Loans

6 Months Ended

Jun. 30, 2014

Receivables [Abstract]

Loans

(5) LOANS

Set forth below is selected data relating to the composition of the loan portfolio by type of loan at June 30, 2014, and December 31, 2013. At June 30, 2014, and December 31, 2013, there were no concentrations of loans exceeding 10% of total loans other than as disclosed below:

	June 30, 2014			June 30, 2014			December 31, 2013			December 31, 2013
	Amount			Percent			Amount			Percent
	(Dollars in thousands, except percentages)
Real estate loans:
One-to-four family (closed end) first mortgages	$	151,917			27.8	%	$	155,252			28.1	%
Second mortgages (closed end)		2,688			0.5	%		3,248			0.6	%
Home equity lines of credit		33,206			6.1	%		34,103			6.2	%
Multi-family		28,242			5.2	%		29,736			5.4	%
Construction		13,327			2.4	%		10,618			1.9	%
Land		29,579			5.4	%		34,681			6.3	%
Farmland		45,616			8.3	%		51,868			9.4	%
Non-residential real estate		157,795			28.9	%		157,692			28.5	%
Total mortgage loans		462,370			84.6	%		477,198			86.4	%
Consumer loans		15,564			2.9	%		11,167			2.0	%
Commercial loans		68,374			12.5	%		64,041			11.6	%
Total other loans		83,938			15.4	%		75,208			13.6	%
Total loans, gross		546,308			100.0	%		552,406			100.0	%
Deferred loan cost, net of fees		(192	)					(92	)
Less allowance for loan losses		(8,353	)					(8,682	)
Total loans	$	537,763					$	543,632

The Company assigns an industry standard NAICS code to each loan in the Company’s portfolio. By assigning a standard code to each type of loan, management can more readily determine concentrations in risk by industry, location and loan type. This information is most useful when analyzing the Company’s non-residential real estate loan portfolio. At June 30, 2014, and December 31, 2013, the Company’s non-residential real estate loan portfolio was made up of the following loan types:

	June 30, 2014		December 31, 2013
	(Dollars in Thousands)
Land	$	29,579		34,681
Manufacturing		5,053		3,962
Professional, Technical		1,489		1,819
Retail Trade		11,491		10,916
Other Services		21,041		19,206
Finance & Insurance		2,615		1,862
Agricultural, Forestry, Fishing & Hunting		45,616		51,868
Real Estate and Rental and Leasing		55,408		55,692
Wholesale Trade		20,824		21,852
Arts, Entertainment & Recreation		3,698		3,015
Accommodations / Food Service		24,200		26,552
Healthcare and Social Assistance		6,473		6,862
Transportation & Warehousing		1,025		1,101
Information		2,205		2,390
Non-industry		2,042		2,101
Admin Support / Waste Mgmt		231		362
Total	$	232,990		244,241

The allowance for loan losses totaled $8.4 million at June 30, 2014, and $8.7 million at December 31, 2013, and $9.4 million at June 30, 2013, respectively. The ratio of the allowance for loan losses to total loans was 1.53% at June 30, 2014, 1.57% at December 31, 2013, and 1.75% at June 30, 2013.

The following table indicates the type and level of non-accrual loans at the dates indicated below:

	June 30, 2014		December 31, 2013		June 30, 2013
	(Dollars in Thousands)
One-to-four family mortgages	$	524		945		1,131
Home equity line of credit		29		1		22
Junior lien		—		2		37
Construction		—		175		—
Land		1,217		1,218		2,255
Non-residential real estate		6,520		6,546		7,055
Farmland		13		703		781
Consumer loans		1		13		11
Commercial loans		431		463		520
Total non-accrual loans	$	8,735		10,066		11,812

The following table provides a detail of the Company’s activity in the allowance for loan loss account by loan type for the six month period ended June 30, 2014:

	Balance 12/31/2013		Charge off 2014			Recovery 2014		General Provision 2014			Specific Provision 2014			Ending Balance 6/30/2014
	(Dollars in Thousands)
One-to-four family mortgages	$	2,048		(181	)		12		105			(125	)		1,859
Home equity line of credit		218		(20	)		2		2			18			220
Junior liens		39		—			7		(16	)		(7	)		23
Multi-family		466		—			—		(159	)		—			307
Construction		88		(10	)		4		—			—			82
Land		1,305		—			—		(80	)		(280	)		945
Non-residential real estate		2,719		—			—		309			(171	)		2,857
Farmland		510		—			—		275			32			817
Consumer loans		541		(196	)		64		52			132			593
Commercial loans		748		(181	)		51		(85	)		117			650
Total	$	8,682		(588	)		140		403			(284	)		8,353

The following table provides a detail of the Company’s activity in the allowance for loan loss account by loan type for the year ended December 31, 2013:

	Balance 12/31/2012		Charge off 2013			Recovery 2013		General Provision 2013			Specific Provision 2013			Balance 12/31/2013
	(Dollars in Thousands)
One-to-four family mortgages	$	2,490		(852	)		329		(285	)		366			2,048
Home equity line of credit		374		(22	)		9		(88	)		(55	)		218
Junior liens		230		(119	)		71		5			(148	)		39
Multi-family		524		(38	)		164		(20	)		(164	)		466
Construction		256		—			—		(168	)		—			88
Land		2,184		(1,432	)		9		(718	)		1,262			1,305
Non-residential real estate		2,921		(1,041	)		14		757			68			2,719
Farmland		712		—			—		(202	)		—			510
Consumer loans		338		(649	)		246		228			378			541
Commercial loans		619		(291	)		32		437			(49	)		748
Total	$	10,648		(4,444	)		874		(54	)		1,658			8,682

The table below presents currently performing, past due and non-accrual balances at June 30, 2014, by loan classification allocated between performing and non-performing:

June 30, 2014	Currently Performing		30 - 89 Days Past Due		Non-accrual Loans		Special Mention		Impaired Loans Currently Performing
									Substandard		Doubtful		Total
	(Dollars in Thousands)
One-to-four family mortgages	$	145,897		669		524		204		4,623		—	$	151,917
Home equity line of credit		32,561		33		29		—		583		—		33,206
Junior liens		2,627		—		—		41		20		—		2,688
Multi-family		23,093		—		—		2,928		2,221		—		28,242
Construction		13,327		—		—		—		—		—		13,327
Land		13,898		2,975		1,217		370		11,119		—		29,579
Non-residential real estate		136,374		3,158		6,520		4,829		6,914		—		157,795
Farmland		43,636		—		13		343		1,624		—		45,616
Consumer loans		15,197		4		1		—		362		—		15,564
Commercial loans		64,632		1,170		431		657		1,484		—		68,374
Total	$	491,242		8,009		8,735		9,372		28,950		—	$	546,308

The table below presents currently performing, past due and non-accrual balances at December 31, 2013, by loan classification allocated between performing and non-performing:

	Currently Performing		30 - 89 Days Past Due		Non-accrual Loans		Special Mention		Impaired Loans Currently Performing
December 31, 2013									Substandard		Doubtful		Total
	(Dollars in Thousands)
One-to-four family mortgages	$	148,759		592		945		814		4,142		—		155,252
Home equity line of credit		33,369		93		1		—		640		—		34,103
Junior liens		3,126		—		2		43		77		—		3,248
Multi-family		29,736		—		—		—		—		—		29,736
Construction		10,443		—		175		—		—		—		10,618
Land		19,899		—		1,218		52		13,512		—		34,681
Non-residential real estate		142,701		343		6,546		515		7,587		—		157,692
Farmland		46,042		—		703		480		4,643		—		51,868
Consumer loans		10,493		234		13		—		427		—		11,167
Commercial loans		61,379		123		463		526		1,550		—		64,041
Total	$	505,947		1,385		10,066		2,430		32,578		—		552,406

All loans listed as 30-89 days past due and non-accrual are not performing as agreed. Loans listed as special mention, substandard and doubtful are paying as agreed. However, the customer’s financial statements may indicate weaknesses in their current cash flow, the customer’s industry may be in decline due to current economic conditions, collateral values used to secure the loan may be declining, or the Company may be concerned about the customer’s future business prospects.

The Company does not originate loans it considers sub-prime and is not aware of any exposure to the additional credit concerns associated with sub-prime lending in either the Company’s loan or investment portfolios. The Company does have a significant amount of construction and land development loans. Management reports to the Company’s Board of Directors on the status of the Company’s specific construction and development loans as well as the market trends in those markets in which the Company actively participates.

The Company’s annualized net charge off ratios for six month periods ended June 30, 2014, June 30, 2013, and the year ended December 31, 2013, was 0.16%, 0.77% and 0.66%, respectively. The ratios of allowance for loan losses to non-accrual loans at June 30, 2014, June 30, 2013, and December 31, 2013, were 95.6%, 86.3%, and 139.0% respectively.

The determination of the allowance for loan losses is based on management’s analysis, completed on a quarterly basis. Various factors are considered, including the market value of the underlying collateral, growth and composition of the loan portfolio, the relationship of the allowance for loan losses to outstanding loans, historical loss experience, delinquency trends and prevailing economic conditions. Although management believes its allowance for loan losses is adequate, there can be no assurance that additional allowances will not be required or that losses on loans will not be incurred.

The Company conducts annual reviews on all loan relationships above one million dollars to ascertain the borrowers continued ability to service their debt as agreed. In addition to the credit relationships mentioned above, management may classify any credit relationship once it becomes aware of adverse credit trends for that customer. Typically, the annual review consists of updated financial statements for borrowers and any guarantors, a review of the borrower’s credit history with the Company and other creditors, and current income tax information.

As a result of this review, management will classify loans based on their credit risk. Additionally, the Company provides a risk grade for all loans past due more than sixty days. The Company uses the following risk definitions for risk grades:

Satisfactory loans of average strength having some deficiency or vulnerability to changing economic or industry conditions. These customers should have reasonable amount of capital and operating ratios. Secured loans may lack in margin or liquidity. Loans to individuals, perhaps supported in dollars of net worth, but with supporting assets may be difficult to liquidate.

Watch loans are acceptable credits: (1) that need continual monitoring, such as out-of territory or asset-based loans (since the Bank does not have an asset-based lending department), or (2) with a marginal risk level to business concerns and individuals that; (a) have exhibited favorable performance in the past, though currently experiencing negative trends;

(b) are in an industry that is experiencing volatility or is declining, and their performance is less than industry norms; and (c) are experiencing unfavorable trends in their financial position, such as one-time net losses or declines in asset values. These marginal borrowers may have early warning signs of problems such as occasional overdrafts and minor delinquency. If considered marginal, a loan would be a “watch” until financial data demonstrated improved performance or further deterioration to a “substandard” grade usually within a 12-month period. In the table on page 25, Watch loans are included with satisfactory loans and classified as Pass.

Other Loans Especially Mentioned are currently protected but are potentially weak. These loans constitute an undue and unwarranted credit risk but not to the point of justifying a substandard classification. The credit risk may be relatively minor yet constitutes an unwarranted risk in light of the circumstances surrounding a specific loan. These credit weaknesses, if not checked or corrected, will weaken the loan or inadequately protect the Bank’s credit position at some future date.

ASubstandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. The loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. This does not imply ultimate loss of the principal, but may involve burdensome administrative expenses and the accompanying cost to carry the credit. Examples of substandard loans include those to borrowers with insufficient or negative cash flow, negative net worth coupled with inadequate guarantor support, inadequate working capital, and/or significantly past-due loans and overdrafts.

A loan classified Doubtful has all the weaknesses inherent in a substandard credit except 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 pending factors charge-off 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. The doubtful classification is applied to that portion of the credit in which the full collection of principal and interest is questionable.

A loan is considered to be impaired when management determines that it is probable that the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. The value of individually impaired loans is measured based on the present value of expected payments using the fair value of the collateral if the loan is collateral dependent. Currently, it is management’s practice to test all loans for impairment that are classified as substandard or doubtful with an outbalance of more than $250,000. At June 30, 2014, December 31, 2013, and June 30, 2013, the Company’s impaired loans totaled $37.7 million, $42.6 million and $40.4 million, respectively. At June 30, 2014, December 31, 2013, and June 30, 2013, the Company’s specific reserve for impaired loans totaled $1.5 million, $1.9 million and $3.5 million, respectively.

A summary of the Company’s loans, including their respective regulatory classification and their respective specific reserve at June 30, 2014, were as follows:

			Special		Impaired Loans						Specific Allowance for		Allowance for Performing
June 30, 2014	Pass		Mention		Substandard		Doubtful		Total		Impairment		Loans
	(Dollars in Thousands)
One-to-four family mortgages	$	146,566		204		5,147		—	$	151,917	$	303	$	1,555
Home equity line of credit		32,594		—		612		—		33,206		—		220
Junior liens		2,627		41		20		—		2,688		—		25
Multi-family		23,093		2,928		2,221		—		28,242		—		307
Construction		13,327		—		—		—		13,327		—		82
Land		16,873		370		12,336		—		29,579		491		452
Non-residential real estate		139,532		4,829		13,434		—		157,795		636		2,222
Farmland		43,636		343		1,637		—		45,616		33		783
Consumer loans		15,201		—		363		—		15,564		83		510
Commercial loans		65,802		657		1,915		—		68,374		—		651
Total	$	499,251		9,372		37,685		—	$	546,308	$	1,546	$	6,807
A summary of the Company’s loans and their respective reserve at December 31, 2013, were as follows:
			Special		Impaired Loans						Specific Allowance for		Allowance for Performing
	Pass		Mention		Substandard		Doubtful		Total		Impairment		Loans
	(Dollars in Thousands)
One-to-four family mortgages	$	149,351		814		5,087		—		155,252		597		1,451
Home equity line of credit		33,462		—		641		—		34,103		—		218
Junior liens		3,126		43		79		—		3,248		—		39
Multi-family		29,736		—		—		—		29,736		—		466
Construction		10,443		—		175		—		10,618		—		88
Land		19,899		52		14,730		—		34,681		771		534
Non-residential real estate		143,044		515		14,133		—		157,692		465		2,254
Farmland		46,042		480		5,346		—		51,868		—		510
Consumer loans		10,727		—		440		—		11,167		96		445
Commercial loans		61,502		526		2,013		—		64,041		—		748
Total	$	507,332		2,430		42,644		—		552,406		1,929		6,753

Impaired loans by classification type and the related valuation allowance amounts at June 30, 2014, were as follows:

	At June 30, 2014						For the six month period ended June 30, 2014
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
Impaired loans with no recorded reserve:
One-to-four family mortgages	$	3,261		3,261		—		2,319		83
Home equity line of credit		612		612		—		599		14
Junior liens		20		20		—		41		1
Multi-family		2,221		2,221		—		74		64
Construction		—		—		—		58		—
Land		9,014		9,014		—		10,334		191
Farmland		1,331		1,331		—		5,921		71
Non-residential real estate		9,449		9,449		—		7,927		218
Consumer loans		31		31		—		34		1
Commercial loans		1,915		1,915		—		2,268		45
Total	$	27,854		27,854		—		29,575		688
Impaired loans with recorded reserve:
One-to-four family mortgages	$	1,886		1,886		303		1,871		50
Home equity line of credit		—		—		—		—		—
Junior liens		—		—		—		—		—
Multi-family		—		—		—		—		—
Construction		—		—		—		—		—
Land		3,322		3,322		491		3,565		64
Farmland		306		306		33		1,221		17
Non-residential real estate		3,985		5,176		636		2,439		183
Consumer loans		332		332		83		439		—
Commercial loans		—		—		—		—		—
Total	$	9,831		11,022		1,546		9,535		314
Total impaired loans	$	37,685		38,876		1,546		39,110		1,002

Impaired loans by classification type and the related valuation allowance amounts at December 31, 2013, were as follows:

	At December 31, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
Impaired loans with no recorded reserve:
One-to-four family mortgages	$	3,216		3,216		—		2,361		8
Home equity line of credit		641		641		—		564		3
Junior liens		79		79		—		239		1
Multi-family		—		—		—		990		—
Construction		175		175		—		1,072		5
Land		10,882		12,315		—		10,668		186
Non-residential real estate		10,775		10,775		—		6,196		263
Farmland		5,346		5,346		—		6,955		149
Consumer loans		56		56		—		48		—
Commercial loans		2,013		2,013		—		2,391		95
Total	$	33,183		34,616		—		31,484		710
Impaired loans with recorded reserve:
One-to-four family mortgages	$	1,871		1,871		597		2,501		9
Home equity line of credit		—		—		—		279		—
Junior liens		—		—		—		113		—
Multi-family		—		—		—		—		—
Construction		—		—		—		1,385		—
Land		3,848		3,848		771		2,741		29
Non-residential real estate		3,358		4,222		465		2,243		111
Farmland		—		—		—		1,601		—
Consumer loans		384		384		96		401		—
Commercial loans		—		—		—		346		—
Total	$	9,461		10,325		1,929		11,610		149
Total impaired loans	$	42,644		44,941		1,929		43,094		859

The following table presents the balance in the allowance for loan losses and the recorded investment in loans of June 30, 2014 and December 31, 2013, by portfolio segment and based on impairment method as of June 30, 2014 and December 31, 2013 (in thousands):

	Commercial		Land Development/ Construction		Commercial Real Estate		Residential Real Estate		Consumer		Total
June 30, 2014:
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	491	$	669	$	303	$	83	$	1,546
Collectively evaluated for impairment		650		535		3,312		1,800		510		6,807
Total ending allowance balance	$	650	$	1,026	$	3,981	$	2,103	$	593	$	8,353
Loans:
Loans individually evaluated for impairment	$	1,915	$	12,336	$	17,292	$	5,779	$	363	$	37,685
Loans collectively evaluated for impairment		66,459		30,570		214,361		182,032		15,201		508,623
Total ending loans balance	$	68,374	$	42,906	$	231,653	$	187,811	$	15,564	$	546,308
	Commercial		Land Development/ Construction		Commercial Real Estate		Residential Real Estate		Consumer		Total
December 31, 2013:
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	771	$	465	$	597	$	96	$	1,929
Collectively evaluated for impairment		748		622		3,230		1,708		445		6,753
Total ending allowance balance	$	748	$	1,393	$	3,695	$	2,305	$	541	$	8,682
Loans:
Loans individually evaluated for impairment	$	2,013	$	14,905	$	19,479	$	5,807	$	440	$	42,644
Loans collectively evaluated for impairment		62,028		30,394		219,817		186,796		10,727		509,762
Total ending loans balance	$	64,041	$	45,299	$	239,296	$	192,603	$	11,167	$	552,406

On a periodic basis, the Bank may modify the terms of certain loans. In evaluating whether a restructuring constitutes a troubled debt restructuring (TDR), Financial Accounting Standards Board has issued Accounting Standards Update 310 (ASU 310), A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. In evaluating whether a restructuring constitutes a TDR, the Bank must separately conclude that both of the following exist:

• The restructuring constitutes a concession

• The debtor is experiencing financial difficulties

ASU 310 provides the following guidance for the Bank’s evaluation of whether it has granted a concession as follows:

• If a debtor does not otherwise have access to funds at a market interest rate for debt with similar risk characteristics as the restructured debt, the restructured debt would be considered a below market rate, which may indicate that the Bank may have granted a concession. In that circumstance, the Bank should consider all aspects of the restructuring in determining whether it has granted a concession, the creditor must make a separate assessment about whether the debtor is experiencing financial difficulties to determine whether the restructuring constitutes a TDR.

• A temporary or permanent increase in the interest rate on a loan as a result of a restructuring does not eliminate the possibility of the restructuring from being considered a concession if the new interest rate on the loan is below the market interest rate for loans of similar risk characteristics.

• A restructuring that results in a delay in payment that is insignificant is not a concession. However, the Bank must consider a variety of factors in assessing whether a restructuring resulting in a delay in payment is insignificant.

At June 30, 2014, and December 31, 2013, the Company has no loans classified as TDR’s that are reported as performing on June 30, 2014, and December 31, 2013, respectively. For the six month period ended June 30, 2014, no loans were classified as TDR and no loans were added or removed from TDR status during the six month period ended June 30, 2014.