XML 84 R12.htm IDEA: XBRL DOCUMENT

Note 4 - Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2014

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

(4) LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans at December 31, 2014 and 2013 consisted of the following:

(In thousands)	2014			2013

Real estate mortgage loans:
Residential	$	106,679		$	107,029
Land		11,028			10,309
Residential construction		10,347			14,423
Commercial real estate		78,314			76,496
Commercial real estate construction		1,422			1,715
Commercial business loans		28,282			21,956
Consumer loans:
Home equity and second mortgage loans		37,513			34,815
Automobile loans		25,274			23,983
Loans secured by savings accounts		1,018			1,138
Unsecured loans		3,316			3,541
Other consumer loans		5,075			4,824
Gross loans		308,268			300,229
Less undisbursed portion of loans in process		(3,325	)		(7,142	)

Principal loan balance		304,943			293,087

Deferred loan origination fees, net		506			341
Allowance for loan losses		(4,846	)		(4,922	)

Loans, net	$	300,603		$	288,506

At December 31, 2014, residential mortgage loans secured by residential properties without private mortgage insurance or government guarantee and with loan-to-value ratios exceeding 90% amounted to approximately $2.5 million.

Mortgage loans serviced for the benefit of others amounted to $169,000 and $200,000 at December 31, 2014 and 2013, respectively.

The Bank has entered into loan transactions with certain directors, officers and their affiliates (i.e., related parties). In the opinion of management, such indebtedness was incurred in the ordinary course of business on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with unrelated persons.

The following table represents the aggregate activity for related party loans during the year ended December 31, 2014. The beginning balance has been adjusted to reflect new directors and officers, as well as directors and officers that are no longer with the Company.

(In thousands)

Beginning balance	$	6,549
New loans		10,612
Payments		(8,507	)

Ending balance	$	8,654

A director of the Company and the Bank is a shareholder of a farm implement dealership that contracts with the Bank to provide sales financing to the dealership’s customers. In the opinion of management, these transactions were made in the ordinary course of business on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with unrelated parties. During the year ended December 31, 2014, the Bank purchased approximately $978,000 of loans to customers of the corporation and the aggregate outstanding balance of all loans purchased from the corporation was approximately $1.2 million and $951,000 at December 31, 2014 and 2013, respectively.

The following table provides the components of the Company’s recorded investment in loans at December 31, 2014 and 2013:

	Residential Real Estate		Land		Construction			Commercial Real Estate			Commercial Business			Home Equity and Second Mortgage		Other Consumer		Total
	(In thousands)
December 31, 2014:
Principal loan balance	$	106,679	$	11,028	$	8,444		$	78,314		$	28,282		$	37,513	$	34,683	$	304,943

Accrued interest receivable		368		48		20			186			131			131		152		1,036

Net deferred loan origination fees and costs		49		4		(1	)		(20	)		(7	)		481		0		506

Recorded investment in loans	$	107,096	$	11,080	$	8,463		$	78,480		$	28,406		$	38,125	$	34,835	$	306,485


December 31, 2013:
Principal loan balance	$	107,029	$	10,309	$	8,996		$	76,496		$	21,956		$	34,815	$	33,486	$	293,087

Accrued interest receivable		427		49		22			202			56			126		168		1,050

Net deferred loan origination fees and costs		52		2		0			(32	)		(9	)		328		0		341

Recorded investment in loans	$	107,508	$	10,360	$	9,018		$	76,666		$	22,003		$	35,269	$	33,654	$	294,478

An analysis of the allowance for loan losses and recorded investment in loans as of and for the year ended December 31, 2014 is as follows:

	Residential Real Estate			Land		Construction			Commercial Real Estate		Commercial Business			Home Equity and Second Mortgage			Other Consumer			Total
	(In thousands)
Allowance for Loan Losses:

Beginning balance	$	811		$	152	$	63		$	1,284	$	1,446		$	877		$	289		$	4,922
Provisions		(69	)		49		(3	)		211		23			(195	)		174			190
Charge-offs		(140	)		0		0			0		(6	)		(154	)		(320	)		(620	)
Recoveries		7			0		0			6		17			192			132			354

Ending balance	$	609		$	201	$	60		$	1,501	$	1,480		$	720		$	275		$	4,846

Ending allowance balance attributable to loans:

Individually evaluated for impairment	$	47		$	0	$	0		$	11	$	1,293		$	0		$	0		$	1,351

Collectively evaluated for impairment		562			201		60			1,490		187			720			275			3,495

Ending balance	$	609		$	201	$	60		$	1,501	$	1,480		$	720		$	275		$	4,846


Recorded Investment in Loans:

Individually evaluated for impairment	$	1,411		$	16	$	0		$	1,819	$	1,642		$	151		$	0		$	5,039

Collectively evaluated for impairment		105,685			11,064		8,463			76,661		26,764			37,974			34,835			301,446

Ending balance	$	107,096		$	11,080	$	8,463		$	78,480	$	28,406		$	38,125		$	34,835		$	306,485

An analysis of the allowance for loan losses and recorded investment in loans as of and for the year ended December 31, 2013 is as follows:

	Residential Real Estate			Land			Construction		Commercial Real Estate			Commercial Business			Home Equity and Second Mortgage			Other Consumer			Total
	(In thousands)
Allowance for Loan Losses:

Beginning balance	$	922		$	71		$	0	$	1,310		$	1,223		$	919		$	291		$	4,736
Provisions		182			83			63		47			169			4			177			725
Charge-offs		(353	)		(2	)		0		(90	)		(20	)		(90	)		(337	)		(892	)
Recoveries		60			0			0		17			74			44			158			353

Ending balance	$	811		$	152		$	63	$	1,284		$	1,446		$	877		$	289		$	4,922

Ending allowance balance attributable to loans:

Individually evaluated for impairment	$	112		$	0		$	0	$	145		$	1,259		$	13		$	0		$	1,529

Collectively evaluated for impairment		699			152			63		1,139			187			864			289			3,393

Ending balance	$	811		$	152		$	63	$	1,284		$	1,446		$	877		$	289		$	4,922


Recorded Investment in Loans:

Individually evaluated for impairment	$	2,040		$	120		$	0	$	2,586		$	1,898		$	276		$	0		$	6,920

Collectively evaluated for impairment		105,468			10,240			9,018		74,080			20,105			34,993			33,654			287,558

Ending balance	$	107,508		$	10,360		$	9,018	$	76,666		$	22,003		$	35,269		$	33,654		$	294,478

At December 31, 2014 and 2013, management applied specific qualitative factor adjustments to the residential real estate, construction, commercial real estate, commercial business, vacant land, and home equity and second mortgage portfolio segments as they determined that the historical loss experience was not indicative of the level of risk in the remaining balance of those portfolio segments. These adjustments increased the loss factors by 0.25% to 20% for certain loan groups, and increased the estimated allowance for loan losses related to those portfolio segments by approximately $1.6 million and $1.4 million, respectively. These changes were made to reflect management’s estimates of inherent losses in these portfolio segments at December 31, 2014 and 2013.

At December 31, 2014 and 2013, for each loan portfolio segment management applied an overall qualitative factor of 1.18 to the Company’s historical loss factors. The overall qualitative factor is derived from management’s analysis of changes and trends in the following qualitative factors:

Underwriting Standards – Management reviews the findings of periodic internal audit loan reviews, independent outsourced loan reviews and loan reviews performed by the banking regulators to evaluate the risk associated with changes in underwriting standards. At December 31, 2014 and 2013, management assessed the risk associated with this component as neutral, requiring no adjustment to the historical loss factors.

Economic Conditions – Management analyzes trends in housing and unemployment data in the Harrison, Floyd and Clark counties of Indiana, the Company’s primary market area, to evaluate the risk associated with economic conditions. Due to a decrease in new home construction and an increase in unemployment in the Company’s primary market area, management assigned a risk factor of 1.20 for this component at December 31, 2014 and 2013.

Past Due Loans – Management analyzes trends in past due loans for the Company to evaluate the risk associated with delinquent loans. In general, past due loan ratios have remained at elevated levels compared to historical amounts since 2007, and management assigned a risk factor of 1.20 for this component at December 31, 2014 and 2013.

Other Internal and External Factors – This component includes management’s consideration of other qualitative factors such as loan portfolio composition. The Company has focused on the origination of commercial business and real estate loans in an effort to convert the Company’s balance sheet from that of a traditional thrift institution to a commercial bank. In addition, the Company has increased its investment in mortgage loans in which it does not hold a first lien position. Commercial loans and second mortgage loans generally entail greater credit risk than residential mortgage loans secured by a first lien. As a result of changes in the loan portfolio composition and other factors, management has maintained the elevated risk factor of 1.30 for this component at December 31, 2014 and 2013.

Each of the four factors above was assigned an equal weight to arrive at an average for the overall qualitative factor of 1.18 at December 31, 2014 and 2013. The effect of the overall qualitative factor was to increase the estimated allowance for loan losses by $520,000 and $471,000 at December 31, 2014 and 2013, respectively.

Management also adjusts the historical loss factors for loans classified as watch, special mention and substandard that are not individually evaluated for impairment. The adjustments consider the increased likelihood of loss on classified loans based on the Company’s separate historical experience for classified loans. The effect of the adjustments for classified loans was to increase the estimated allowance for loan losses by $664,000 and $521,000 at December 31, 2014 and 2013, respectively.

The following table summarizes the Company’s impaired loans as of and for the year ended December 31, 2014. The Company did not recognize any interest income on impaired loans using the cash receipts method of accounting for the year ended December 31, 2014.

	Recorded Investment		Unpaid Principal Balance		Average Related Allowance		Interest Recorded Investment		Income Recognized
	(In thousands)

Loans with no related allowance recorded:
Residential real estate	$	1,141	$	1,446	$	0	$	1,293	$	26
Land		16		18		0		96		0
Construction		0		0		0		52		0
Commercial real estate		1,777		1,808		0		1,626		70
Commercial business		0		0		0		113		0
Home equity and second mortgage		71		87		0		147		2
Other consumer		0		0		0		0		0

	$	3,005	$	3,359	$	0	$	3,327	$	98

Loans with an allowance recorded:
Residential real estate	$	270	$	304	$	47	$	369	$	0
Land		0		0		0		1		0
Construction		0		0		0		0		0
Commercial real estate		42		65		11		656		0
Commercial business		1,642		1,909		1,293		1,696		0
Home equity and second mortgage		80		98		0		46		0
Other consumer		0		0		0		0		0

	$	2,034	$	2,376	$	1,351	$	2,768	$	0

Total:
Residential real estate	$	1,411	$	1,750	$	47	$	1,662	$	26
Land		16		18		0		97		0
Construction		0		0		0		52		0
Commercial real estate		1,819		1,873		11		2,282		70
Commercial business		1,642		1,909		1,293		1,809		0
Home equity and second mortgage		151		185		0		193		2
Other consumer		0		0		0		0		0

	$	5,039	$	5,735	$	1,351	$	6,095	$	98

The following table summarizes the Company’s impaired loans as of and for the year ended December 31, 2013. The Company did not recognize any interest income on impaired loans using the cash receipts method of accounting for the year ended December 31, 2013.

	Recorded Investment		Unpaid Principal Balance		Average Related Allowance		Interest Recorded Investment		Income Recognized
	(In thousands)

Loans with no related allowance recorded:
Residential real estate	$	1,591	$	1,869	$	0	$	1,508	$	32
Land		120		131		0		124		0
Construction		0		0		0		173		0
Commercial real estate		1,637		1,643		0		1,410		63
Commercial business		189		209		0		38		4
Home equity and second mortgage		254		268		0		164		5
Other consumer		0		0		0		0		0

	$	3,791	$	4,120	$	0	$	3,417	$	104

Loans with an allowance recorded:
Residential real estate	$	449	$	487	$	112	$	624	$	2
Land		0		0		0		1		0
Construction		0		0		0		0		0
Commercial real estate		949		1,048		145		1,108		0
Commercial business		1,709		1,909		1,259		1,801		0
Home equity and second mortgage		22		22		13		47		0
Other consumer		0		0		0		0		0

	$	3,129	$	3,466	$	1,529	$	3,581	$	2

Total:
Residential real estate	$	2,040	$	2,356	$	112	$	2,132	$	34
Land		120		131		0		125		0
Construction		0		0		0		173		0
Commercial real estate		2,586		2,691		145		2,518		63
Commercial business		1,898		2,118		1,259		1,839		4
Home equity and second mortgage		276		290		13		211		5
Other consumer		0		0		0		0		0

	$	6,920	$	7,586	$	1,529	$	6,998	$	106

Nonperforming loans consists of nonaccrual loans and loans over 90 days past due and still accruing interest. The following table presents the recorded investment in nonperforming loans at December 31, 2014 and 2013:

	December 31, 2014						December 31, 2013
	Nonaccrual Loans		Loans 90+ Days Past Due Still Accruing		Total Nonperforming Loans		Nonaccrual Loans		Loans 90+ Days Past Due Still Accruing		Total Nonperforming Loans
	(In thousands)

Residential real estate	$	919	$	68	$	987	$	1,533	$	180	$	1,713
Land		16		0		16		120		0		120
Construction		0		0		0		0		0		0
Commercial real estate		433		0		433		1,456		0		1,456
Commercial business		1,642		0		1,642		1,898		0		1,898
Home equity and second mortgage		129		14		143		252		39		291
Other consumer		0		3		3		0		8		8

Total	$	3,139	$	85	$	3,224	$	5,259	$	227	$	5,486

The following table presents the aging of the recorded investment in loans at December 31, 2014:

	30-59 Days Past Due		60-89 Days Past Due		Over 90 Days Past Due		Total Past Due		Current		Total Loans
	(In thousands)

Residential real estate	$	3,070	$	551	$	308	$	3,929	$	103,167	$	107,096
Land		24		124		0		148		10,932		11,080
Construction		0		0		0		0		8,463		8,463
Commercial real estate		54		133		42		229		78,251		78,480
Commercial business		0		0		0		0		28,406		28,406
Home equity and second mortgage		153		23		97		273		37,852		38,125
Other consumer		263		26		3		292		34,543		34,835

Total	$	3,564	$	857	$	450	$	4,871	$	301,614	$	306,485

The following table presents the aging of the recorded investment in loans at December 31, 2013:

	30-59 Days Past Due		60-89 Days Past Due		Over 90 Days Past Due		Total Past Due		Current		Total Loans
	(In thousands)

Residential real estate	$	3,160	$	830	$	701	$	4,691	$	102,817	$	107,508
Land		162		109		12		283		10,077		10,360
Construction		0		0		0		0		9,018		9,018
Commercial real estate		231		500		49		780		75,886		76,666
Commercial business		0		0		189		189		21,814		22,003
Home equity and second mortgage		411		24		132		567		34,702		35,269
Other consumer		296		34		8		338		33,316		33,654

Total	$	4,260	$	1,497	$	1,091	$	6,848	$	287,630	$	294,478

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, public information, historical payment experience, credit documentation, and current economic trends, among other factors. The Company classifies loans based on credit risk at least quarterly. The Company uses the following regulatory definitions for risk ratings:

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, 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.

Loss: Loans classified as loss are considered uncollectible and of such little value that their continuance on the Company’s books as an asset is not warranted.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

The following table presents the recorded investment in loans by risk category as of the date indicated:

	Residential Real Estate		Land		Construction		Commercial Real Estate		Commercial Business		Home Equity and Second Mortgage		Other Consumer		Total
	(In thousands)
December 31, 2014:
Pass	$	104,780	$	7,969	$	7,722	$	73,204	$	26,137	$	37,860	$	34,770	$	292,442
Special mention		105		94		741		2,648		298		2		49		3,937
Substandard		1,292		3,001		0		2,195		329		134		16		6,967
Doubtful		919		16		0		433		1,642		129		0		3,139
Loss		0		0		0		0		0		0		0		0

Total	$	107,096	$	11,080	$	8,463	$	78,480	$	28,406	$	38,125	$	34,835	$	306,485

December 31, 2013:
Pass	$	103,594	$	7,096	$	9,018	$	71,893	$	19,328	$	34,693	$	33,627	$	279,249
Special mention		756		0		0		2,627		458		198		27		4,066
Substandard		1,625		3,144		0		690		319		126		0		5,904
Doubtful		1,533		120		0		1,456		1,898		252		0		5,259
Loss		0		0		0		0		0		0		0		0

Total	$	107,508	$	10,360	$	9,018	$	76,666	$	22,003	$	35,269	$	33,654	$	294,478

Troubled Debt Restructurings

The following table summarizes the Company’s TDRs by accrual status as of December 31, 2014 and 2013:

	December 31, 2014								December 31, 2013
	Accruing		Nonaccrual		Total		Related Allowance for Loan Losses		Accruing		Nonaccrual		Total		Related Allowance for Loan Losses
	(In thousands)

Residential real estate	$	492	$	166	$	658	$	6	$	508	$	226	$	734	$	45
Commercial real estate		1,386		338		1,724		0		1,130		0		1,130		0
Commercial business		0		1,642		1,642		1,292		0		1,709		1,709		1,259
Home equity and second mortgage		22		0		22		0		24		0		24		0

Total	$	1,900	$	2,146	$	4,046	$	1,298	$	1,662	$	1,935	$	3,597	$	1,304

At December 31, 2014 and 2013, there were no commitments to lend additional funds to debtors whose loan terms have been modified in a TDR.

The following table summarizes information in regard to TDRs that were restructured during the year ended December 31, 2014:

	Number of Contracts		Pre-Modification Outstanding Balance		Post-Modification Outstanding Balance
	(In thousands)

Commercial real estate		5	$	641	$	641

Total		5	$	641	$	641

For the TDRs listed above, the terms of modification included temporary interest-only payment periods and a temporary decrease in the borrowers’ monthly payments. There were no principal charge-offs recorded as a result of TDRs during 2014 and there was no specific allowance for loan losses related to TDRs modified during 2014 at December 31, 2014.

The following table summarizes information in regard to TDRs that were restructured during the year ended December 31, 2013:

	Number of Contracts		Pre-Modification Outstanding Balance		Post-Modification Outstanding Balance
	(In thousands)

Residential real estate		5	$	310	$	310

Total		5	$	310	$	310

For the TDRs listed above, the terms of modification included reduction of the stated interest rate and the extension of the maturity date. There were no principal charge-offs recorded as a result of TDRs during 2013 and there was no specific allowance for loan losses related to TDRs modified during 2013 at December 31, 2013.

There were no TDRs modified within the previous 12 months for which there was a subsequent payment default (defined as the loan becoming more than 90 days past due, being moved to nonaccrual status, or the collateral being foreclosed upon) during the years ended December 31, 2014 and 2013. In the event that a TDR subsequently defaults, the Company evaluates the restructuring for possible impairment. As a result, the related allowance for loan losses may be increased or charge-offs may be taken to reduce the carrying amount of the loan.

- Definition

The entire disclosure for claims held for amounts due a entity, excluding financing receivables. Examples include, but are not limited to, trade accounts receivables, notes receivables, loans receivables. Includes disclosure for allowance for credit losses.

+ References+ Details