NOTE 3 - LOANS AND LEASES

Loans outstanding at March 31, 2014 and December 31, 2013, are as follows:


	(Expressed in Thousands)
	March 31, 2014		December 31, 2013
Consumer Real Estate:
Construction	$	617	$	487
Farmland		129		136
Residential 1-4 Family		23,389		23,275
Home Equity Loans		1,536		1,665
Home Equity Lines of Credit		3,454		3,684

Total Consumer Real Estate		29,125		29,247
Commercial Real Estate:
Non-farm, non-residential		34,256		35,345
Multifamily (5 or more) residential properties		7,239		8,762

Total Commercial Real Estate		41,495		44,107
Commercial and Other Loans:
Commercial		5,389		5,489
Non-rated industrial development obligations		11,838		11,200
Other loans		24		36

Total Commercial and Other Loans		17,251		16,725
Consumer Loans:
Installment and other loans to individuals		2,718		2,921
Credit Cards		518		535

Total Consumer Loans		3,236		3,456

Total loans	$	91,107		93,535
Less unearned interest and deferred fees		137		133

Gross loans	$	90,970		93,402

The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. These policies and procedures are reviewed by management and approved by the Board of Directors on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentration of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

The Company originates direct and indirect consumer loans including principally residential real estate, home equity lines and loans, credit cards, and indirect vehicle loans using a credit analysis as part of the underwriting process. Each loan type has a separate underwriting criteria, which consists of several factors including debt to income, type of collateral, credit history and customer relationship with the Company. Credit risk is driven by factors such as the creditworthiness of a borrower and general economic conditions in the Company’s market area that might impact the borrower’s personal income, employment, or collateral value. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably. Underwriting standards are designed to promote relationship banking rather than transactional banking. The Company’s management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of the borrower, however, may not be as expected and the collateral securing the loan may fluctuate in value. Credit risk in these loans is driven by the creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations. Minimum standards and underwriting guidelines have been established for commercial loan types.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be adversely affected by the general economy or conditions specific to the real estate market such as geography and/or property type.

Construction and land development real estate loans are usually based upon estimates of costs and estimated value of the completed project and include independent appraisal reviews and a financial analysis of the developers and property owners. Sources of repayment of these loans may include permanent loans, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are considered to be higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the economic conditions in the Company’s market areas.

Non-accrual loans amounted to $1,214,965 and $1,270,447 at March 31, 2014 and December 31, 2013, respectively. The amount of interest income that would have been recognized had the loans performed in accordance with their original terms was $18,799, $42,301 and $84,793 for the three months ended March 31, 2014 and 2013 and for the year ended December 31, 2013, respectively.

The following tables present the aging of the recorded investment in past due loans by class of loans (in thousands):


	March 31, 2014
	Current			30-59 Days Past Due		60-89 Days Past Due		90 Days or more Past Due		Total Past Due		Total Loans			90 Days or more Past Due and Accruing
Commercial and Other Loans	$	17,215		$	4	$	—	$	32	$	36	$	17,251		$	—
Commercial real estate		40,611			20		36		828		884		41,495			—
Consumer real estate		28,958			85		8		74		167		29,125			—
Consumer		3,228			5		3		—		8		3,236			—
Unearned interest and deferred fees		(137	)		—		—		—		—		(137	)		—

Total loans	$	89,875		$	114	$	47	$	934	$	1,095	$	90,970		$	—

Non-accrual loans included above are as follows:
Commercial and Other Loans	$	2		$	—	$	—	$	23	$	23	$	25		$	—
Commercial real estate		—			20		—		828		848		848			—
Consumer real estate		172			85		8		74		167		339			—
Consumer		—			—		3		—		3		3			—

Total non-accrual loans	$	174		$	105	$	11	$	925	$	1,041	$	1,215		$	—


	December 31, 2013
	Current			30-59 Days Past Due		60-89 Days Past Due		90 Days or more Past Due		Total Past Due		Total Loans			90 Days or more Past Due and Accruing
Commercial and Other Loans	$	16,693		$	10	$	—	$	22	$	32	$	16,725		$	—
Commercial real estate		43,244			159		—		704		863		44,107			—
Consumer real estate		28,994			168		9		76		253		29,247			—
Consumer		3,451			4		—		1		5		3,456			—
Unearned interest and deferred fees		(133	)		—		—		—		—		(133	)		—

Total loans	$	92,249		$	341	$	9	$	803	$	1,153	$	93,402		$	—

Non-accrual loans included above are as follows:
Commercial and Other Loans	$	4		$	—	$	—	$	22	$	22	$	26		$	—
Commercial real estate		22			159		—		704		863		885			—
Consumer real estate		146			124		9		76		209		355			—
Consumer		—			3		—		1		4		4			—

Total non-accrual loans	$	172		$	286	$	9	$	803	$	1,098	$	1,270		$	—

The Company utilizes an internal asset classification system as a means of reporting problem and potential problem loans. Risk ratings are assigned to individual credit exposures as an aspect of the credit approval and are adjusted thereafter to reflect changes in risk exposure as the borrower’s condition changes. The most significant factor used to determine the risk rating is the borrower’s primary source of repayment which includes a cash flow analysis. Other items considered in the loan review include secondary sources of repayment, financial trends, collateral value and characteristics, the size of the loan, and external factors impacting the borrower’s repayment ability.

Loans rated as “Pass” include those that have minimal, modest, acceptable, and higher risk. Minimal risk loans are fully secured by marketable securities or cash collateral, or loans supported by the United States Treasury. Modest risk loans have borrowers with stable cash flows over an extended period of time and extensive access to credit from several sources. Acceptable risk loans include individual borrowers with substantial liquid assets and commercial borrowers with strong cash flow. Higher risk loans have adequate sources of repayment and no current identifiable risk for repayment and loans that are slightly below average due to any number of factors such as income, collateral, or the lack of sufficient financial information.

Problem and potential problem loans are classified as “Special Mention,” “Substandard,” and “Doubtful.” Substandard loans are inadequately protected by the current worth and paying capacity of the borrower or the collateral pledged, if any. These loans have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loans classified as Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans that do not currently expose the Company to sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses that deserve management’s close attention are deemed to be Special Mention.

The following tables present the risk category of loans by class of loans based on the most recent analysis performed and the contractual aging as of March 31, 2014 and December 31, 2013 (in thousands):


March 31, 2014	Pass		Special Mention		Substandard		Doubtful		Total
Commercial and Other	$	17,216	$	—	$	35	$	—	$	17,251
Commercial Real Estate		33,461		3,273		4,761		—		41,495
Construction and Land Development		395		—		351		—		746

Total	$	51,072	$	3,273	$	5,147	$	—	$	59,492

Current	$	51,032	$	3,273	$	4,265	$	—	$	58,570
Past Due 30-59 days		4		—		—		—		4
Past Due 60-89 days		36		—		—		—		36
Past Due 90 days or more		—		—		9		—		9
Non- accrual		—		—		873		—		873

Total	$	51,072	$	3,273	$	5,147	$	—	$	59,492


December 31, 2013	Pass		Special Mention		Substandard		Doubtful		Total
Commercial and Other	$	16,675	$	—	$	50	$	—	$	16,725
Commercial Real Estate		35,302		3,936		4,869		—		44,107
Construction and Land Development		272		—		351		—		623

Total	$	52,249	$	3,936	$	5,270	$	—	$	61,455

Current	$	52,249	$	3,936	$	4,349	$	—	$	60,534
Past Due 30-59 days		—		—		10		—		10
Past Due 60-89 days		—		—		—		—		—
Past Due 90 days or more		—		—		—		—		—
Non- accrual		—		—		911		—		911

Total	$	52,249	$	3,936	$	5,270	$	—	$	61,455

For consumer and consumer real estate loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in those loan classes based on payment activity as of March 31, 2014 and December 31, 2013 (in thousands):


March 31, 2014	Performing		Non-performing		Total
Consumer	$	3,233	$	3	$	3,236
Consumer Real Estate		28,040		339		28,379

Total	$	31,273	$	342	$	31,615


December 31, 2013	Performing		Non-performing		Total
Consumer	$	3,452	$	4	$	3,456
Consumer Real Estate		28,269		355		28,624

Total	$	31,721	$	359	$	32,080

The Company also evaluates problem loans for impairment. A loan is considered to be impaired if it is probable that the Company will not be able to collect the payments for principal and interest when due according to the contractual terms of the loan agreement. Impaired loans generally include all non-accrual loans and Troubled Debt Restructurings (TDR’s).

Impaired loans at March 31, 2014 and December 31, 2013 are set forth in the following tables (in thousands):


	March 31, 2014
	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
Commercial and Other Loans	$	25	$	2	$	23	$	25	$	23
Commercial real estate		892		348		544		892		174
Consumer real estate		219		219		—		219		—

Total	$	1,136	$	569	$	567	$	1,136	$	197


	December 31, 2013
	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
Commercial and Other Loans	$	36	$	4	$	32	$	36	$	32
Commercial real estate		930		378		552		930		136
Consumer real estate		231		231		—		231		—

Total	$	1,197	$	613	$	584	$	1,197	$	168

Interest income of $592 was recognized on impaired commercial real estate loans subsequent to their classification as impaired for the three months ended March 31, 2014. No interest income was recognized on impaired loans subsequent to their classification as impaired for the three months ended March 31, 2013.

The average recorded investment in impaired loans at March 31, 2014 and March 31, 2013 are set forth below in the following table (in thousands):


	Average Recorded Investment
	March 31, 2014		March 31, 2013
Commercial and Other Loans	$	25	$	30
Commercial real estate		911		3,081
Consumer real estate		224		223

Total	$	1,160	$	3,334

Loan Modifications

The Company’s loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring (TDR), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonaccrual at the time of restructure and may only be returned to accrual status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months. TDR’s on accrual status may remain in accrual status after they have been restructured as long as they continue to perform in accordance with their modified terms. There was one TDR in accrual status at March 31, 2014 and December 31, 2013.

When the Company modifies a loan, management evaluates any possible impairment based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the collateral. In these cases management uses the current fair value of the collateral, less selling costs, instead of discounted cash flows. If management determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized by segment or class of loan, as applicable, through an allowance estimate or a charge-off to the allowance. Segment and class status is determined by the loan’s classification at origination.

The following tables include the recorded investment and number of modifications for newly modified loans, as of the respective dates. The Company reports the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured.


	March 31, 2014						December 31, 2013
	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
Commercial and Other Loans		—	$	—	$	—		—	$	—	$	—
Commercial real estate		—		—		—		1		46		46
Consumer real estate		—		—		—		—		—		—

Total		—	$	—	$	—		1	$	46	$	46

Troubled Debt Restructurings That subsequently defaulted
Commercial and Other Loans		—	$	—	$	—		—	$	—	$	—
Commercial real estate		—		—		—		—		—		—
Consumer real estate		—		—		—		—		—		—

Total		—	$	—	$	—		—	$	—	$	—

The concession granted on the TDR that originated in 2013 was an extension of the maturity date. At March 31, 2014 and December 31, 2013, there were funds of $6,566 and $5,711 committed to be advanced to customers whose loans were classified as TDR’s. No troubled debt restructurings modified in the past 12 months subsequently defaulted.