Note 5: Loans and Allowance

Classes of loans at December 31, 2014 and 2013 include:



	2014		2013
Real estate
Commercial	$	198,019	$	200,817
Commercial construction and development		33,102		13,321
Consumer closed end first mortgage		517,063		531,272
Consumer open end and junior liens		71,073		69,354
		819,257		814,764
Other loans
Consumer loans
Auto		14,712		14,856
Boat/RVs		94,761		79,419
Other		5,184		5,766
Commercial and industrial		88,474		75,402
		203,131		175,443
Total loans		1,022,388		990,207
Undisbursed loans in process		(9,285)		(13,346)
Unamortized deferred loan costs, net		3,583		2,517
Allowance for loan losses		(13,168)		(13,412)
Net loans	$	1,003,518	$	965,966

Year-end non-accrual loans, segregated by class of loans, were as follows:



	2014		2013
Real estate
Commercial	$	2,023	$	1,349
Commercial construction and development		209		1,103
Consumer closed end first mortgage		3,499		4,057
Consumer open end and junior liens		658		421
Consumer loans
Auto		-		10
Boat/RVs		191		339
Other		27		12
Commercial and industrial		605		1,109
	$	7,212	$	8,400

Nonaccrual Loan and Past Due Loans

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in managements’ opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions, but never later than 90 days past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured and generally only after six months of satisfactory performance.

An age analysis of the Company’s past due loans, segregated by class of loans, as of December 31, 2014 and 2013 are as follows:



	December 31, 2014
		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans Receivable		Total Loans 90 Days or More and Accruing
Real estate
Commercial	$	1,308	$	848	$	325	$	2,481	$	195,538	$	198,019	$	-
Commercial construction and development		-		-		209		209		32,893		33,102		-
Consumer closed end first mortgage		8,144		1,220		2,160		11,524		505,539		517,063		226
Consumer open end and junior liens		969		130		27		1,126		69,947		71,073		-
Consumer loans
Auto		65		-		-		65		14,647		14,712		-
Boat/RVs		775		158		115		1,048		93,713		94,761		-
Other		92		27		14		133		5,051		5,184		-
Commercial and industrial		1,066		176		441		1,683		86,791		88,474		-
	$	12,419	$	2,559	$	3,291	$	18,269	$	1,004,119	$	1,022,388	$	226


	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 Receivable		Total Loans 90 Days or More and Accruing
Real estate
Commercial	$	763	$	196	$	1,196	$	2,155	$	198,662	$	200,817	$	-
Commercial construction and development		333		-		915		1,248		12,073		13,321		-
Consumer closed end first mortgage		11,680		2,122		3,515		17,317		513,955		531,272		175
Consumer open end and junior liens		609		185		394		1,188		68,166		69,354		-
Consumer loans
Auto		54		8		9		71		14,785		14,856		-
Boat/RVs		1,410		262		202		1,874		77,545		79,419		13
Other		61		3		-		64		5,702		5,766		-
Commercial and industrial		67		393		531		991		74,411		75,402		-
	$	14,977	$	3,169	$	6,762	$	24,908	$	965,299	$	990,207	$	188

Impaired Loans

Loans are considered impaired in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

Interest on impaired loans is recorded based on the performance of the loan. All interest received on impaired loans that are on nonaccrual is accounted for on the cash-basis method until qualifying for return to accrual. Interest is accrued per the contract for impaired loans that are performing.

The following tables present impaired loans for the years ended December 31, 2014, 2013 and 2012:



	December 31, 2014
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized
Loans without a specific valuation allowance
Real estate
Commercial	$	4,933	$	4,933	$	-	$	3,776	$	161
Commercial construction and development		931		1,860		-		1,323		30
Consumer closed end first mortgage		1,138		1,138		-		1,142		8
Consumer open end and junior liens		-		-		-		100		3
Commercial and industrial		758		789		-		923		12

Total	$	7,760	$	8,720	$	-	$	7,264	$	214

As of December 31, 2014, there were no impaired loans with a valuation allowance.



	December 31, 2013
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized
Loans without a specific valuation allowance
Real estate
Commercial	$	3,148	$	3,660	$	-	$	3,894	$	160
Commercial construction and development		1,294		3,218		-		5,386		46
Consumer closed end first mortgage		1,483		2,071		-		2,582		33
Commercial and industrial		764		764		-		897		2

Loans with a specific valuation allowance
Real estate
Commercial construction and development		344		371		100		344		-
Commercial and industrial		424		624		235		566		20

Total	$	7,457	$	10,708	$	335	$	13,669	$	261



	December 31, 2012
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized
Loans without a specific valuation allowance
Real estate
Commercial	$	5,341	$	6,354	$	-	$	5,384	$	248
Commercial construction and development		3,632		7,078		-		4,884		30
Consumer closed end first mortgage		2,583		3,522		-		3,755		58
Commercial and industrial		972		972		-		2,828		117

Loans with a specific valuation allowance
Real estate
Commercial		208		947		100		211		12
Commercial construction and development		4,639		5,157		959		5,230		78
Consumer closed end first mortgage		834		834		57		654		-
Commercial and industrial		912		912		257		921		30

Total	$	19,121	$	25,776	$	1,373	$	23,867	$	573

The following information presents the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of December 31, 2014.

Commercial Loan Grades

Definition of Loan Grades. Loan grades are numbered 1 through 8. Grades 1-4 are "pass" credits, grade 5 [Special Mention] loans are "criticized" assets, and grades 6 [Substandard], 7 [Doubtful] and 8 [Loss] are "classified" assets. The use and application of these grades by the Bank conform to the Bank's policy and regulatory definitions.

Pass. Pass credits are loans in grades prime through fair. These are at least considered to be credits with acceptable risks and would be granted in the normal course of lending operations.

Special Mention. Special mention credits have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the credits or in the Bank’s credit position at some future date. If weaknesses cannot be identified, classifying as special mention is not appropriate. Special mention credits are not adversely classified and do not expose the Bank to sufficient risk to warrant an adverse classification. No apparent loss of principal or interest is expected.

Substandard. Substandard credits are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged. Financial statements normally reveal some or all of the following: poor trends, lack of earnings and cash flow, excessive debt, lack of liquidity, and the absence of creditor protection. Credits so classified must have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss of the deficiencies are not corrected.

Doubtful. A doubtful extension of credit has all the weaknesses inherent in a substandard asset 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. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans. Doubtful classification for an entire credit should be avoided when collection of a specific portion appears highly probable with the adequately secured portion graded Substandard.

Retail Loan Grades

Pass. Pass credits are loans that are currently performing as agreed and are not troubled debt restructurings.

Substandard. Substandard credits are loans that have reason to be considered to have a weakness and placed on non-accrual. This would include all retail loans over 90 days and troubled debt restructurings.



December 31, 2014
Commercial Credit Exposure Credit Risk Profile
Internal Rating	Real Estate			Construction and Development	Commercial and Industrial
Pass	$	187,436	$	30,422	$	84,746
Special Mention		3,316		1,721		439
Substandard		7,267		959		2,848
Doubtful		-		-		441
Total	$	198,019	$	33,102	$	88,474

Consumer Credit Exposure Credit Risk Profile
Internal Rating	Closed End First Mortgage		Real Estate Open End and Junior Liens		Auto		Boat/RV		Other
Pass	$	509,765	$	70,299	$	14,704	$	94,377	$	5,125
Special Mention		-		-		-		-		-
Substandard		7,298		774		8		384		59
Total	$	517,063	$	71,073	$	14,712	$	94,761	$	5,184



December 31, 2013
Commercial Credit Exposure Credit Risk Profile
Internal Rating	Real Estate			Construction and Development	Commercial and Industrial
Pass	$	190,041	$	9,910	$	73,648
Special Mention		3,308		1,659		223
Substandard		7,468		1,752		1,000
Doubtful		-		-		531
Total	$	200,817	$	13,321	$	75,402

Consumer Credit Exposure Credit Risk Profile
Internal Rating	Closed End First Mortgage		Real Estate Open End and Junior Liens		Auto		Boat/RV		Other
Pass	$	522,352	$	68,445	$	14,834	$	78,863	$	5,415
Special Mention		1,783		-		-		-		-
Substandard		7,137		909		22		556		351
Total	$	531,272	$	69,354	$	14,856	$	79,419	$	5,766

Allowance for Loan Losses

The risk characteristics of each loan portfolio segment are as follows:

Commercial Loans

Commercial real estate 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 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 more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

Commercial construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analyses of absorption and lease rates and financial analyses of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

Commercial business loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Residential and Consumer

With respect to residential loans that are secured by one-to-four family residences and are primarily owner occupied, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance (PMI) if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in one-to-four family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

The following tables detail activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2014, 2013 and 2012. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses on other segments.



	December 31, 2014
	Commercial		Mortgage		Consumer		Total
Allowance for loan losses:
Balance, beginning of year	$	8,148	$	3,124	$	2,140	$	13,412
Provision charged to expense		(1,273)		888		1,235		850
Losses charged off		(289)		(572)		(1,021)		(1,882)
Recoveries		499		31		258		788
Balance, end of period	$	7,085	$	3,471	$	2,612	$	13,168

Ending balance:
Individually evaluated for impairment	$	-	$	-	$	-	$	-
Collectively evaluated for impairment		7,085		3,471		2,612		13,168
Total allowance for loan losses	$	7,085	$	3,471	$	2,612	$	13,168

Loans:
Ending balance
Individually evaluated for impairment	$	6,622	$	1,138	$	-	$	7,760
Collectively evaluated for impairment		312,973		515,925		185,730		1,014,628
Total Loans	$	319,595	$	517,063	$	185,730	$	1,022,388



	December 31, 2013
	Commercial		Mortgage		Consumer		Total
Allowance for loan losses:
Balance, beginning of year	$	9,908	$	3,394	$	2,736	$	16,038
Provision charged to expense		884		343		73		1,300
Losses charged off		(2,713)		(886)		(940)		(4,539)
Recoveries		69		273		271		613
Balance, end of period	$	8,148	$	3,124	$	2,140	$	13,412

Ending balance:
Individually evaluated for impairment	$	335	$	-	$	-	$	335
Collectively evaluated for impairment		7,813		3,124		2,140		13,077
Total allowance for loan losses	$	8,148	$	3,124	$	2,140	$	13,412

Loans:
Ending balance
Individually evaluated for impairment	$	5,974	$	1,483	$	-	$	7,457
Collectively evaluated for impairment		283,566		529,789		169,395		982,750
Total Loans	$	289,540	$	531,272	$	169,395	$	990,207



	December 31, 2012
	Commercial		Mortgage		Consumer		Total
Allowance for loan losses:
Balance, beginning of year	$	10,602	$	3,444	$	2,769	$	16,815
Provision charged to expense		3,213		1,612		1,200		6,025
Losses charged off		(4,493)		(1,901)		(1,608)		(8,002)
Recoveries		586		239		375		1,200
Balance, end of period	$	9,908	$	3,394	$	2,736	$	16,038

Ending balance:
Individually evaluated for impairment	$	1,316	$	57	$	-	$	1,373
Collectively evaluated for impairment		8,592		3,337		2,736		14,665
Total allowance for loan losses	$	9,908	$	3,394	$	2,736	$	16,038

Loans:
Ending balance
Individually evaluated for impairment	$	15,704	$	3,417	$	-	$	19,121
Collectively evaluated for impairment		273,144		499,202		199,102		971,448
Total Loans	$	288,848	$	502,619	$	199,102	$	990,569

Troubled Debt Restructurings

Certain categories of impaired loans include loans that have been modified in a troubled debt restructuring, that involves granting economic concessions to borrowers who have experienced financial difficulties. These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Modifications of terms for our loans and their inclusion as troubled debt restructurings are based on individual facts and circumstances.

When we modify loans in a troubled debt restructuring, we evaluate any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, or we use the current fair value of the collateral, less selling costs for collateral dependent loans. If we determine 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 through a specific reserve or a charge-off to the allowance.

Loans retain their accrual status at the time of their modification. As a result, if a loan is on nonaccrual at the time it is modified, it stays as nonaccrual until a period of satisfactory performance, generally six months, is obtained. If a loan is on accrual at the time of the modification, the loan is evaluated to determine the collection of principal and interest is reasonably assured and generally stays on accrual.

At December 31, 2014 and 2013, the Company had a number of loans that were modified in troubled debt restructurings and impaired. The modification of terms of such loans included one or a combination of the following: an extension of maturity, a reduction of the stated interest rate or a permanent reduction of the recorded investment in the loan.

The following tables describe troubled debts restructured during the years ended December 31, 2014, 2013 and 2012.



	December 31, 2014
	No. of Loans	Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance
Real estate
Commercial	6	$	1,229	$	1,248
Consumer closed end first mortgage	12		1,493		1,139
Consumer open end and junior liens	5		58		59
Commercial and industrial	2		193		223



	December 31, 2013
	No. of Loans	Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance
Real estate
Commercial	3	$	1,532	$	1,601
Consumer closed end first mortgage	24		1,706		1,884
Consumer open end and junior liens	30		1,236		1,249
Consumer loans
Auto	2		22		22
Boat/RVs	6		172		171
Other	1		11		11
Commercial and industrial	3		1,122		843



	December 31, 2012
	No. of Loans	Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance
Real estate
Commercial	10	$	2,239	$	2,399
Commercial construction and development	3		1,047		1,133
Consumer closed end first mortgage	57		3,857		4,098
Consumer open end and junior liens	14		592		590
Consumer loans
Auto	4		34		33
Boat/RVs	7		154		153
Other	4		53		52
Commercial and industrial	6		325		386

The impact on the allowance for loan losses was insignificant as a result of these modifications.

Newly restructured loans by type for the years ended December 31, 2014, 2013 and 2012 are as follows:



	December 31, 2014
		Interest Only		Term		Combination		Total Modification
Real Estate
Commercial	$	-	$	701	$	547	$	1,248
Consumer closed end first mortgage		101		-		1,038		1,139
Consumer open end junior lien		-		28		31		59
Commercial and industrial		-		223		-		223



	December 31, 2013
		Interest Only		Term		Combination		Total Modification
Real Estate
Commercial	$	-	$	-	$	1,601	$	1,601
Consumer closed end first mortgage		-		36		1,848		1,884
Consumer open end junior lien		250		402		597		1,249
Consumer Loans
Auto		-		4		18		22
Boat/RVs		-		135		36		171
Other		-		-		11		11
Commercial and industrial		-		209		634		843


	December 31, 2012
		Interest Only		Term		Combination		Total Modification
Real Estate
Commercial	$	-	$	1,281	$	1,118	$	2,399
Commercial construction and development		-		961		172		1,133
Consumer closed end first mortgage		320		189		3,589		4,098
Consumer open end junior lien		-		97		493		590
Consumer Loans
Auto		-		29		4		33
Boat/RVs		-		153		-		153
Other		-		8		44		52
Commercial and industrial		-		143		243		386

Defaults of any loans modified as troubled debt restructurings made in the years ended December 31, 2014, 2013 and 2012, respectively, are listed in the table below. Defaults are defined as any loans that become 90 days past due. We have included one other commercial loan in the default category due to a large subsequent charge-off after modification.



	December 31, 2014
	No. of Loans	Post-Modification Outstanding Recorded Balance
Real Estate
Consumer closed end first mortgage	4	$	663
Consumer open end and junior liens	1		23



	December 31, 2013
	No. of Loans	Post-Modification Outstanding Recorded Balance
Real Estate
Consumer closed end first mortgage	3	$	210
Commercial and industrial	1		634



	December 31, 2012
	No. of Loans	Post-Modification Outstanding Recorded Balance
Real Estate
Commercial	1	$	109
Consumer closed end first mortgage	2		61
Consumer Loans
Other	1		14
Commercial and industrial	1		518