(5)

LOANS

The components of loans receivable in the consolidated balance sheets as of June 30, 2015, and December 31, 2014, were as follows:


	June 30, 2015			June 30, 2015			December 31, 2014			December 31, 2014
	Amount			Percent			Amount			Percent
	(Dollars in thousands, except percentages)
Real estate loans
One-to-four family (closed end) first mortgages	$	146,285			26.1	%	$	150,551			27.6	%
Second mortgages (closed end)		2,046			0.4	%		2,102			0.4	%
Home equity lines of credit		33,803			6.0	%		34,238			6.3	%
Multi-family		22,580			4.0	%		25,991			4.8	%
Construction		27,072			4.8	%		24,241			4.4	%
Land		24,521			4.4	%		26,654			4.9	%
Farmland		41,224			7.4	%		42,874			7.8	%
Non-residential real estate		160,039			28.5	%		150,596			27.6	%

Total mortgage loans		457,570			81.6	%		457,247			83.8	%

Consumer loans		16,011			2.9	%		14,438			2.6	%
Commercial loans		87,148			15.5	%		74,154			13.6	%

Total other loans		103,159			18.4	%		88,592			16.2	%

Total loans, gross		560,729			100.0	%		545,839			100.0	%


Deferred loan cost, net of income		(389	)					(286	)
Less allowance for loan losses		(5,534	)					(6,289	)


Total loans	$	554,806					$	539,264

The allowance for loan losses totaled $5.5 million at June 30, 2015, $6.3 million at December 31, 2014, and $8.4 million at June 30, 2014, respectively. The ratio of the allowance for loan losses to total loans was 0.99% at June 30, 2015, 1.15% at December 31, 2014, and 1.53% at June 30, 2014. The following table indicates the type and level of non-accrual loans at the periods indicated below:


	June 30, 2015		December 31, 2014		June 30, 2014
	(Dollars in Thousands)
One-to-four family mortgages	$	1,456		1,501		524
Home equity line of credit		48		—		29
Multi-family		1,827		95		—
Land		1,982		215		1,217
Non-residential real estate		520		1,159		6,520
Farmland		209		115		13
Consumer loans		—		—		1
Commercial loans		1,014		90		431

Total non-accrual loans	$	7,056		3,175		8,735

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, 2015:


Six month period ended June 30, 2015	Balance 12/31/2014		Charge off 2015			Recovery 2015		General Provision 2015			Specific Provision 2015			Ending Balance 6/30/2015

One-to-four family mortgages	$	1,198		(88	)		21		61			(194	)		998
Home equity line of credit		181		(92	)		3		89			15			196
Junior liens		14		—			2		(2	)		(4	)		10
Multi-family		85		—			—		—			(12	)		73
Construction		146		—			—		—			20			166
Land		1,123		(631	)		—		84			597			1,173
Non-residential real estate		2,083		(222	)		2		(73	)		(150	)		1,640
Farmland		461		—			—		—			(94	)		367
Consumer loans		494		(177	)		73		91			(134	)		347
Commercial loans		504		(147	)		16		222			(31	)		564


	$	6,289		(1,357	)		117		472			13			5,534

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, 2014:


Year ended December 31, 2014	Balance 12/31/2013		Charge off 2014			Recovery 2014		General Provision 2014			Specific Provision 2014			Ending Balance 12/31/2014

One-to-four family mortgages	$	2,048		(233	)		24		(304	)		(337	)		1,198
Home equity line of credit		218		(83	)		3		(37	)		80			181
Junior liens		39		—			9		(25	)		(9	)		14
Multi-family		466		—			—		(381	)		—			85
Construction		88		(139	)		9		58			130			146
Land		1,305		—			—		(74	)		(108	)		1,123
Non-residential real estate		2,719		(66	)		864		(1,368	)		(66	)		2,083
Farmland		510		—			—		542			(591	)		461
Consumer loans		541		(415	)		109		(13	)		272			494
Commercial loans		748		(296	)		94		(244	)		202			504


	$	8,682		(1,232	)		1,112		(1,846	)		(427	)		6,289

The table below presents loan balances at June 30, 2015, by loan classification allocated between past due, performing and non-performing:


			30 – 89						Impaired Loans
	Currently		Days		Non-accrual		Special		Currently Performing
June 30, 2015	Performing		Past Due		Loans		Mention		Substandard		Doubtful		Total
	(Dollars in Thousands)

One-to-four family mortgages	$	142,987		398		1,456		42		1,402		—		146,285
Home equity line of credit		33,113		69		48		—		573		—		33,803
Junior liens		1,992		—		—		38		16		—		2,046
Multi-family		17,818		140		1,827		1,655		1,140		—		22,580
Construction		26,972		100		—		—		—		—		27,072
Land		14,425		—		1,982		44		8,070		—		24,521
Non-residential real estate		149,565		162		520		640		9,152		—		160,039
Farmland		40,143		168		209		681		23		—		41,224
Consumer loans		15,790		13		—		14		194		—		16,011
Commercial loans		84,772		126		1,014		169		1,067		—		87,148

Total	$	527,577		1,176		7,056		3,283		21,637		—		560,729

The table below presents loan balances at December 31, 2014, by loan classification allocated between past due, performing and non-performing:


			30 - 89						Impaired Loans
	Currently		Days		Non-accrual		Special		Currently Performing
	Performing		Past Due		Loans		Mention		Substandard		Doubtful		Total

One-to-four family mortgages	$	145,372		757		1,501		203		2,718		—		150,551
Home equity line of credit		33,338		143		—		—		757		—		34,238
Junior liens		2,025		—		—		40		37		—		2,102
Multi-family		20,066		—		95		2,904		2,926		—		25,991
Construction		24,241		—		—		—		—		—		24,241
Land		14,674		654		215		362		10,749		—		26,654
Non-residential real estate		131,854		—		1,159		5,492		12,091		—		150,596
Farmland		40,057		64		115		516		2,122		—		42,874
Consumer loans		14,104		14		—		21		299		—		14,438
Commercial loans		71,191		55		90		325		2,493		—		74,154


Total	$	496,922		1,687		3,175		9,863		34,192		—		545,839

The following table presents the balance in the allowance for loan losses and the recorded investment in loans as of June 30, 2015, and December 31, 2014, by portfolio segment and based on the impairment method as of June 30, 2015, and December 31, 2014.


	Commercial		Land Development / Construction		Commercial Real Estate		Residential Real Estate		Consumer		Total
June 30, 2015:
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	91		116		445		46		48	$	746
Collectively evaluated for impairment		473		1,223		1,635		1,158		299		4,788

Total ending allowance balance	$	564		1,339		2,080		1,204		347	$	5,534


Loans:
Loans individually evaluated for impairment	$	2,081		10,052		12,871		3,495		194	$	28,693
Loans collectively evaluated for impairment		85,067		41,541		210,972		178,639		15,817		532,036

Total ending loans balance	$	87,148		51,593		223,843		182,134		16,011	$	560,729


	Commercial		Land Development / Construction		Commercial Real Estate		Residential Real Estate		Consumer		Total
December 31, 2014:
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—		663		738		51		62	$	1,514
Collectively evaluated for impairment		504		606		1,891		1,342		432		4,775

Total ending allowance balance	$	504		1,269		2,629		1,393		494	$	6,289


Loans:
Loans individually evaluated for impairment	$	2,583		10,964		18,508		5,013		299	$	37,367
Loans collectively evaluated for impairment		71,571		39,931		200,953		181,878		14,139		508,472

Total ending loans balance	$	74,154		50,895		219,461		186,891		14,438	$	545,839

All loans listed as 30-89 days past due and non-accrual are not performing as agreed. Loans listed as special mentioned, 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, 2015, June 30, 2014, and the year ended December 31, 2014, was 0.45%, 0.16% and 0.02%, respectively. The ratios of allowance for loan losses to non-accrual loans at June 30, 2015, June 30, 2014, and December 31, 2014, were 78.4%, 95.6%, and 198.08%, respectively.

The determination of the allowance for loan losses is based on management’s analysis, performed 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 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 23, Watch loans are included with satisfactory loans and classified as Pass.

Special Mention loans 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.

A Substandard 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 possible 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 or using the fair value of the collateral less cost to sell if the loan is collateral dependent. Currently, it is management’s practice to classify all substandard or doubtful loans as impaired. At June 30, 2015, December 31, 2014, and June 30, 2014, the Company’s impaired loans totaled $28.7 million, $37.4 million and $37.7 million, respectively.

At June 30, 2015, December 31, 2014 and June 30, 2014, the Company’s specific reserve for impaired loans totaled $746,000, $1.5 million and $1.5 million respectively. Loans by classification type and the related allowance amounts at June 30, 2015, are as follows:


											Specific		Reserve
											Reserve		for
			Special		Impaired Loans						for		Performing
June 30, 2015	Pass		Mention		Substandard		Doubful		Total		Impairment		Loans
	(Dollars in Thousands)
One-to-four family mortgages	$	143,385		42		2,858		—		146,285		46		952
Home equity line of credit		33,182		—		621		—		33,803		—		196
Junior liens		1,992		38		16		—		2,046		—		10
Multi-family		17,958		1,655		2,967		—		22,580		—		73
Construction		27,072		—		—		—		27,072		—		166
Land		14,425		44		10,052		—		24,521		116		1,057
Non-residential real estate		149,727		640		9,672		—		160,039		445		1,195
Farmland		40,311		681		232		—		41,224		—		367
Consumer loans		15,803		14		194		—		16,011		48		299
Commercial loans		84,898		169		2,081		—		87,148		91		473


Total	$	528,753		3,283		28,693		—		560,729		746		4,788


Loans by classification type and the related valuation allowance amounts at December 31, 2014, are as follows:

			Special		Impaired Loans						Specific Allowance for		Allowance For Loans
	Pass		Mention		Substandard		Doubtful		Total		Impairment		Not Impaired
December 31, 2014

One-to-four family mortgages	$	146,129		203		4,219		—		150,551		51		1,147
Home equity line of credit		33,481		—		757		—		34,238		—		181
Junior lien		2,025		40		37		—		2,102		—		14
Multi-family		20,066		2,904		3,021		—		25,991		—		85
Construction		24,241		—		—		—		24,241		—		146
Land		15,328		362		10,964		—		26,654		663		460
Non-residential real estate		131,854		5,492		13,250		—		150,596		738		1,345
Farmland		40,121		516		2,237		—		42,874		—		461
Consumer loans		14,118		21		299		—		14,438		62		432
Commercial loans		71,246		325		2,583		—		74,154		—		504


Total	$	498,609		9,863		37,367		—		545,839		1,514		4,775

Impaired loans by classification type and the related valuation allowance amounts at June 30, 2015, were as follows:


							For the three month period ended
	At June 30, 2015						June 30, 2015
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
Impaired loans with no recorded reserve
One-to-four family mortgages	$	2,148		2,175		—		2,408		11
Home equity line of credit		621		621		—		693		—
Junior liens		16		16		—		18		—
Multi-family		2,967		2,967		—		2,982		34
Construction		—		—		—		—		—
Land		9,456		10,087		—		8,376		20
Farmland		232		232		—		237		—
Non-residential real estate		8,949		8,949		—		9,580		18
Consumer loans		3		3		—		5		—
Commercial loans		1,727		1,727		—		1,607		21

Total		26,119		26,777		—		25,906		104


Impaired loans with a specific allowance:

One-to-four family mortgages		710		710		46		712		—
Home equity line of credit		—		—		—		—		—
Junior liens		—		—		—		—		—
Multi-family		—		—		—		—		—
Construction		—		—		—		—		—
Land		596		596		116		2,009		—
Farmland		—		—		—		—		—
Non-residential real estate		723		723		445		952		—
Consumer loans		191		191		48		185		—
Commercial loans		354		354		91		529		16

Total		2,574		2,574		746		4,387		16


Total impaired loans	$	28,693		29,351		746		30,293		120

Impaired loans by classification type and the related valuation allowance amounts at December 31, 2014, were as follows:


							For the year ended
	At December 31, 2014						December 31, 2014
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
Impaired loans with no specific allowance
One-to-four family mortgages	$	3,501		3,501		—		2,972		176
Home equity line of credit		757		757		—		690		35
Junior liens		37		37		—		39		2
Multi-family		3,021		3,021		—		1,342		190
Construction		—		—		—		29		—
Land		7,740		7,740		—		8,978		339
Non-residential real estate		12,057		12,057		—		8,672		669
Farmland		2,237		2,237				3,968		125
Consumer loans		51		51		—		36		3
Commercial loans		2,583		2,583		—		2,246		154

Total		31,984		31,984		—		28,972		1,693


Impaired loans with a specific allowance

One-to-four family mortgages	$	718		718		51		1,434		44
Home equity line of credit		—		—		—		—		—
Junior liens		—		—		—		—		—
Multi-family		—		—		—		—		—
Construction		—		—		—		—		—
Land		3,224		4,737		663		3,418		160
Non-residential real estate		1,193		1,258		738		3,617		69
Farmland		—		—		—		619		—
Consumer loans		248		248		62		355		—
Commercial loans		—		—		—		100		—

Total		5,383		6,961		1,514		9,543		273


Total impaired loans	$	37,367		38,945		1,514		38,515		1,966

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 December 31, 2014, and June 30, 2015, the Company had two loans classified as performing TDRs. At June 30, 2015, the terms of both loans are interest only and are paying as agreed. There was no activity in loans classified as TDRs for the six month ended June 30, 2015. A summary of the activity in loans classified as TDRs for the six month period ended June 30, 2015, is as follows:


	Balance at 12/31/14		New TDR		Loss or Foreclosure		Transferred to Held For Sale		Removed from (Taken to) Non-accrual		Balance at 6/30/15
	(Dollars in Thousands)

Non-residential real estate	$	3,284		—		—		—		—		3,284


Total performing TDR	$	3,284		—		—		—		—		3,284

A summary of the activity in loans classified as TDRs for the twelve month period ended December 31, 2014, is as follows:


	Balance at 12/31/13		New TDR		Loss or Foreclosure		Transferred to Held For Sale			Removed from (Taken to) Non-accrual		Balance at 12/31/14
	(Dollars in Thousands)
One-to-four family mortgages	$	—		—		—		—			—	$	—
Non-residential real estate		—		10,271		—		(6,987	)		—		3,284
Commercial loans		—		—		—		—			—		—


Total performing TDR	$	—		10,271		—		(6,987	)		—	$	3,284