Note 9 - Allowance for Loan Losses and Credit Quality Information

9 Months Ended

Sep. 30, 2015

Allowance For Loan Losses And Credit Quality Information [Abstract]

Allowance For Loan Losses And Credit Quality Information [Text Block]

(9) Allowance for Loan Losses and Credit Quality Information

The allowance for loan losses for the three and nine months ended September 30, 2015 and 2014 is summarized as follows:

(Dollars in thousands)	1-4 Family			Commercial Real Estate			Consumer			Commercial Business			Total
For the three months ended September 30, 2015:
Balance, June 30, 2015	$	1,011			5,278			1,162			951			8,402
Provision for losses		117			(462	)		25			264			(56	)
Charge-offs		(19	)		0			(39	)		(1	)		(59	)
Recoveries		1			435			7			56			499
Balance, September 30, 2015	$	1,110			5,251			1,155			1,270			8,786
For the nine months ended September 30, 2015:
Balance, December 31, 2014	$	1,096			5,024			1,009			1,203			8,332
Provision for losses		30			(415	)		191			(45	)		(239	)
Charge-offs		(19	)		0			(66	)		(6	)		(91	)
Recoveries		3			642			21			118			784
Balance, September 30, 2015	$	1,110			5,251			1,155			1,270			8,786
Allocated to:
Specific reserves	$	270			370			307			127			1,074
General reserves		826			4,654			702			1,076			7,258
Balance, December 31, 2014	$	1,096			5,024			1,009			1,203			8,332
Allocated to:
Specific reserves	$	220			259			353			79			911
General reserves		890			4,992			802			1,191			7,875
Balance, September 30, 2015	$	1,110			5,251			1,155			1,270			8,786
Loans receivable at December 31, 2014:
Individually reviewed for impairment	$	1,867			9,728			806			555			12,956
Collectively reviewed for impairment		67,974			181,940			54,119			56,567			360,600
Ending balance	$	69,841			191,668			54,925			57,122			373,556
Loans receivable at September 30, 2015:
Individually reviewed for impairment	$	1,862			7,589			917			402			10,770
Collectively reviewed for impairment		80,365			228,530			61,938			59,424			430,257
Ending balance	$	82,227			236,119			62,855			59,826			441,027

(Dollars in thousands)	1-4 Family			Commercial Real Estate			Consumer			Commercial Business			Total
For the three months ended September 30, 2014:
Balance, June 30, 2014	$	2,085			3,823			1,164			1,624			8,696
Provision for losses		(489	)		14			(16	)		(498	)		(989	)
Charge-offs		0			0			(15	)		(55	)		(70	)
Recoveries		0			229			10			47			286
Balance, September 30, 2014	$	1,596			4,066			1,143			1,118			7,923
For the nine months ended September 30, 2014:
Balance, December 31, 2013	$	1,628			6,458			1,106			2,209			11,401
Provision for losses		60			(3,588	)		83			(1,332	)		(4,777	)
Charge-offs		(92	)		(936	)		(75	)		(56	)		(1,159	)
Recoveries		0			2,132			29			297			2,458
Balance, September 30, 2014	$	1,596			4,066			1,143			1,118			7,923

The following table summarizes the amount of classified and unclassified loans at September 30, 2015 and December 31, 2014:

	September 30, 2015
	Classified										Unclassified
(Dollars in thousands)	Special Mention		Substandard		Doubtful		Loss		Total		Total		Total Loans
1-4 family	$	191		2,556		55		0		2,802		79,425		82,227
Commercial real estate:
Residential developments		0		6,842		0		0		6,842		22,232		29,074
Other		3,158		12,744		0		0		15,902		191,143		207,045
Consumer		0		568		89		260		917		61,938		62,855
Commercial business:
Construction industry		48		185		0		0		233		6,977		7,210
Other		4,653		1,567		14		0		6,234		46,382		52,616
	$	8,050		24,462		158		260		32,930		408,097		441,027

	December 31, 2014
	Classified										Unclassified
(Dollars in thousands)	Special Mention		Substandard		Doubtful		Loss		Total		Total		Total Loans
1-4 family	$	0		2,493		207		0		2,700		67,141		69,841
Commercial real estate:
Residential developments		323		9,960		0		0		10,283		9,677		19,960
Other		7,376		8,792		0		0		16,168		155,540		171,708
Consumer		0		489		55		261		805		54,120		54,925
Commercial business:
Construction industry		0		439		0		0		439		6,682		7,121
Other		4,255		1,156		0		0		5,411		44,590		50,001
	$	11,954		23,329		262		261		35,806		337,750		373,556

Classified loans represent special mention, substandard (performing and non-performing), and non-performing loans categorized as doubtful and loss. Loans classified as special mention are loans that have potential weaknesses that, if left uncorrected, may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date. Loans classified as substandard are loans that are generally inadequately protected by the current net worth and paying capacity of the obligor, or by the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans classified as doubtful have the weaknesses of those classified as substandard, with additional characteristics that make collection in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. A loan classified as loss is considered uncollectible and of such little value that continuance as an asset on the balance sheet is not warranted. Loans classified as substandard or doubtful require the Bank to perform an analysis of the individual loan and charge off any loans, or portion thereof, that are deemed uncollectible.

The aging of past due loans at September 30, 2015 and December 31, 2014 is summarized as follows:

(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current Loans		Total Loans		Loans 90 Days or More Past Due and Still Accruing
September 30, 2015
1-4 family	$	915		318		714		1,947		80,280		82,227		0
Commercial real estate:
Residential developments		0		0		0		0		29,074		29,074		0
Other		0		0		0		0		207,045		207,045		0
Consumer		306		290		147		743		62,112		62,855		0
Commercial business:
Construction industry		0		0		0		0		7,210		7,210		0
Other		263		20		15		298		52,318		52,616		0
	$	1,484		628		876		2,988		438,039		441,027		0
December 31, 2014
1-4 family	$	413		673		841		1,927		67,914		69,841		0
Commercial real estate:
Residential developments		0		0		0		0		19,960		19,960		0
Other		0		0		0		0		171,708		171,708		0
Consumer		550		176		131		857		54,068		54,925		0
Commercial business:
Construction industry		0		0		0		0		7,121		7,121		0
Other		136		0		0		136		49,865		50,001		0
	$	1,099		849		972		2,920		370,636		373,556		0

Impaired loans include loans that are non-performing (non-accruing) and loans that have been modified in a troubled debt restructuring (TDR). The following table summarizes impaired loans and related allowances as of September 30, 2015 and December 31, 2014:

	September 30, 2015						December 31, 2014
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
Loans with no related allowance recorded:
1-4 family	$	995		995		0		755		755		0
Commercial real estate:
Residential developments		5,215		7,558		0		7,416		10,040		0
Other		500		645		0		48		216		0
Consumer		410		411		0		463		464		0
Commercial business:
Construction industry		0		102		0		80		198		0
Other		14		14		0		0		0		0
Loans with an allowance recorded:
1-4 family		867		867		220		1,112		1,112		270
Commercial real estate:
Residential developments		1,684		1,684		233		1,522		1,522		240
Other		190		190		26		742		743		130
Consumer		507		524		353		343		360		307
Commercial business:
Construction industry		0		0		0		0		0		0
Other		388		939		79		475		1,026		127
Total:
1-4 family		1,862		1,862		220		1,867		1,867		270
Commercial real estate:
Residential developments		6,899		9,242		233		8,938		11,562		240
Other		690		835		26		790		959		130
Consumer		917		935		353		806		824		307
Commercial business:
Construction industry		0		102		0		80		198		0
Other		402		953		79		475		1,026		127
	$	10,770		13,929		911		12,956		16,436		1,074

The following tables summarize average recorded investment and interest income recognized on impaired loans during the three and nine months ended September 30, 2015 and 2014.

	For the three months ended September 30, 2015				For the nine months ended September 30, 2015
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Loans with no related allowance recorded:
1-4 family	$	989		1		866		32
Commercial real estate:
Residential developments		5,884		97		6,480		287
Other		501		8		388		22
Consumer		363		1		365		5
Commercial business:
Construction industry		3		0		36		0
Other		20		0		10		1
Loans with an allowance recorded:
1-4 family		968		3		1,069		10
Commercial real estate:
Residential developments		1,705		6		1,540		24
Other		192		0		330		0
Consumer		531		2		434		16
Commercial business:
Construction industry		0		0		0		0
Other		397		4		432		13
Total:
1-4 family		1,957		4		1,935		42
Commercial real estate:
Residential developments		7,589		103		8,020		311
Other		693		8		718		22
Consumer		894		3		799		21
Commercial business:
Construction industry		3		0		36		0
Other		417		4		442		14
	$	11,553		122		11,950		410

	For the three months ended September 30, 2014				For the nine months ended September 30, 2014
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Loans with no related allowance recorded:
1-4 family	$	234		3		352		6
Commercial real estate:
Residential developments		7,691		102		7,688		112
Other		51		5		51		5
Consumer		456		8		468		10
Commercial business:
Construction industry		86		0		89		0
Other		0		0		0		0
Loans with an allowance recorded:
1-4 family		1,606		6		1,651		13
Commercial real estate:
Residential developments		1,153		0		3,521		0
Other		866		9		874		24
Consumer		489		3		479		9
Commercial business:
Construction industry		0		0		0		0
Other		981		8		990		23
Total:
1-4 family		1,840		9		2,003		19
Commercial real estate:
Residential developments		8,844		102		11,209		112
Other		917		14		925		29
Consumer		945		11		947		19
Commercial business:
Construction industry		86		0		89		0
Other		981		8		990		23
	$	13,613		144		16,163		202

At September 30, 2015 and December 31, 2014, non-accruing loans totaled $9.1 million and $10.9 million, respectively, for which the related allowance for loan losses was $0.6 million and $0.8 million, respectively. All of the interest income that was recognized for non-accruing loans was recognized using the cash basis method of income recognition. Non-accruing loans for which no specific allowance has been recorded, because management determined that the value of the collateral was sufficient to repay the loan, totaled $6.7 million and $8.0 million at September 30, 2015 and December 31, 2014, respectively. Non-accrual loans also include certain loans that have had terms modified in a TDR.

The non-accrual loans at September 30, 2015 and December 31, 2014 are summarized as follows:

(Dollars in thousands)	September 30, 2015		December 31, 2014
1-4 family	$	1,621	$	1,564
Commercial real estate:
Residential developments		6,382		8,483
Other		235		267
Consumer		797		486
Commercial business:
Construction industry		0		80
Other		17		40
	$	9,052	$	10,920

At September 30, 2015 and December 31, 2014 there were loans included in loans receivable, net, with terms that had been modified in a TDR totaling $7.8 million and $9.4 million, respectively. For the loans that were restructured in the third quarter of 2015, $74,000 were classified but performing and $26,000 were non-performing at September 30, 2015. There were no loans modified in the third quarter of 2014.

The following table summarizes TDRs at September 30, 2015 and December 31, 2014:

	September 30, 2015						December 31, 2014
(Dollars in thousands)	Accrual		Non-Accrual		Total		Accrual		Non-Accrual		Total
1-4 family	$	241		361		602		303		65		368
Commercial real estate		971		5,216		6,187		979		6,977		7,956
Consumer		121		470		591		320		251		571
Commercial business		385		2		387		434		121		555
	$	1,718		6,049		7,767		2,036		7,414		9,450

There were no material commitments to lend additional funds to customers whose loans were restructured or classified as nonaccrual at September 30, 2015 or December 31, 2014.

TDR concessions can include reduction of interest rates, extension of maturity dates, forgiveness of principal and/or interest due, or acceptance of real estate or other assets in full or partial satisfaction of the debt. Loan modifications are not reported as TDRs after 12 months if the loan was modified at a market rate of interest for comparable risk loans, and the loan is performing in accordance with the terms of the restructured agreement for the entire 12 month period. All loans classified as TDRs are considered to be impaired.

When a loan is modified as a TDR, there may be a direct, material impact on the loans within the balance sheet, as principal balances may be partially forgiven. The financial effects of TDRs are presented in the following tables and represent the difference between the outstanding recorded balance pre-modification and post-modification, for the three month and nine month periods ended September 30, 2015 and 2014.

	Three Months Ended September 30, 2015						Nine Months Ended September 30, 2015
(Dollars in thousands)	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:
1-4 family		1	$	46	$	46		2	$	358	$	358
Consumer		4		53		54		11		365		367
Total		5	$	99	$	100		13	$	723	$	725

	Three Months Ended September 30, 2014						Nine Months Ended September 30, 2014
(Dollars in thousands)	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:
1-4 family		0	$	0	$	0		2	$	760	$	760
Consumer		0		0		0		4		155		140
Total		0	$	0	$	0		6	$	915	$	900

There were no loans restructured in the 12 months preceding September 30, 2015 that defaulted in the three and nine months ended September 30, 2015. Loans that were restructured within the 12 months preceding September 30, 2014 that defaulted during the three and nine month periods ended September 30, 2014 are presented in the following table:

	Three Months Ended September 30, 2014				Nine Months Ended September 30, 2014
(Dollars in thousands)	Number of Contracts		Outstanding Recorded Investment		Number of Contracts		Outstanding Recorded Investment
Troubled debt restructurings that subsequently defaulted:
1-4 family		0	$	0		1	$	640
Total		0	$	0		1	$	640

The Company considers a loan to have defaulted when it becomes 90 or more days past due under the modified terms, when it is placed in non-accrual status, when it becomes other real estate owned, or when it becomes non-compliant with some other material requirement of the modification agreement.

Loans that were non-accrual prior to modification remain on non-accrual status for at least six months following modification. Non-accrual TDR loans that have performed according to the modified terms for six months may be returned to accrual status. Loans that were accruing prior to modification remain on accrual status after the modification as long as the loan continues to perform under the new terms.

TDRs are reviewed for impairment following the same methodology as other impaired loans. For loans that are collateral dependent, the value of the collateral is reviewed and additional reserves may be added as needed. Loans that are not collateral dependent may have additional reserves established if deemed necessary. The reserves for TDRs was $0.4 million, or 4.5%, of the total $8.8 million in loan loss reserves at September 30, 2015 and $0.4 million, or 5.1%, of the total $8.3 million in loan loss reserves at December 31, 2014.

Loans acquired in a business combination are segregated into two types: purchased performing loans with a discount attributable at least in part to credit quality and purchased credit impaired (PCI) loans with evidence of significant credit deterioration. Purchased performing loans are accounted for in accordance with ASC 310-20 “Nonrefundable Fees and Other Costs” as these loans do not have evidence of credit deterioration since origination. PCI loans are accounted for in accordance with ASC 310-30 “Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality” as they display significant credit deterioration since origination. In accordance with ASC 310-30, for PCI loans, the difference between contractually required payments at acquisition and the cash flows expected to be collected is referred to as the non-accretable difference. This amount is not recognized as a yield adjustment or as a loss accrual or a valuation allowance. Furthermore, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loans when there is a reasonable expectation about the amount and timing of such cash flows. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through an adjustment of the yield on the loan over its remaining estimated life. Decreases in expected cash flows are recognized immediately as an impairment through the provision for loan losses.

The following is additional information with respect to loans acquired through the Kasson State Bank acquisition:

(Dollars in thousands)	Contractual Principal Receivable			Accretable Difference			Carrying Amount
Purchased Performing Loans:
Balance at August 15, 2015:	$	24,215			(793	)		23,422
Change due to payments/refinances		(1,730	)		122			(1,608	)
Transferred to foreclosed assets		0			0			0
Change due to loan charge-off		0			0			0
Balance at September 30, 2015	$	22,485			(671	)		21,814

(Dollars in thousands)	Contractual Principal Receivable			Non-Accretable Difference			Carrying Amount
Purchased Credit Impaired Loans:
Balance at August 15, 2015:	$	1,134			(497	)		637
Change due to payments/refinances		(16	)		0			(16	)
Transferred to foreclosed assets		0			0			0
Change due to loan charge-off		0			0			0
Balance at September 30, 2015	$	1,118			(497	)		621

As a result of the Kasson State Bank acquisition, the Company has PCI loans for which there was, at acquisition, evidence of deterioration of credit quality since origination and for which it was probable at acquisition that all contractually required payments would not be collected. The carrying amount of those loans as of September 30, 2015 was $0.6 million.

No provision for loan losses was recognized during the period ended September 30, 2015 related to acquired loans as there was no significant change to the credit quality of those loans.