Loans and Leases | NOTE 3 - Loans outstanding at June 30, 2015 and December 31, 2014, are as follows: (Expressed in Thousands) June 30, December 31, Consumer Real Estate: Construction $ 3,563 $ 3,519 Farmland 82 93 Residential 1-4 family 22,757 23,737 Home equity loans 980 1,207 Home equity lines of credit 4,305 3,966 Total Consumer Real Estate 31,687 32,522 Commercial Real Estate: Non-farm, 39,742 37,411 Multifamily (5 or more) residential properties 9,210 9,538 Total Commercial Real Estate 48,952 46,949 Commercial and Other Loans: Commercial 10,751 5,720 Non-rated 10,792 11,384 Other loans 27 19 Total Commercial and Other Loans 21,570 17,123 Consumer Loans: Installment and other loans to individuals 2,299 2,261 Credit Cards 462 503 Total Consumer Loans 2,761 2,764 Total Loans 104,970 99,358 Less unearned interest and deferred fees 150 141 Gross Loans 104,820 99,217 Less allowance for loan losses 1,758 1,813 Net Loans $ 103,062 $ 97,404 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 the 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 The following tables present the aging of the recorded investment in past due loans by class of loans ( in thousands June 30, 2015 Current 30-59 60-89 90 Days Total Total Loans 90 Days or Commercial and other loans $ 21,519 $ 31 $ — $ 20 $ 51 $ 21,570 $ — Commercial real estate 48,272 354 — 326 680 48,952 — Consumer real estate 31,493 116 — 78 194 31,687 — Consumer 2,741 12 8 — 20 2,761 — Unearned interest and deferred fees (150 ) — — — — (150 ) — Total loans $ 103,875 $ 513 $ 8 $ 424 $ 945 $ 104,820 $ — Non-accrual loans included above are as follows: Commercial and other loans $ — $ — $ — $ 20 $ 20 $ 20 $ — Commercial real estate 243 — — 326 326 569 — Consumer real estate 171 31 — 78 109 280 — Consumer — — — — — — — Total non-accrual loans $ 414 $ 31 $ — $ 424 $ 455 $ 869 $ — December 31, 2014 Current 30-59 60-89 90 Days Total Total 90 Days or Commercial and other loans $ 17,078 $ 6 $ — $ 39 $ 45 $ 17,123 $ — Commercial real estate 46,246 — 13 690 703 46,949 — Consumer real estate 32,384 71 — 67 138 32,522 — Consumer 2,742 5 3 14 22 2,764 14 Unearned interest and deferred fees (141 ) — — — — (141 ) — Total loans $ 98,309 $ 82 $ 16 $ 810 $ 908 $ 99,217 $ 14 Non-accrual loans included above are as follows: Commercial and other loans $ — $ — $ — $ 39 $ 39 $ 39 $ — Commercial real estate — — 13 690 703 703 — Consumer real estate 223 — — 67 67 290 — Consumer — — — — — — — Total non-accrual loans $ 223 $ — $ 13 $ 796 $ 809 $ 1,032 $ — 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 as of June 30, 2015 and December 31, 2014 ( in thousands June 30, 2015 Pass Special Mention Substandard Doubtful Total Commercial and other $ 21,550 $ — $ 20 $ — $ 21,570 Commercial real estate 45,226 — 3,726 — 48,952 Total $ 66,776 $ — $ 3,746 $ — $ 70,522 December 31, 2014 Pass Special Mention Substandard Doubtful Total Commercial and other $ 17,084 $ — $ 39 $ — $ 17,123 Commercial real estate 41,679 1,170 4,100 — 46,949 Total $ 58,763 $ 1,170 $ 4,139 $ — $ 64,072 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 June 30, 2015 and December 31, 2014 ( in thousands June 30, 2015 Performing Non-performing Total Consumer $ 2,761 $ — $ 2,761 Consumer real estate 31,056 631 31,687 Total $ 33,817 $ 631 $ 34,448 December 31, 2014 Performing Non-performing Total Consumer $ 2,750 $ 14 $ 2,764 Consumer real estate 32,232 290 32,522 Total $ 34,982 $ 304 $ 35,286 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 (TDRs). Impaired loans at June 30, 2015 and December 31, 2014 are set forth in the following tables ( in thousands June 30, 2015 Unpaid Recorded Recorded Total Related Commercial and other loans $ 20 $ — $ 20 $ 20 $ 20 Commercial real estate 569 341 228 569 77 Consumer real estate 425 75 350 425 9 Total $ 1,014 $ 416 $ 598 $ 1,014 $ 106 December 31, 2014 Unpaid Recorded Recorded Total Related Commercial and other loans $ 39 $ — $ 39 $ 39 $ 39 Commercial real estate 744 474 270 744 78 Consumer real estate 493 143 350 493 9 Consumer 18 — 11 11 1 Total $ 1,294 $ 617 $ 670 $ 1,287 $ 127 Average Recorded Investment Interest Income Recognized Interest Income Recognized Cash Basis For the three months ended For the three months ended For the three months ended June 30, 2015 June 30, 2014 June 30, 2015 June 30, 2014 June 30, 2015 June 30, 2014 Commercial and other loans $ 20 $ 22 $ — $ — $ — $ — Commercial real estate 587 850 — 1 39 — Consumer real estate 431 185 5 2 1 — Total $ 1,038 $ 1,057 $ 5 $ 3 $ 40 $ — Average Recorded Investment Interest Income Recognized Interest Income Recognized Cash Basis For the six months ended For the six months ended For the six months ended June 30, 2015 June 30, 2014 June 30, 2015 June 30, 2014 June 30, 2015 June 30, 2014 Commercial and other loans $ 29 $ 24 $ — $ — $ — $ — Commercial real estate 646 881 — 1 253 — Consumer real estate 459 179 10 2 2 — Total $ 1,134 $ 1,084 $ 10 $ 3 $ 255 $ — 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. TDRs 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 June 30, 2015 and two TDRs in accrual status at December 31, 2014. 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 new TDRs, 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 (in thousands) June 30, 2015 December 31, 2014 Troubled Debt Restructurings Number of Pre- Modification Outstanding Recorded Investment Post Modification Outstanding Recorded Investment Number of Contracts Pre- Modification Outstanding Recorded Investment Post Modification Outstanding Recorded Investment Commercial and other loans — $ — $ — — $ — $ — Commercial real estate — — — — — — Consumer real estate 2 422 422 1 350 350 Total 2 $ 422 $ 422 1 $ 350 $ 350 Troubled Debt Restructurings That Subsequently Defaulted Within 12 Months After Restructuring Commercial and other loans — $ — $ — — $ — $ — Commercial real estate — — — — — — Consumer real estate — — — 1 350 350 Total — $ — $ — 1 $ 350 $ 350 The following tables include new TDRs by type of modification (in thousands) June 30, 2015 Troubled Debt Restructurings Interest Only Term Combination Total Modification Commercial and other loans $ — $ — $ — $ — Commercial real estate — — — — Consumer real estate — 422 — 422 Total $ — $ 422 $ — $ 422 December 31, 2014 Troubled Debt Restructurings Interest Only Term Combination Total Modification Commercial and other loans $ — $ — $ — $ — Commercial real estate — — — — Consumer real estate — 350 — 350 Total $ — $ 350 $ — $ 350 At June 30, 2015 and December 31, 2014, there were funds of $24,000 and $33,000 committed to be advanced to customers whose loans were classified as TDRs. |