a real estate loan, an appraisal of the real estate intended to secure the proposed loan is undertaken by an independent appraiser approved by the Company. The board of directors has established individual lending authorities for each loan officer by loan type. Loans over an individual officer’s lending limits must be approved by a loan officer with a higher lending limit, with the highest being that of the president and senior loan officer who have a combined lending authority up to $500,000. Loans with a principal balance over this limit must be approved by the directors’ loan committee, which meets weekly and consists of the chairman of the board, all outside directors, the president, the senior loan officer and loan officers. The senior loan officer and loan officers do not vote on the loans presented. The board of directors ratifies all loans that are originated. Once the loan is approved, the applicant is informed and a closing date is scheduled. Loan commitments are typically funded within 30 days.

 

The Company requires evidence of marketable title and lien position or appropriate title insurance on all loans secured by real property. The Company also requires fire and extended coverage casualty insurance in amounts at least equal to the lesser of the principal amount of the loan or the value of improvements on the property, depending on the type of loan. As required by federal regulations, the Company also requires flood insurance to protect the property securing its interest if such property is located in a designated flood area.

 

The Company’s lending can be summarized into five primary areas; residential real estate loans, commercial real estate and farmland loans, commercial and agricultural finance loans, consumer loans and loans to state and municipal government loans. A description of each of the lending areas can be found in the Company’s Annual Report on Form 10-K for the year ended March 31, 2011. The significant majority of the lending activity occurs in the Company’s Illinois market, with the remainder in the Indiana market. Management reserves the right to change the amount or type of lending in which it engages to adjust to market or other factors.

 

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

 

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. Management’s evaluation is also subject to review and potential change, by bank regulatory authorities.

 

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal and external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

 

There have been no significant changes to the Company’s accounting policies or methodology from the prior periods.

 

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of December 31, 2011 and March 31, 2011:

 

    For Nine Months Ended December 31, 2011  
    Commercial
Real Estate
    Residential
Real Estate
    Commercial     Consumer/
Other
Loans
    State and
Municipal
Government
    Total  
    (In thousands)  
Allowance for loan losses:                                                
Balance at March 31, 2011   $ 365     $ 581     $ 168     $ 31     $     $ 1,145  
Provision charged to expense     8       (101 )     527        121             555  
Losses charged off     61       26       297       50             434  
Recoveries                       24             24  
Balance, end of period   $ 312     $ 454     $ 398     $ 126     $     $ 1,290  

 

    For Three Months Ended December 31, 2011

 

 
    Commercial
Real Estate
    Residential
Real Estate
    Commercial     Consumer/
Other
Loans
    State and
Municipal
Government
    Total  
    (In thousands)  
Allowance for loan losses:                                                
Balance at September 30, 2011   $ 304     $ 429     $ 349     $ 67     $     $ 1,149  
Provision charged to expense     8       25       49        68             150  
Losses charged off                       18             18  
Recoveries                       9             9  
Balance, end of period   $ 312     $ 454     $ 398     $ 126     $     $ 1,290  

 

 The following table presents the activity in the allowance for loan losses for the three-month and nine-month periods ended December 31, 2010:

 

    For Nine Months Ended December 31, 2010  
    Commercial
Real Estate
    Residential
Real Estate
    Commercial     Consumer/
Other
Loans
    State and
Municipal
Government
    Total  
    (In thousands)  
Allowance for loan losses:                                                
Balance at March 31, 2010   $ 593     $ 72     $ 279     $ 29     $     $ 973  
Provision charged to expense     (95 )     303       (70 )        27             165  
Losses charged off     18       31       1       40             90  
Recoveries     24                   30             54  
Balance, end of period   $ 504     $ 344     $ 208     $ 46     $     $ 1,102  

 

    For Three Months Ended December 31, 2010  
    Commercial
Real Estate
    Residential
 Real Estate
    Commercial     Consumer/
Other
Loans
    State and
Municipal
Government
    Total  
    (In thousands)  
                                     
Allowance for loan losses:                                                
Balance at September 30, 2010   $ 548     $ 143     $ 331     $ 38     $     $ 1,060  
Provision charged to expense     (26 )     201       (122 )       22             75  
Losses charged off     18             1       19             38  
Recoveries                       5             5  
Balance, end of period   $ 504     $ 344     $ 208     $ 46     $     $ 1,102  

 

Management’s opinion as to the ultimate collectability of loans is subject to estimates regarding future cash flows from operations and the value of property, real and personal, pledged as collateral. These estimates are affected by changing economic conditions and the economic prospects of borrowers.

 

Credit Quality Indicators

 

The Company 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. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on all loans at origination. In addition, commercial lending relationships over $100,000 are reviewed annually by the credit analyst or senior loan officer in our loan department in order to verify risk ratings. The Company uses the following definitions for risk ratings:

 

Watch – Loans classified as watch have minor weaknesses or negative trends. The is a possibility that some loss could be sustained.

 

Special Mention – 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.

 

Substandard – 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 the institution will sustain some loss if the deficiencies are not corrected.

 

Doubtful – 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.

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be Pass rated loans.

 

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of December 31, 2011 and March 31, 2011:

 

    December 31, 2011  
    Commercial
Real Estate
    Residential
Real Estate
    Commercial     Consumer/
Other
Loans
    State and
Municipal
Government
    Total  
    (In thousands)  
Rating:                                                
Pass   $ 31,842     $ 53,985     $ 16,989     $ 16,929     $ 1,200     $ 120,945  
Watch     4,953       779       763       153       126       6,774  
Special Mention     121       133       477       10             741  
Substandard     476       415       707       70             1,668  
Doubtful     178       168       5       56             407  
Total   $ 37,570     $ 55,480     $ 18,941     $ 17,218     $ 1,326     $ 130,535  

 

    March 31, 2011  
    Commercial
Real Estate
    Residential
Real Estate
    Commercial     Consumer/
Other
Loans
    State and
Municipal
Government
    Total  
    (In thousands)  
Rating:                                                
Pass   $ 31,664     $ 51,798     $ 17,767     $ 15,703     $ 634     $ 117,566  
Watch     1,627       296       423       65       130       2,541  
Special Mention     287       146       677                   1,110  
Substandard     81       272       259       27             639  
Doubtful     239       107       6       57             409  
Total   $ 33,898     $ 52,619     $ 19,132     $ 15,852     $ 764     $ 122,265  

  

The following tables present the Company’s loan portfolio aging analysis as of December 31, 2011 and March 31, 2011:

  

    December 31, 2011  
    30-59 Days
Past Due
    60-89 Days
Past Due
    Greater
Than 90
Days
    Non-
accrual
    Total Loans
Past Due
and Non-
accrual
    Current     Total Loans
Receivable
 
    (In thousands)  
Real Estate:                                                        
Residential:                                                        
1-4 Family   $ 143     $     $ 94     $ 79     $ 316     $ 45,202     $ 45,518  
Construction     110                         110       4,514       4,624  
Second mortgages                                   1,345       1,345  
Equity lines of credit                       9       9       3,984       3,993  
Commercial real estate                       178       178       37,392       37,570  
Commercial     520       489             5       1,014       17,927       18,941  
Consumer/other loans     162       9             78       249       16,969       17,218  
State and municipal government                                   1,326       1,326  
                                                         
Total   $ 935     $ 498     $ 94     $ 349     $ 1,876     $ 128,659     $ 130,535  

 

 

    March 31, 2011  
    30-59 Days
Past Due
    60-89 Days
Past Due
    Greater
Than 90
Days
    Non-accrual     Total Loans
Past Due
and Non-accrual
    Current     Total
Loans
Receivable
 
    (In thousands)  
Real Estate:                                                        
Residential:                                                        
1-4 Family   $ 121     $     $     $ 52     $ 173     $ 41,781     $ 41,954  
Construction                                   5,362       5,362  
Second mortgages                                   1,542       1,542  
Equity lines of credit                                   3,761       3,761  
Commercial real estate                       239       239       33,659       33,898  
Commercial           333             6       339       18,793       19,132  
Consumer/other loans     23                   40       63       15,789       15,852  
State and municipal government                                   764       764  
                                                         
Total   $ 144     $ 333     $     $ 337     $ 814     $ 121,451     $ 122,265  

 

The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is passed on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

 

All interest accrued but not collected for loans that are placed on nonaccrual or charged off are reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual basis when all the principal and interest amounts contractually due are brought current and future payments are reasonable assured.

 

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

 

Impairment is measured on a loan-by-loan basis by either the present value of the expected future cash flows, the loan’s observable market value, or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. Significant restructured loans are considered impaired in determining the adequacy of the allowance for loan losses.

 

The Company actively seeks to reduce its investment in impaired loans. The primary tools to work through impaired loans are settlement with the borrowers or guarantors, foreclosure of the underlying collateral, or restructuring.

 

The Company will restructure loans when the borrower demonstrates the inability to comply with the terms of the loan, but can demonstrate the ability to meet acceptable restructured terms. Restructurings generally include one or more of the following restructuring options; reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance, or other actions intended to maximize collection. Restructured loans in compliance with modified terms are classified as impaired.

 

The following tables present impaired loans for the three and nine months ended December 31, 2011 and the year ended March 31, 2011:

 

          Three Months Ended     Nine Months Ended  
    December 31, 2011     December 31, 2011     December 31, 2011  
    Recorded
Balance
    Unpaid
Principal
Balance
    Specific
Allowance
    Average
Investment
in Impaired
Loans
    Interest
Income
Recognized
    Average
Investment
in Impaired
Loans
    Interest
Income
Recognized
 
    (In thousands)  
Loans without a specific valuation allowance:                                                        
Residential   $ 140     $ 140     $     $ 93     $ 1     $ 78     $ 5  
Commercial real estate     178       391             178             196        
Consumer     2       2             2             10        
Commercial     1       1             2             66        
Loans with a specific valuation allowance:                                                        
Residential     224       224       31       219       2       220       7  
Commercial real estate                                          
Consumer     98       98       32       60             40       4  
Commercial     494       494       44       495       3       296       8  
Total:                                                        
Residential   $ 364     $ 364     $ 31     $ 312     $ 3     $ 298     $ 12  
Commercial real estate   $ 178     $ 391     $     $ 178     $     $ 196     $  
Consumer   $ 100     $ 100     $ 32     $ 62     $     $ 50     $ 4  
Commercial   $ 495     $ 495     $ 44     $ 497     $ 3     $ 362     $ 8  

 

 

    March 31, 2011  
    Recorded
Balance
    Unpaid
Principal
Balance
    Specific
Allowance
    Average
Investment in
Impaired
Loans
    Interest
Income
Recognized
 
    (In thousands)  
Loans without a specific valuation allowance:                                        
Residential   $ 97     $ 97     $     $ 67     $ 6  
Commercial real estate     239       391             48       6  
Consumer     40       40             13       1  
Commercial     5       5             1       1  
Loans with a specific valuation allowance:                                        
Residential     218       218       27       294       13  
Commercial real estate                       97        
Consumer     21       21       9       17       1  
Commercial     6       6       3       38        
Total:                                        
Residential   $ 315     $ 315     $ 27     $ 361     $ 19  
Commercial real estate   $ 239     $ 391     $     $ 145     $ 6  
Consumer   $ 61     $ 61     $ 9     $ 30     $ 2  
Commercial   $ 11     $ 11     $ 3     $ 39     $ 1  

 

During the nine months ended December 31, 2011, the Company adopted the provisions of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) No. 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring (“TDR”).  Management applied the guidance on determining whether any restructurings that occurred from April 1, 2011 or later met the definition of a TDR.  TDRs at December 31, 2011 and March 31, 2011 totaled $413,000, and $466,000, respectively.  At December 31, 2011, the Company had a related allowance for loan losses of $23,000 allocated to these TDRs, compared to $19,000 at March 31, 2011.  As of December 31, 2011, the Company had $207,000 classified as TDRs performing as agreed under the terms of their restructured plans and $206,000 not performing as agreed under the terms of the restructured plans.  For the three and nine month periods ended December 31, 2011, there was one loan with a balance of $26,000 modified as a TDR.  The following table presents an analysis of TDRs as of December 31, 2011 and March 31, 2011 (dollar amounts in thousands).

 

    December 31, 2011     March 31, 2011  
    Number of
Contracts
    Pre-
Modification
Outstanding
Recorded
Investment
    Post-
Modification
Outstanding
Recorded
Investment
    Number of
Contracts
    Pre-
Modification
Outstanding
Recorded
Investment
    Post-
Modification
Outstanding
Recorded
Investment
 
Troubled Debt Restructurings:                                                
Residential     5     $ 224     $ 224       4     $ 210     $ 210  
Commercial real estate     1       391       178       1       391       239  
Consumer     1       5       5       1       6       6  
Commercial     2       6       6       2       11       11  
Total:     9     $ 626     $ 413       8     $ 618     $ 466