Note 8 - Troubled Debt Restructurings

3 Months Ended

Mar. 31, 2015

Debt Disclosure [Abstract]

Debt Disclosure [Text Block]

8. Troubled Debt Restructurings. The following table details performing TDR loans at March 31, 2015 and December 31, 2014, segregated by class of financing receivables:

	March 31, 2015			December 31, 2014
Performing TDR loans accounted for on an accrual basis:	(Dollars in thousands)
Residential real estate	$	-		$	-
Commercial real estate		1,118			1,132
Commercial construction		-			-
Commercial lots and raw land		-			-
Commercial and industrial		8			9
Consumer real estate		164			165
Consumer lots and raw land		58			60
Home equity lines of credit		-			-
Consumer other		8			56
Total performing TDR loans accounted for on an accrual basis	$	1,356		$	1,422
Percentage of total loans, net		0.3	%		0.3	%

The following table presents a roll forward of performing and non-performing TDR loans for the three months ended March 31, 2015:

Performing TDRs	Beginning Balance		Additions (1)		Charge-Offs (2)		Other (3)			Ending Balance
March 31, 2015	(In thousands)
Residential mortgage	$	-	$	-	$	-	$	-		$	-
Commercial		1,141		-		-		(15	)		1,126
Consumer		281		-		-		(51	)		230
Total	$	1,422	$	-	$	-	$	(66	)	$	1,356

Non-Performing TDRs	Beginning Balance		Additions (1)		Charge-Offs (2)		Other (4)			Ending Balance
March 31, 2015	(In thousands)
Residential mortgage	$	834	$	-	$	-	$	(7	)	$	827
Commercial		2,355		-		-		(833	)		1,522
Consumer		51		-		-		-			51
Total	$	3,240	$	-	$	-	$	(840	)	$	2,400

1. Includes new TDRs and increases to existing TDRs.

2. Post modification charge-offs.

3. Includes principal payments, paydowns and performing loans previously restructured at market rates that are no longer reported as TDRs.

4. Includes principal payments, paydowns and loans previously designated as non-performing that are currently performing in compliance with their modified terms.

In determining the allowance for loan and lease losses, the Bank considers TDRs and subsequent defaults in restructuring in its estimate. As a result, the allowance may be increased, adjustments may be made in the allocation of the allowance, or charge-offs may be taken to further write down the carrying value of the loan. The Bank’s primary objective in granting concessions to borrowers having financial difficulties is an attempt to protect as much of its investment as possible. The Bank faces significant challenges when working with borrowers who are experiencing diminished operating cash flows, depreciated collateral values, or prolonged sales and rental absorption periods. While borrowers may experience deterioration in their financial condition, many continue to be creditworthy customers who have the willingness and capacity to repay their debts. In such cases, the Bank finds it mutually beneficial to work constructively with its borrowers, and that prudent restructurings are often in the best interest of the Bank and the borrower. The Bank offers a variety of TDR programs on a loan-by-loan basis in which, for economic or legal reasons related to an individual borrower’s financial condition, it grants a concession to the borrower that would not otherwise be considered. The restructuring of a troubled loan may include, but is not limited to any one or combination of the following: a modification of the loan terms such as a reduction of the contractual interest rate, principal, payment amount or accrued interest; an extension of the maturity date at a stated interest rate lower than the current market rate for a new debt with similar risks; a change in payment type, e.g. from principal and interest, to interest only with all principal and interest due at maturity; a substitution or acceptance of additional collateral; and a substitution or addition of new debtors for the original borrower.

The Bank’s restructuring success includes but is not limited to any one or combination of the following: improves the prospects for repayment of principal and interest; reduces the prospects of further write downs and charge-offs; reduces the prospects of potential additional foreclosures; helps borrowers to maintain a creditworthy status; and ultimately will reduce the volume of classified, criticized and/or non-accrual loans. The Bank identifies loans for potential restructuring on a loan-by-loan basis using a variety of sources which may include, but is not limited to any one or combination of the following: being approached or contacted by the borrower to modify loan terms; review of borrower’s financial statements indicates borrower may be experiencing financial difficulties; past due payment reports; loans extending past their stated maturity date; and non-accrual loan reports.

On a loan-by-loan basis, the Bank restructures loans that were either on non-accrual basis or on accrual basis prior to restructuring. If a loan was on nonaccrual basis prior to restructuring, it remains on nonaccrual basis until the borrower has demonstrated a willingness and ability to meet the terms and conditions of the restructuring and to make the restructured loan payments, generally for a period of at least nine months. The Bank has not immediately placed any restructured loan on accrual status that was on nonaccrual status prior to restructuring. If a restructured loan was on accrual basis prior to restructuring and the Bank expects the borrower to perform to the terms and conditions of the loan after restructuring (i.e. the loan was current, on accrual basis, and the borrower has the ability to make the restructured loan payments), the loan remains on an accrual basis and placement on nonaccrual is not required.

The Bank performs restructurings on certain troubled loan workouts, whereby existing loans are restructured into a multiple note structure (i.e., Note A and Note B structure). The Bank separates a portion of the current outstanding debt into a new legally enforceable note (Note A) that is reasonably assured of repayment and performance according to prudently modified terms. The portion of the debt that is not reasonably assured of repayment (Note B) is adversely classified and charged-off as appropriate. The following table provides information on multiple note restructures for certain commercial real estate loan workouts as of March 31, 2015. There were no multiple note restructures outstanding as of March 31, 2014.

	March 31, 2015		March 31, 2014
Note A Structure	(In thousands)
Commercial real estate (1)	$	275	$	-
Note B Structure
Commercial real estate (2)	$	174	$	-
Reduction of interest income (3)	$	3	$	-

(1) If Note A was on nonaccrual status, it may be placed back on accrual status based on sustained historical payment performance of generally nine months.

(2) Note B is immediately charged-off upon restructuring; however, payment in full is due at maturity of the note.

(3) Reflects amount of interest income reduction during the three months ended March 31, 2015, as a result of multiple note restructures.

The benefit of this workout strategy is for the A note to remain a performing asset for which the borrower has the willingness and ability to meet the restructured payment terms and conditions. In addition, this workout strategy reduces the prospects of further write downs and charge offs, and also reduces the prospects of a potential foreclosure. Following this restructuring, the Note A credit classification generally improves from “substandard” to an unclassified risk grade.

The general terms of the new loans restructured under the Note A and Note B structure differ as follows:

● Note A: First lien position; fixed or adjustable current market interest rate; fixed month term to maturity; payments – interest only to maturity, or full principal and interest to maturity. Note A is underwritten in accordance with the Bank’s customary underwriting standards and is on an accrual basis.

● Note B: Second lien position; fixed or adjustable below current market interest rate; fixed month term to maturity; payments – due in full at maturity. Note B is underwritten in accordance with the Bank’s customary underwriting standards, except for the below market interest rate and payment terms, and is on a nonaccrual basis.