Note 3 - Loans and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2014

Receivables [Abstract]

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

3. Loans and Allowance for Loan Losses

The Company’s loan and allowance for loan loss policies are as follows:

Loans are stated at unpaid principal balances, less net deferred loan fees and the allowance for loan losses.  The Company grants real estate mortgage, commercial business and consumer loans.  A substantial portion of the loan portfolio is represented by mortgage loans to customers in southern Indiana.  The ability of the Company’s customers to honor their loan agreements is dependent upon the real estate and general economic conditions in this area.

Loan origination and commitment fees, as well as certain direct costs of underwriting and closing loans, are deferred and amortized as a yield adjustment to interest income over the lives of the related loans using the interest method.  Amortization of net deferred loan fees is discontinued when a loan is placed on nonaccrual status.

The recognition of income on a loan is discontinued and previously accrued interest is reversed, when interest or principal payments become ninety (90) days past due unless, in the opinion of management, the outstanding interest remains collectible. Past due status is determined based on contractual terms. Generally, by applying the cash receipts method, interest income is subsequently recognized only as received until the loan is returned to accrual status. The cash receipts method is used when the likelihood of further loss on the loan is remote. Otherwise, the Company applies the cost recovery method and applies all payments as a reduction of the unpaid principal balance until the loan qualifies for return to accrual status.  Interest income on impaired loans is recognized using the cost recovery method, unless the likelihood of further loss on the loan is remote.

A loan is restored to accrual status when all principal and interest payments are brought current and the borrower has demonstrated the ability to make future payments of principal and interest as scheduled, which generally requires that the borrower demonstrate a period of performance of at least six consecutive months.

For portfolio segments other than consumer loans, the Company’s practice is to charge-off any loan or portion of a loan when the loan is determined by management to be uncollectible due to the borrower’s failure to meet repayment terms, the borrower’s deteriorating or deteriorated financial condition, the depreciation of the underlying collateral, the loan’s classification as a loss by regulatory examiners, or for other reasons.  A partial charge-off is recorded on a loan when the uncollectibility of a portion of the loan has been confirmed, such as when a loan is discharged in bankruptcy, the collateral is liquidated, a loan is restructured at a reduced principal balance, or other identifiable events that lead management to determine the full principal balance of the loan will not be repaid.  A specific reserve is recognized as a component of the allowance for estimated losses on loans individually evaluated for impairment.  Partial charge-offs on nonperforming and impaired loans are included in the Company’s historical loss experience used to estimate the general component of the allowance for loan losses as discussed below.  Specific reserves are not considered charge-offs in management’s analysis of the allowance for loan losses because they are estimates and the outcome of the loan relationship is undetermined.  At September 30, 2014, the Company had 12 loans on which partial charge-offs of $480,000 had been recorded.

Consumer loans not secured by real estate are typically charged off at 90 days past due, or earlier if deemed uncollectible, unless the loans are in the process of collection.  Overdrafts are charged off after 45 days past due.  Charge-offs are typically recorded on loans secured by real estate when the property is foreclosed upon.

The allowance for loan losses reflects management’s judgment of probable loan losses inherent in the loan portfolio at the balance sheet date.  Additions to the allowance for loan losses are made by the provision for loan losses charged to earnings.  Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The Company uses a disciplined process and methodology to evaluate the allowance for loan losses on at least a quarterly basis that is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific and general components.  The specific component relates to loans that are individually evaluated for impairment or loans otherwise classified as doubtful, substandard, or special mention.  For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.

The general component covers non-classified loans and classified loans that are found, upon individual evaluation, to not be impaired.  Such loans are pooled by segment and losses are modeled using annualized historical loss experience adjusted for qualitative factors.  The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent twelve calendar quarters unless the historical loss experience is not considered indicative of the level of risk in the remaining balance of a particular portfolio segment, in which case an adjustment is determined by management.  The Company’s historical loss experience is then adjusted by an overall loss factor weighting adjustment based on a qualitative analysis prepared by management and reviewed on a quarterly basis.  The overall loss factor considers changes in underwriting standards, economic conditions, changes and trends in past due and classified loans and other internal and external factors.

Management also applies additional loss factor multiples to loans classified as watch, special mention and substandard that are not individually evaluated for impairment.  The loss factor multiples for classified loans are based on management’s assessment of historical trends regarding losses experienced on classified loans in prior periods.  See below for additional discussion of the overall loss factor and loss factor multiples for classified loans as of September 30, 2014 and December 31, 2013, as well as a discussion of changes in management’s allowance for loan losses methodology from 2013 to 2014.

Management exercises significant judgment in evaluating the relevant historical loss experience and the qualitative factors.  Management also monitors the differences between estimated and actual incurred loan losses for loans considered impaired in order to evaluate the effectiveness of the estimation process and make any changes in the methodology as necessary.

Management utilizes the following portfolio segments in its analysis of the allowance for loan losses:  residential real estate, land, construction, commercial real estate, commercial business, home equity and second mortgage, and other consumer loans.  Additional discussion of the portfolio segments and the risks associated with each segment can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Values for collateral dependent loans are generally based on appraisals obtained from independent licensed real estate appraisers, with adjustments applied for estimated costs to sell the property, costs to complete unfinished or repair damaged property and other factors.  New appraisals are generally obtained for all significant properties when a loan is identified as impaired, and a property is considered significant if the value of the property is estimated to exceed $200,000.  Subsequent appraisals are obtained as needed or if management believes there has been a significant change in the market value of the property.  In instances where it is not deemed necessary to obtain a new appraisal, management bases its impairment and allowance for loan loss analysis on the original appraisal with adjustments for current conditions based on management’s assessment of market factors and management’s inspection of the property.

Loans at September 30, 2014 and December 31, 2013 consisted of the following:

(In thousands)	September 30, 2014			December 31, 2013
Real estate mortgage loans:
Residential	$	103,955		$	107,029
Land		10,459			10,309
Residential construction		15,948			14,423
Commercial real estate		79,991			76,496
Commercial real estate contruction		1,118			1,715
Commercial business loans		29,687			21,956
Consumer loans:
Home equity and second mortgage loans		36,656			34,815
Automobile loans		25,520			23,983
Loans secured by savings accounts		1,026			1,138
Unsecured loans		3,416			3,541
Other consumer loans		4,818			4,824
Gross loans		312,594			300,229
Less undisbursed portion of loans in process		(5,723	)		(7,142	)
Principal loan balance		306,871			293,087
Deferred loan origination fees, net		459			341
Allowance for loan losses		(5,055	)		(4,922	)
Loans, net	$	302,275		$	288,506

The following table provides the components of the Company’s recorded investment in loans at September 30, 2014:

	Residential Real Estate		Land		Construction			Commercial Real Estate			Commercial Business			Home Equity & 2nd Mtg		Other Consumer		Total
	(In thousands)
Recorded Investment in Loans:
Principal loan balance	$	103,955	$	10,459	$	11,343		$	79,991		$	29,687		$	36,656	$	34,780	$	306,871
Accrued interest receivable		365		50		27			198			91			127		147		1,005
Net deferred loan origination fees and costs		63		3		(2	)		(32	)		(7	)		434		0		459
Recorded investment in loans	$	104,383	$	10,512	$	11,368		$	80,157		$	29,771		$	37,217	$	34,927	$	308,335
Recorded Investment in Loans as Evaluated for Impairment:
Individually evaluated for impairment	$	1,297	$	107	$	0		$	1,709		$	1,864		$	170	$	0	$	5,147
Collectively evaluated for impairment		103,086		10,405		11,368			78,448			27,907			37,047		34,927		303,188
Acquired with deteriorated credit quality		0		0		0			0			0			0		0		0
Ending balance	$	104,383	$	10,512	$	11,368		$	80,157		$	29,771		$	37,217	$	34,927	$	308,335

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

	Residential Real Estate		Land		Construction		Commercial Real Estate			Commercial Business			Home Equity & 2nd Mtg		Other Consumer		Total
	(In thousands)
Recorded Investment in Loans:
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
Recorded Investment in Loans as Evaluated for Impairment:
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
Acquired with deteriorated credit quality		0		0		0		0			0			0		0		0
Ending balance	$	107,508	$	10,360	$	9,018	$	76,666		$	22,003		$	35,269	$	33,654	$	294,478

An analysis of the allowance for loan losses as of September 30, 2014 is as follows:

	Residential Real Estate		Land		Construction		Commercial Real Estate		Commercial Business		Home Equity & 2nd Mtg		Other Consumer		Total
	(In thousands)
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	53	$	0	$	0	$	13	$	1,226	$	16	$	0	$	1,308
Collectively evaluated for impairment		772		156		77		1,248		221		929		344		3,747
Acquired with deteriorated credit quality		0		0		0		0		0		0		0		0
Ending balance	$	825	$	156	$	77	$	1,261	$	1,447	$	945	$	344	$	5,055

An analysis of the allowance for loan losses as of December 31, 2013 is as follows:

	Residential Real Estate		Land		Construction		Commercial Real Estate		Commercial Business		Home Equity & 2nd Mtg		Other Consumer		Total
	(In thousands)
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
Acquired with deteriorated credit quality		0		0		0		0		0		0		0		0
Ending balance	$	811	$	152	$	63	$	1,284	$	1,446	$	877	$	289	$	4,922

An analysis of the changes in the allowance for loan losses for the three months and nine months ended September 30, 2014 is as follows:

	Residential Real Estate			Land		Construction			Commercial Real Estate			Commercial Business			Home Equity & 2nd Mtg			Other Consumer			Total
	(In thousands)
Allowance for loan losses:
Changes in Allowance for Loan Losses for the three-months ended September 30, 2014
Beginning balance	$	843		$	153	$	78		$	1,280		$	1,444		$	932		$	336		$	5,066
Provisions for loan losses		36			3		(1	)		(19	)		(5	)		1			60			75
Charge-offs		(56	)		0		0			0			0			0			(84	)		(140	)
Recoveries		2			0		0			0			8			12			32			54
Ending balance	$	825		$	156	$	77		$	1,261		$	1,447		$	945		$	344		$	5,055
Changes in Allowance for Loan Losses for the nine-months ended September 30, 2014
Beginning balance	$	811		$	152	$	63		$	1,284		$	1,446		$	877		$	289		$	4,922
Provisions for loan losses		148			4		14			(23	)		(12	)		(69	)		128			190
Charge-offs		(140	)		0		0			0			0			(54	)		(172	)		(366	)
Recoveries		6			0		0			0			13			191			99			309
Ending balance	$	825		$	156	$	77		$	1,261		$	1,447		$	945		$	344		$	5,055

An analysis of the changes in the allowance for loan losses for the three months and nine months ended September 30, 2013 is as follows:

	Residential Real Estate			Land			Construction			Commercial Real Estate			Commercial Business		Home Equity & 2nd Mtg			Other Consumer			Total
	(In thousands)
Allowance for loan losses:
Changes in Allowance for Loan Losses for the three-months ended September 30, 2013
Beginning balance	$	905		$	73		$	60		$	1,291		$	1,260	$	894		$	352		$	4,835
Provisions for loan losses		(26	)		(3	)		(10	)		(52	)		210		(13	)		(6	)		100
Charge-offs		0			0			0			(1	)		0		(24	)		(89	)		(114	)
Recoveries		15			0			0			3			4		8			53			83
Ending balance	$	894		$	70		$	50		$	1,241		$	1,474	$	865		$	310		$	4,904
Changes in Allowance for Loan Losses for the nine-months ended September 30, 2013
Beginning balance	$	922		$	71		$	0		$	1,310		$	1,223	$	919		$	291		$	4,736
Provisions for loan losses		211			1			50			3			196		(37	)		151			575
Charge-offs		(298	)		(2	)		0			(89	)		0		(59	)		(260	)		(708	)
Recoveries		59			0			0			17			55		42			128			301
Ending balance	$	894		$	70		$	50		$	1,241		$	1,474	$	865		$	310		$	4,904

At September 30, 2014 and December 31, 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 September 30, 2014 and December 31, 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, Washington 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 September 30, 2014 and December 31, 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 September 30, 2014 and December 31, 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 assigned a risk factor of 1.30 at September 30, 2014 and December 31, 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 September 30, 2014 and December 31, 2013.  The effect of the overall qualitative factor was to increase the estimated allowance for loan losses by $455,000 and $471,000 at September 30, 2014 and December 31, 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 $487,000 and $521,000 at September 30, 2014 and December 31, 2013, respectively.

The following table summarizes the Company’s impaired loans as of September 30, 2014 and for the three months and nine months ended September 30, 2014:

	At September 30, 2014						Three Months Ended September 30, 2014						Nine Months Ended September 30, 2014
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Interest Recognized - Cash Method		Average Recorded Investment		Interest Income Recognized		Interest Recognized - Cash Method
	(In thousands)
Loans with no related allowance recorded:
Residential	$	1,042	$	1,325	$	0	$	1,113	$	8	$	9	$	1,331	$	25	$	31
Land		107		126		0		110		0		0		116		0		0
Construction		0		0		0		0		0		0		65		0		0
Commercial real estate		1,666		1,698		0		1,713		19		18		1,588		53		58
Commercial business		188		209		0		188		0		0		142		0		0
Home equity/2nd mortgage		74		88		0		85		0		0		167		2		1
Other consumer		0		0		0		0		0		0		0		0		0
		3,077		3,446		0		3,209		27		27		3,409		80		90
Loans with an allowance recorded:
Residential		255		299		53		259		0		0		394		0		0
Land		0		0		0		0		0		0		2		0		0
Construction		0		0		0		0		0		0		0		0		0
Commercial real estate		43		66		13		477		0		0		809		0		0
Commercial business		1,676		1,909		1,226		1,676		0		0		1,709		0		0
Home equity/2nd mortgage		96		96		16		48		0		0		38		0		0
Other consumer		0		0		0		0		0		0		0		0		0
		2,070		2,370		1,308		2,460		0		0		2,952		0		0
Total:
Residential		1,297		1,624		53		1,372		8		9		1,725		25		31
Land		107		126		0		110		0		0		118		0		0
Construction		0		0		0		0		0		0		65		0		0
Commercial real estate		1,709		1,764		13		2,190		19		18		2,397		53		58
Commercial business		1,864		2,118		1,226		1,864		0		0		1,851		0		0
Home equity/2nd mortgage		170		184		16		133		0		0		205		2		1
Other consumer		0		0		0		0		0		0		0		0		0
	$	5,147	$	5,816	$	1,308	$	5,669	$	27	$	27	$	6,361	$	80	$	90

The following table summarizes the Company’s impaired loans for the three months and nine months ended September 30, 2013:

	Three Months Ended September 30, 2013						Nine Months Ended September 30, 2013
	Average Recorded Investment		Interest Income Recognized		Interest Recognized - Cash Method		Average Recorded Investment		Interest Income Recognized		Interest Recognized - Cash Method
Loans with no related allowance recorded:
Residential	$	1,041	$	4	$	2	$	1,219	$	8	$	3
Land		125		0		0		125		0		0
Construction		102		0		0		217		0		0
Commercial real estate		138		0		0		471		0		0
Commercial business		0		0		0		0		0		0
Home equity/2nd mortgage		161		2		2		141		3		3
Other consumer		0		0		0		0		0		0
		1,567		6		4		2,173		11		6
Loans with an allowance recorded:
Residential		560		0		0		668		1		0
Land		0		0		0		2		0		0
Construction		0		0		0		0		0		0
Commercial real estate		977		0		0		1,147		0		0
Commercial business		1,872		0		0		1,824		4		3
Home equity/2nd mortgage		55		0		0		54		1		0
Other consumer		0		0		0		0		0		0
		3,464		0		0		3,695		6		3
Total:
Residential		1,601		4		2		1,887		9		3
Land		125		0		0		127		0		0
Construction		102		0		0		217		0		0
Commercial real estate		1,115		0		0		1,618		0		0
Commercial business		1,872		0		0		1,824		4		3
Home equity/2nd mortgage		216		2		2		195		4		3
Other consumer		0		0		0		0		0		0
	$	5,031	$	6	$	4	$	5,868	$	17	$	9

The following table summarizes the Company’s impaired loans as of December 31, 2013:

	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(In thousands)
Loans with no related allowance recorded:
Residential	$	1,591	$	1,869	$	0
Land		120		131		0
Construction		0		0		0
Commercial real estate		1,637		1,643		0
Commercial business		189		209		0
Home equity/2nd mortgage		254		268		0
Other consumer		0		0		0
		3,791		4,120		0
Loans with an allowance recorded:
Residential		449		487		112
Land		0		0		0
Construction		0		0		0
Commercial real estate		949		1,048		145
Commercial business		1,709		1,909		1,259
Home equity/2nd mortgage		22		22		13
Other consumer		0		0		0
		3,129		3,466		1,529
Total:
Residential		2,040		2,356		112
Land		120		131		0
Construction		0		0		0
Commercial real estate		2,586		2,691		145
Commercial business		1,898		2,118		1,259
Home equity/2nd mortgage		276		290		13
Other consumer		0		0		0
	$	6,920	$	7,586	$	1,529

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 September 30, 2014 and December 31, 2013:

	September 30, 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	$	802	$	85	$	887	$	1,533	$	180	$	1,713
Land		107		0		107		120		0		120
Construction		0		0		0		0		0		0
Commercial real estate		504		0		504		1,456		0		1,456
Commercial business		1,864		0		1,864		1,898		0		1,898
Home equity/2nd mortgage		148		0		148		252		39		291
Other consumer		0		37		37		0		8		8
Total	$	3,425	$	122	$	3,547	$	5,259	$	227	$	5,486

The following table presents the aging of the recorded investment in loans at September 30, 2014:

	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans
	(In thousands)
Residential	$	2,515	$	580	$	222	$	3,317	$	101,066	$	104,383
Land		187		0		0		187		10,325		10,512
Construction		0		0		0		0		11,368		11,368
Commercial real estate		58		43		0		101		80,056		80,157
Commercial business		0		0		189		189		29,582		29,771
Home equity/2nd mortgage		191		66		132		389		36,828		37,217
Other consumer		190		94		37		321		34,606		34,927
Total	$	3,141	$	783	$	580	$	4,504	$	303,831	$	308,335

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		90 Days or More Past Due		Total Past Due		Current		Total Loans
	(In thousands)
Residential	$	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/2nd 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 institution’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 institution 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 institution’s books as an asset is not warranted.

Loans not meeting the criteria above that are analyzed individually as part of the 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 & 2nd Mtg		Other Consumer		Total
	(In thousands)
September 30, 2014
Pass	$	101,786	$	7,282	$	10,776	$	73,983	$	25,077	$	36,956	$	34,857	$	290,717
Special Mention		212		94		592		4,811		2,830		2		54		8,595
Substandard		1,583		3,029		0		859		0		111		16		5,598
Doubtful		802		107		0		504		1,864		148		0		3,425
Loss		0		0		0		0		0		0		0		0
Total	$	104,383	$	10,512	$	11,368	$	80,157	$	29,771	$	37,217	$	34,927	$	308,335
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

The following table summarizes the Company’s troubled debt restructurings (TDRs) by accrual status as of September 30, 2014 and December 31, 2013:

	September 30, 2014								December 31, 2013
	Accruing		Nonaccrual		Total		Related Allowance for Loan Losses		Accruing		Nonaccrual		Total		Related Allowance for Loan Losses
	(In thousands)
Troubled debt restructurings:
Residential real estate	$	495	$	169	$	664	$	6	$	508	$	226	$	734	$	45
Commercial real estate		1,205		341		1,546		0		1,130		0		1,130		0
Commercial business		0		1,676		1,676		1,226		0		1,709		1,709		1,259
Home equity and 2nd mortgage		22		0		22		0		24		0		24		0
Total	$	1,722	$	2,186	$	3,908	$	1,232	$	1,662	$	1,935	$	3,597	$	1,304

At September 30, 2014 and December 31, 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 three and nine months ended September 30, 2014:

	Three months ended September 30, 2014						Nine months ended September 30, 2013
	Number of Contracts		Pre-Modification Outstanding Balance		Post-Modification Outstanding Balance		Number of Contracts		Pre-Modification Outstanding Balance		Post-Modification Outstanding Balance
	(Dollars in thousands)						(Dollars in thousands)
Troubled debt restructurings:
Commercial real estate		1	$	115	$	115		4	$	657	$	657
Total		1	$	115	$	115		4	$	657	$	657

For the TDRs listed above, the terms of modification included a temporary decrease in the borrowers’ monthly payments.  There were no principal charge-offs recorded as a result of TDRs during the three months and nine months ended September 30, 2014, and there was no specific allowance for loan losses related to TDRs modified during the three months and nine months ended September 30, 2014.

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 three months and nine months ended September 30, 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.

The following table summarizes information in regard to TDRs that were restructured during the nine months ended September 30, 2013.  There were no TDRs that were restructured during the three months ended September 30, 2013:

	Nine months ended September 30, 2013
	Number of Contracts		Pre-Modification Outstanding Balance		Post-Modification Outstanding Balance
	(Dollars in thousands)
Troubled debt restructurings:
Residential real estate		1	$	160	$	160
Total		1	$	160	$	160

For the TDR listed above, the term of modification included a reduction of the stated interest rate.  There were no principal charge-offs recorded as a result of TDRs during the three months and nine months ended September 30, 2013, and there was no specific allowance for loan losses related to TDRs modified during the three months and nine months ended September 30, 2013.