Loans and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2015

Loans and Allowance For Loan Losses [Abstract]

Loans and Allowance for Loan Losses

Note 3: Loans and Allowance for Loan Losses

Categories of loans include:

	September 30,		December 31,
	2015		2014
	(In thousands)
Commercial loans	$	61,721	$	52,286
Commercial real estate		163,222		158,314
Residential real estate		83,200		83,870
Installment loans		18,182		21,284
Total gross loans		326,325		315,754
Less allowance for loan losses		(2,727)		(2,400)
Total loans	$	323,598	$	313,354

The risk characteristics of each loan portfolio segment are as follows:

Commercial

Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may include a personal guarantee. Short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial Real Estate

Commercial real estate 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 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 more adversely affected by conditions in the real estate markets or in the general economy. The characteristics of properties securing the Company’s commercial real estate portfolio are diverse, but with geographic location almost entirely in the Company’s market area. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In general, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate versus nonowner-occupied loans.

Residential and Consumer

Residential and consumer loans consist of two segments - residential mortgage loans and personal loans. For residential mortgage loans that are secured by 1-4 family residences and are generally owner-occupied, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and consumer personal loans are secured by consumer personal assets, such as automobiles or recreational vehicles. Some consumer personal loans are unsecured, such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Allowance for Loan Losses and Recorded Investment in Loans

As of and for the three and nine month period ended September 30, 2015

			Commercial
	Commercial		Real Estate		Residential		Installment		Unallocated		Total
(In thousands)
Allowance for loan losses:
Balance, July 1, 2015	$	234	$	771	$	172	$	276	$	1,244	$	2,697
Provision charged to expense		7		(28)		14		46		87		126
Losses charged off		––		—		(20)		(103)		––		(123)
Recoveries		—		4		7		16		––		27
Balance, September 30, 2015	$	241	$	747	$	173	$	235	$	1,331	$	2,727
Balance, January 1, 2015	$	254	$	1,116	$	92	$	147	$	791	$	2,400
Provision charged to expense		(39)		(380)		80		186		540		387
Losses charged off		—		—		(20)		(196)		––		(216)
Recoveries		26		11		21		98		––		156
Balance, September 30, 2015	$	241	$	747	$	173	$	235	$	1,331	$	2,727
Ending balance:  individually evaluated for impairment	$	84	$	331	$	––	$	129	$	––	$	544
Ending balance:  collectively evaluated for impairment	$	157	$	416	$	173	$	106	$	1,331	$	2,183
Loans:
Ending balance:  individually evaluated for impairment	$	96	$	1,496	$	––	$	224	$	––	$	1,816
Ending balance:  collectively evaluated for impairment	$	61,625	$	161,726	$	83,200	$	17,958	$	––	$	324,509

Allowance for Loan Losses and Recorded Investment in Loans

As of and for the three and nine month period ended September 30, 2014

			Commercial
	Commercial		Real Estate		Residential		Installment		Unallocated		Total
(In thousands)
Allowance for loan losses:
Balance, July 1, 2014	$	472	$	1,838	$	91	$	146	$	585	$	3,132
Provision charged to expense		24		(171)		47		93		232		225
Losses charged off		––		(205)		(48)		(107)		––		(360)
Recoveries		1		11		1		14		––		27
Balance, September 30, 2014	$	497	$	1,473	$	91	$	146	$	817	$	3,024
Balance, January 1, 2014	$	412	$	1,609	$	90	$	141	$	642	$	2,894
Provision charged to expense		107		45		116		214		175		657
Losses charged off		(25)		(205)		(119)		(285)		––		(634)
Recoveries		3		24		4		76		––		107
Balance, September 30, 2014	$	497	$	1,473	$	91	$	146	$	817	$	3,024
Ending balance:  individually evaluated for impairment	$	354	$	989	$	––	$	––	$	––	$	1,343
Ending balance:  collectively evaluated for impairment	$	143	$	484	$	91	$	146	$	817	$	1,681
Loans:
Ending balance:  individually evaluated for impairment	$	437	$	5,441	$	––	$	––	$	––	$	5,878
Ending balance:  collectively evaluated for impairment	$	46,494	$	153,760	$	83,761	$	22,851	$	––	$	306,866

			Commercial
	Commercial		Real Estate		Residential		Installment		Unallocated		Total
	(In thousands)
Allowance for loan losses:
Ending balance:  individually evaluated for impairment	$	92	$	622	$	––	$	––	$	––	$	714
Ending balance:  collectively evaluated for impairment	$	162	$	494	$	92	$	147	$	791	$	1,686
Loans:
Ending balance:  individually evaluated for impairment	$	112	$	1,756	$	––	$	––	$	––	$	1,868
Ending balance:  collectively evaluated for impairment	$	52,174	$	156,558	$	83,870	$	21,284	$	––	$	313,886

The following tables show the portfolio quality indicators.

	September 30, 2015
			Commercial
Loan Class	Commercial		Real Estate		Residential		Installment		Total
	(In thousands)
Pass Grade	$	61,583	$	157,863	$	83,200	$	17,941	$	320,587
Special Mention		40		1,014		––		––		1,054
Substandard		98		4,345		––		241		4,684
Doubtful		––		––		––		––		––
	$	61,721	$	163,222	$	83,200	$	18,182	$	326,325

	December 31, 2014
			Commercial
Loan Class	Commercial		Real Estate		Residential		Installment		Total
	(In thousands)
Pass Grade	$	51,895	$	151,535	$	83,870	$	21,284	$	308,584
Special Mention		265		1,980		––		––		2,245
Substandard		126		4,799		––		––		4,925
Doubtful		––		––		––		––		––
	$	52,286	$	158,314	$	83,870	$	21,284	$	315,754

To facilitate the monitoring of credit quality within the loan portfolio, and for purposes of analyzing historical loss rates used in the determination of the ALLL, the Company utilizes the following categories of credit grades: pass, special mention, substandard, and doubtful. The four categories, which are derived from standard regulatory rating definitions, are assigned upon initial approval of credit to borrowers and updated periodically thereafter. Pass ratings, which are assigned to those borrowers that do not have identified potential or well defined weaknesses and for which there is a high likelihood of orderly repayment, are updated periodically based on the size and credit characteristics of the borrower. All other categories are updated on at least a quarterly basis.

The Company assigns a special mention rating to loans that have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects for the loan or the Company’s credit position.

The Company assigns a substandard rating to loans that are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged. Substandard loans have well defined weaknesses or weaknesses that could jeopardize the orderly repayment of the debt. Loans and leases in this grade also are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies noted are not addressed and corrected.

The Company assigns a doubtful rating to loans that have all the attributes of a substandard rating 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 possibility of loss is extremely high, but because of certain important and reasonable specific pending factors that may work to the advantage of and strengthen the credit quality of the loan or lease, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceeding, capital injection, perfecting liens on additional collateral or refinancing plans.

The Company evaluates the loan risk grading system definitions and allowance for loan losses methodology on an ongoing basis. No significant changes were made to either during the past year to date period.

Loan Portfolio Aging Analysis

As of September 30, 2015

	30-59 Days		60-89 Days		Greater
	Past Due		Past Due		Than 90				Total Past
	and		and		Days and		Non		Due and				Total Loans
	Accruing		Accruing		Accruing		Accrual		Non Accrual		Current		Receivable
	(In thousands)
Commercial	$	200	$	––	$	––	$	29	$	229	$	61,492	$	61,721
Commercial real estate		137		40		131		404		712		162,510		163,222
Residential		1,068		79		––		869		2,016		81,184		83,200
Installment		172		30		––		247		449		17,733		18,182
Total	$	1,577	$	149	$	131	$	1,549	$	3,406	$	322,919	$	326,325

Loan Portfolio Aging Analysis

As of December 31, 2014

	30-59 Days		60-89 Days		Greater
	Past Due		Past Due		Than 90				Total Past
	and		and		Days and		Non		Due and				Total Loans
	Accruing		Accruing		Accruing		Accrual		Non Accrual		Current		Receivable
	(In thousands)
Commercial	$	—	$	––	$	—	$	46	$	46	$	52,240	$	52,286
Commercial real estate		394		––		127		247		768		157,546		158,314
Residential		292		17		—		658		967		82,903		83,870
Installment		70		11		—		7		88		21,196		21,284
Total	$	756	$	28	$	127	$	958	$	1,869	$	313,885	$	315,754

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.

Impaired Loans

							For the three months ended				For the nine months ended
	As of September 30, 2015						September 30, 2015				September 30, 2015
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Specific		Investment in		Income		Investment in		Income
	Balance		Balance		Allowance		Impaired Loans		Recognized		Impaired Loans		Recognized
	(In thousands)
Loans without a specific valuation allowance:
Commercial	$	—	$	—	$	––	$	—	$	––	$	—	$	—
Commercial real estate		507		507		––		895		5		1,162		31
Residential		––		––		––		––		––		––		––
Installment		––		––		––		––		––		––		––
		507		507		––		895		5		1,162		31
Loans with a specific valuation allowance:
Commercial		96		96		84		98		1		101		5
Commercial real estate		989		989		331		1,077		9		1,078		27
Residential		––		––		––		––		––		––		––
Installment		224		224		129		235		10		237		14
		1,309		1,309		544		1,410		20		1,416		46
Total:
Commercial	$	96	$	96	$	84	$	98	$	1	$	101	$	5
Commercial real estate	$	1,496	$	1,496	$	331	$	1,972	$	14	$	2,240	$	58
Residential	$	––	$	––	$	––	$	––	$	––	$	––	$	––
Installment	$	224	$	224	$	129	$	235	$	10	$	237	$	14

Impaired Loans

							For the three months ended				For the nine months ended
	As of December 31, 2014						September 30, 2014				September 30, 2014
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Specific		Investment in		Income		Investment in		Income
	Balance		Balance		Allowance		Impaired Loans		Recognized		Impaired Loans		Recognized
	(In thousands)
Loans without a specific valuation allowance:
Commercial	$	7	$	7	$	––	$	9	$	––	$	12	$	1
Commercial real estate		794		1,144		––		1,786		59		1,809		73
Residential		––		––		––		––		––		––		––
Installment		––		––		––		––		––		––		––
		801		1,151		––		1,795		59		1,821		74
Loans with a specific valuation allowance:
Commercial		105		105		92		407		19		417		23
Commercial real estate		962		962		622		3,751		76		3,823		197
Residential		––		––		––		––		––		––		––
Installment		––		––		––		––		––		––		––
		1,067		1,067		714		4,158		95		4,240		220
Total:
Commercial	$	112	$	112	$	92	$	416	$	19	$	429	$	24
Commercial real estate	$	1,756	$	2,106	$	622	$	5,537	$	135	$	5,632	$	270
Residential	$	––	$	––	$	––	$	––	$	––	$	––	$	––
Installment	$	––	$	––	$	––	$	––	$	––	$	––	$	––

Interest income recognized on a cash basis was not materiality different than interest income recognized.

For the TDRs noted in the tables below, the Company extended the maturity dates and granted interest rate concessions as part of each of those loan restructurings. The loans included in the tables are considered impaired and specific loss calculations are performed on the individual loans. In conjunction with the restructuring there were no amounts charged-off.

	Three Months ended September 30, 2015
			Pre- Modification		Post-Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Contracts		Investment		Investment
	(In thousands)
Commercial		2	$	40	$	40
Commercial real estate		1		62		62
Residential		––		––		––
Installment		––		––		––

	Three Months ended September 30, 2015
	Interest						Total
	Only		Term		Combination		Modification
			(In thousands)
Commercial	$	––	$	40	$	––	$	40
Commercial real estate		––		62		––		62
Residential		––		––		––		––
Consumer		––		––		––		––

		Nine Months ended September 30, 2015
				Pre- Modification		Post-Modification
				Outstanding		Outstanding
		Number of		Recorded		Recorded
		Contracts		Investment		Investment
	(In thousands)
Commercial			2	$	40	$	40
Commercial real estate			1		62		62
Residential			––		––		––
Installment			––		––		––

	Nine Months Ended September 30, 2015
	Interest						Total
	Only		Term		Combination		Modification
			(In thousands)
Commercial	$	––	$	40	$	––	$	40
Commercial real estate		––		62		––		62
Residential		––		––		––		––
Consumer		––		––		––		––

	Three Months ended September 30, 2014
			Pre- Modification		Post-Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Contracts		Investment		Investment
	(In thousands)
Commercial		––	$	––	$	––
Commercial real estate		––		––		––
Residential		––		––		––
Installment		––		––		––

	Three Months Ended September 30, 2014
	Interest						Total
	Only		Term		Combination		Modification
			(In thousands)
Commercial	$	––	$	––	$	––	$	––
Commercial real estate		––		––		––		––
Residential		––		––		––		––
Consumer		––		––		––		––

	Nine Months ended September 30, 2014
			Pre- Modification		Post-Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Contracts		Investment		Investment
	(In thousands)
Commercial		––	$	––	$	––
Commercial real estate		2		155		68
Residential		––		––		––
Installment		––		––		––

	Nine Months Ended September 30, 2014
	Interest						Total
	Only		Term		Combination		Modification
			(In thousands)
Commercial	$	––	$	––	$	––	$	––
Commercial real estate		––		68		––		68
Residential		––		––		––		––
Consumer		––		––		––		––

During the nine months ended September 30, 2015, troubled debt restructurings did not have an impact on the allowance for loan losses. During the nine the months ended September 30, 2014, troubled debt restructurings described above increased the allowance for loan losses by $90,000.

At September 30, 2015 and 2014 and for three and nine month periods then ended, there were no material defaults of any troubled debt restructurings that were modified in the last 12 months. The Company generally considers TDR’s that become 90 days or more past due under the modified terms as subsequently defaulted.