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Note 5 - Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2015

Receivables [Abstract]

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

(5)

LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans at December 31, 2015 and 2014 consisted of the following:

(In thousands)		2015				2014

Real estate mortgage loans:
Residential		$	147,933			$	106,679
Land			12,962				11,028
Residential construction			16,391				10,347
Commercial real estate			84,493				78,314
Commercial real estate construction			1,090				1,422
Commercial business loans			23,095				28,282
Consumer loans:
Home equity and second mortgage loans			38,476				37,513
Automobile loans			28,828				25,274
Loans secured by savings accounts			2,096				1,018
Unsecured loans			4,350				3,316
Other consumer loans			7,210				5,075
Gross loans			366,924				308,268
Less undisbursed portion of loans in process			(4,926	)			(3,325	)

Principal loan balance			361,998				304,943

Deferred loan origination fees, net			583				506
Allowance for loan losses			(3,415	)			(4,846	)

Loans, net		$	359,166			$	300,603

At December 31, 2015, the net unaccreted discount on loans acquired from Peoples, excluding PCI loans, was $590,000.

At December 31, 2015, 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 $156,000 and $169,000 at December 31, 2015 and 2014, 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, 2015. 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		$	8,609
New loans			7,790
Payments			(8,224	)

Ending balance		$	8,175

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, 2015, the Bank purchased approximately $862,000 of loans to customers of the corporation and the aggregate outstanding balance of all loans purchased from the corporation was approximately $1.3 million and $1.2 million at December 31, 2015 and 2014, respectively.

The following table provides the components of the Company’s recorded investment in loans at December 31, 2015 and 2014:

		Residential Real Estate				Land				Construction				Commercial Real Estate				Commercial Business				Home Equity and Second Mortgage				Other Consumer				Total
		(In thousands)
December 31, 2015:
Principal loan balance		$	147,933			$	12,962			$	12,555			$	84,493			$	23,095			$	38,476			$	42,484			$	361,998

Accrued interest receivable			584				70				61				281				64				130				171				1,361

Net deferred loan origination fees and costs			58				6				0				(46	)			(6	)			571				0				583

Recorded investment in loans		$	148,575			$	13,038			$	12,616			$	84,728			$	23,153			$	39,177			$	42,655			$	363,942


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

An analysis of the allowance for loan losses and recorded investment in loans as of and for the year ended December 31, 2015 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		$	609			$	201			$	60			$	1,501			$	1,480			$	720			$	275			$	4,846
Provisions			35				(44	)			(13	)			6				(23	)			(49	)			138				50
Charge-offs			(128	)			0				0				0				(1,205	)			(78	)			(268	)			(1,679	)
Recoveries			11				0				0				34				9				33				111				198
Ending balance		$	527			$	157			$	47			$	1,541			$	261			$	626			$	256			$	3,415

Ending allowance balance attributable to loans:

Individually evaluated for impairment		$	6			$	0			$	0			$	49			$	100			$	11			$	0			$	166
Collectively evaluated for impairment			521				157				47				1,492				161				615				256				3,249
Acquired with deteriorated credit quality			0				0				0				0				0				0				0				0
Ending balance		$	527			$	157			$	47			$	1,541			$	261			$	626			$	256			$	3,415

Recorded Investment in Loans:
Individually evaluated for impairment		$	1,996			$	24			$	0			$	3,623			$	167			$	136			$	0			$	5,946
Collectively evaluated for impairment			145,695				13,014				12,616				80,639				22,986				39,041				42,655				356,646
Acquired with deteriorated credit quality			884				0				0				466				0				0				0				1,350
Ending balance		$	148,575			$	13,038			$	12,616			$	84,728			$	23,153			$	39,177			$	42,655			$	363,942

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

At December 31, 2015 and 2014, 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 $1.4 million and $1.6 million, respectively. These changes were made to reflect management’s estimates of inherent losses in these portfolio segments at December 31, 2015 and 2014.

At December 31, 2015 and 2014, 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, 2015 and 2014, 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 Louisville, Kentucky metropolitan area, 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, 2015 and 2014.

·

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, 2015 and 2014.

·

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, 2015 and 2014.

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, 2015 and 2014. The effect of the overall qualitative factor was to increase the estimated allowance for loan losses by $457,000 and $520,000 at December 31, 2015 and 2014, 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 $410,000 and $664,000 at December 31, 2015 and 2014, respectively.

The following table summarizes the Company’s impaired loans as of and for the year ended December 31, 2015. The Company did not recognize any interest income on impaired loans using the cash receipts method of accounting for the year ended December 31, 2015.

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

Loans with no related allowance recorded:
Residential real estate		$	1,938			$	2,330			$	0			$	1,356			$	19
Land			24				27				0				20				0
Construction			0				0				0				0				0
Commercial real estate			3,389				3,706				0				2,092				76
Commercial business			67				67				0				19				0
Home equity and second mortgage			56				65				0				64				2
Other consumer			0				0				0				0				0

		$	5,474			$	6,195			$	0			$	3,551			$	97

Loans with an allowance recorded:
Residential real estate		$	58			$	62			$	6			$	190			$	0
Land			0				0				0				0				0
Construction			0				0				0				0				0
Commercial real estate			234				260				49				78				0
Commercial business			100				100				100				355				0
Home equity and second mortgage			80				81				11				80				0
Other consumer			0				0				0				0				0

		$	472			$	503			$	166			$	703			$	0

Total:
Residential real estate		$	1,996			$	2,392			$	6			$	1,546			$	19
Land 24			27				0				20				0
Construction			0				0				0				0				0
Commercial real estate			3,623				3,966				49				2,170				76
Commercial business			167				167				100				374				0
Home equity and second mortgage			136				146				11				144				2
Other consumer			0				0				0				0				0

		$	5,946			$	6,698			$	166			$	4,254			$	97

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				Related Allowance				Average Recorded Investment				Interest 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

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, 2015 and 2014:

		December 31, 2015												December 31, 2014
		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		$	1,648			$	271			$	1,919			$	919			$	68			$	987
Land			24				75				99				16				0				16
Construction			0				0				0				0				0				0
Commercial real estate			2,267				0				2,267				433				0				433
Commercial business			167				0				167				1,642				0				1,642
Home equity and second mortgage			116				0				116				129				14				143
Other consumer			0				9				9				0				3				3

Total		$	4,222			$	355			$	4,577			$	3,139			$	85			$	3,224

The following table presents the aging of the recorded investment in loans at December 31, 2015:

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

Residential real estate		$	3,078			$	786			$	1,256			$	5,120			$	142,571			$	884			$	148,575
Land			55				26				99				180				12,858				0				13,038
Construction			71				0				0				71				12,545				0				12,616
Commercial real estate			435				773				396				1,604				82,658				466				84,728
Commercial business			0				100				67				167				22,986				0				23,153
Home equity and second mortgage			365				6				80				451				38,726				0				39,177
Other consumer			464				13				9				486				42,169				0				42,655

Total		$	4,468			$	1,704			$	1,907			$	8,079			$	354,513			$	1,350			$	363,942

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 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, 2015:
Pass		$	140,438			$	10,077			$	12,286			$	76,389			$	22,365			$	38,956			$	42,553			$	343,064
Special mention			3,657				125				330				4,446				471				0				53				9,082
Substandard			1,948				2,812				0				1,195				150				105				49				6,259
Doubtful			2,532				24				0				2,698				167				116				0				5,537
Loss			0				0				0				0				0				0				0				0

Total		$	148,575			$	13,038			$	12,616			$	84,728			$	23,153			$	39,177			$	42,655			$	363,942

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

Troubled Debt Restructurings

The following table summarizes the Company’s TDRs by accrual status as of December 31, 2015 and 2014:

		December 31, 2015																December 31, 2014
		Accruing				Nonaccrual				Total				Related Allowance for Loan Losses				Accruing				Nonaccrual				Total				Related Allowance for Loan Losses
		(In thousands)

Residential real estate		$	342			$	315			$	657			$	0			$	492			$	166			$	658			$	6
Commercial real estate			1,348				294				1,642				0				1,386				338				1,724				0
Commercial business			0				0				0				0				0				1,642				1,642				1,292
Home equity and second mortgage			20				0				20				0				22				0				22				0

Total		$	1,710			$	609			$	2,319			$	0			$	1,900			$	2,146			$	4,046			$	1,298

At December 31, 2015 and 2014, there were no commitments to lend additional funds to debtors whose loan terms have been modified in a TDR.

There were no TDRs that were restructured during the year ended December 31, 2015. 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 Company had payment defaults (defined as the loan becoming more than 90 days past due, being moved to nonaccrual status, or the collateral being foreclosed upon) on two TDRs to the same borrower totaling $187,000 during the year ended December 31, 2015. There were no such defaults during the year ended December 31, 2014. 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. The Company did not recognize any provisions for loan losses or net charge-offs as a result of defaulted TDRs for the years ended December 31, 2015 and 2014.

Purchased Credit Impaired (“PCI”) Loans

Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date with no carryover of the related allowance for loan and lease losses. Such loans are accounted for individually or aggregated into pools of loans based on common risk characteristics such as credit score, loan type and date of origination. In determining the estimated fair value of purchased loans or pools, management considers a number of factors including the remaining life, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, and net present value of cash flows expected to be received, among others. Purchased loans are accounted for in accordance with guidance for certain loans acquired in a transfer (ASC 310-30), when the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that the acquirer will not collect all contractually required principal and interest payments. The difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. The difference between the expected cash flows and the fair value at acquisition is recorded as interest income over the remaining life of the loan or pool of loans and is referred to as the accretable yield. Subsequent decreases to the expected cash flows will generally result in a provision for loan and lease losses. Subsequent increases in expected cash flows will result in a reversal of the provision for loan losses to the extent of prior charges and then an adjustment to accretable yield, which is recognized as future interest income.

The following table presents the carrying amount of PCI loans accounted for under ASC 310-30 at December 31, 2015:

(In thousands)

Residential real estate		$	884
Commercial real estate			466

		$	1,350

There was no allowance for loan losses related to PCI loans at December 31, 2015 or 2014. In addition, there were no losses recognized or reductions of the allowance for loan losses on PCI loans for the years ended December 31, 2015 and 2014.

Accretable yield, or income expected to be collected, is as follows for the year ended December 31, 2015:

(In thousands)

Balance at January 1		$	-
New loans purchased			331
Accretion to income			(12	)
Disposals of loans			-
Reclassification (to) from nonaccretable difference			-

Balance at December 31		$	319