4. Loans and Allowance For Loan Losses

12 Months Ended

Dec. 31, 2014

Notes

4. Loans and Allowance For Loan Losses

4.  LOANS AND ALLOWANCE FOR LOAN LOSSES

The composition of the net loans is as follows:

	December 31,	December 31,
(In 000's)	2014	2013
Commercial and industrial:
Commercial	$2,563	$1,211
SBA loans	168	585
Asset-based	1,904	2,067
Total commercial and industrial	4,635	3,863
Commercial real estate:
Commercial mortgages	15,470	17,343
SBA loans	525	566
Construction	3,423	2,456
Religious organizations	12,138	12,597
Total commercial real estate	31,556	32,962
Consumer real estate:
Home equity loans	1,047	1,176
Home equity lines of credit	22	24
1-4 family residential mortgages	2,228	2,709
Total consumer real estate	3,297	3,909
Total real estate	34,853	36,871
Consumer and other:
Consumer installment	7	16
Student loans	1,221	1,366
Other	145	148
Total consumer and other	1,373	1,530
Loans, net	$40,861	$42,264

At December 31, 2014 and 2013, unamortized net deferred fees totaled $52,909 and $100,962, respectively, and are included in the related loan accounts. At December 31, 2014 and 2013, the unearned discount totaled $26,177 and $27,182, respectively, and is included in the related loan accounts.

Loan Origination/Risk Management.  The Bank has lending policies and procedures in place to maximize loan income within an acceptable level of risk.  Management reviews and approves these policies and procedures on a regular basis.  A reporting system supplements the review process by providing management with periodic reports related to loan origination, asset quality, concentrations of credit, loan delinquencies and non-performing and emerging problem loans.  Diversification in the portfolio is a means of managing risk with fluctuations in economic conditions.

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate prudently to service the projected debt.  Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, the Bank’s management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed.  Commercial and industrial 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 collateral securing these loans may fluctuate in value.  Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable. The Bank may also seek credit enhancements for commercial and industrial loans from the Small Business Administration, Department of Transportation or other available programs.  Generally, the Bank utilizes an advance formula for loans secured by eligible accounts receivable and other available programs to mitigate risk.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans. These loans are viewed as cash flow loans first and secondarily as loans secured by real estate.  Commercial real estate loans typically have higher principal amounts and the repayment of these loans is dependent on the successful operation of property securing the loan or 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 Bank tracks the level of owner occupied versus non-owner occupied loans.   Typically, owner-occupied real estate loans represent less risk for the Bank.

The Bank’s commercial real estate loans are largely concentrated in loans to religious organizations. These loans are generally made to these organizations are primarily for expansion and repair of church facilities (construction loans).  The source of repayment is viewed as cash flow from tithes and offerings and secondarily as loans secured by real estate.

The Bank’s construction lending has primarily involved lending for construction of commercial properties although the Bank does lend funds for construction of single-family residences. Construction loans are underwritten utilizing feasibility studies, independent appraisals, analysis of lease rates, and the financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates can be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Loan proceeds are disbursed during the construction phase according to a draw schedule based on the stage of completion. Construction projects are inspected by contracted inspectors or bank personnel. These loans are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, regulations of real property, general economic conditions and the availability of long-term financing.

Consumer loans are underwritten after an analysis of the borrower’s past and present financial information including credit score, personal financial statements, tax returns and other information deemed necessary to calculate debt service ratios that determine the ability of a borrower to repay the loan.  Minimum debt service ratios have been established by policy.  Underwriting standards for home equity loans are also heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage of 80% and documentation requirements.

The Bank performs an annual loan review by an independent third party firm that reviews and validates the credit risk program.  The results of these reviews are presented to the board and management.  The loan review process reinforces the risk identification and assessment decisions made by lenders and credit administration personnel, as well as the Bank’s policies and procedures.

Concentrations of Credit.  The Bank’s loan portfolio is concentrated in commercial real estate and commercial and industrial loans   Approximately $21 million of these loans are secured by owner occupied commercial real estate as of December 31, 2014. The Bank continues to have a significant concentration in lending to religious organizations for which total loans at December 31, 2014 were $12.1 million, or 34%, of the commercial portfolio.

Related Party Loans.  In the ordinary course of business, the Bank granted loans to certain directors, executive officers and their affiliates (collectively referred to as “related parties”).  These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other unaffiliated persons and do not involve more than normal risk of collectability. Disaffiliations include directors who do not stand for re-election and are no longer affiliated with the Bank.  

Activity in related party loans is presented in the following table.

	2014	2013
Balance outstanding at December 31,	$858,861	$1,572,023
Principal additions	52,000	65,800
Disaffiliations	-	(718,007)
Principal reductions	(65,384)	(60,958)
Balance outstanding at December 31,	$845,477	$858,861

Non-accrual and Past Due Loans.  Loans are considered past due if the required principal and interest payments have not been received 30 days as of the date such payments were due.  The Bank generally places a loan on non-accrual status when interest or principal is past due 90 days or more.  If it otherwise appears doubtful that the loan will be repaid, management may place the loan on nonaccrual status before the lapse of 90 days. Interest on loans past due 90 days or more ceases to accrue except for loans that are well collateralized and in the process of collection.  When a loan is placed on nonaccrual status, previously accrued and unpaid interest is reversed out of income.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

An age analysis of past due loans, segregated by class of loans, as of December 31, 2014 is as follows:

(In 000's)		Accruing
	Loans	Loans 90 or
	30-89 Days	More Days		Total Past	Current
	Past Due	Past Due	Nonaccrual	Due Loans	Loans	Total Loans
Commercial and industrial:
Commercial	-	-	$248	$248	$2,315	$2,563
SBA loans	-	-	48	48	120	168
Asset-based	-	-	-	-	1,904	1,904
Total Commercial and industrial	-	-	296	296	4,339	4,635
Commercial real estate:
Commercial mortgages	17	83	985	1,085	14,385	15,470
SBA loans	-	-	118	118	407	525
Construction	-	-	-	-	3,423	3,423
Religious organizations	-	-	520	520	11,618	12,138
Total Commercial real estate	17	83	1,623	1,723	29,833	31,556
Consumer real estate:
Home equity loans	246	-	368	614	433	1,047
Home equity lines of credit	-	-	-	-	22	22
1-4 family residential mortgages	-	-	194	194	2,034	2,228
Total consumer real estate	246	-	562	808	2,489	3,297
Total real estate	263	83	2,185	2,531	32,322	34,853
Consumer and other:
Consumer installment	-	-	-	-	7	7
Student loans	136	88	-	224	997	1,221
Other	12	-	-	12	133	145
Total consumer and other	148	88	-	236	1,137	1,373
Total loans	$411	$171	$2,481	$3,063	$37,798	$40,861

An age analysis of past due loans, segregated by class of loans, as of December 31, 2013 is as follows:

(In 000's)		Accruing
	Loans	Loans 90 or
	30-89 Days	More Days		Total Past	Current
	Past Due	Past Due	Nonaccrual	Due Loans	Loans	Total Loans
Commercial and industrial:
Commercial	-	-	$444	$444	$767	$1,211
SBA loans	-	-	130	130	455	585
Asset-based	-	-	-	-	2,067	2,067
Total Commercial and industrial	-	-	574	574	3,289	3,863
Commercial real estate:
Commercial mortgages	22	442	630	1,094	16,249	17,343
SBA loans	184	-	-	184	382	566
Construction	-	-	-	-	2,456	2,456
Religious organizations	-	-	630	630	11,967	12,597
Total Commercial real estate	206	442	1,260	1,908	31,054	32,962
Consumer real estate:
Home equity loans	209	147	115	471	705	1,176
Home equity lines of credit	-	-	-	-	24	24
1-4 family residential mortgages	125	-	242	367	2,342	2,709
Total consumer real estate	334	147	357	838	3,071	3,909
Total real estate	540	589	1,617	2,746	34,125	36,871
Consumer and other:
Consumer installment	-	-	-	-	16	16
Student loans	87	141	-	228	1,138	1,366
Other	5	-	-	5	143	148
Total consumer and other	92	141	-	233	1,297	1,530
Total loans	$632	$730	$2,191	$3,553	$38,711	$42,264

Impaired Loans. The Bank identifies a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. The Bank recognizes interest income on impaired loans under the cash basis when the collateral on the loan is sufficient to cover the outstanding obligation to the Bank.   If these factors do not exist, the Bank will record interest payments on the cost recovery basis.

In accordance with guidance provided by ASC 310-10, Accounting by Creditors for Impairment of a Loan, management employs one of three methods to determine and measure impairment: the Present Value of Future Cash Flow Method; the Fair Value of Collateral Method; or the Observable Market Price of a Loan Method.  To perform an impairment analysis, the Company reviews a loan’s internally assigned grade, its outstanding balance, guarantors, collateral, strategy, and a current report of the action being implemented. Based on the nature of the specific loans, one of the impairment methods is chosen for the respective loan and any impairment is determined, based on criteria established in ASC 310-10.

The Company records partial charge-offs of impaired loans when the impairment is deemed permanent and is considered a loss.  To date, these charge-offs have only included the unguaranteed portion of Small Business Administration (“SBA”) loans.  Specific reserves are allocated to cover “other-than-permanent” impairment for which the underlying collateral value may fluctuate with market conditions. In 2014, the Bank made a partial charge-off totaling approximately $253,000 related to one impaired commercial and industrial loan. In 2013, there were no partial charge-offs of impaired loans.

Consumer real estate and other loans are not individually evaluated for impairment, but collectively evaluated, because they are pools of smaller balance homogeneous loans.

Year-end 2014 impaired loans are set forth in the following table.

(In 000’s)	Unpaid Contractual	Recorded Investment	Recorded Investment	Total		Average	Interest recognized
	Principal	With No	With	Recorded	Related	Recorded	on impaired
	Balance	Allowance	Allowance	Investment	Allowance	Investment	loans
Commercial and industrial:
Commercial	$501	$38	$210	$248	$199	$248	$3
SBA  loans	94	46	48	94	48	52	-
Asset-based	40	40	-	40	-	4	1
Total Commercial and industrial	635	124	258	382	247	304	4
Commercial real estate:
Commercial mortgages	985	616	369	985	27	933	3
SBA  Loans	118	118	-	118	-	124	-
Religious Organizations	520	520	-	520	-	607	-
Total Commercial real estate	1,623	1,254	369	1,623	27	1,664	3
Total Loans	$2,258	$1,378	$627	$2,005	$274	$1,968	7

Year-end 2013 impaired loans are set forth in the following table.

(In 000’s)	Unpaid Contractual	Recorded Investment	Recorded Investment	Total		Average	Interest recognized
	Principal	With No	With	Recorded	Related	Recorded	on impaired
	Balance	Allowance	Allowance	Investment	Allowance	Investment	loans
Commercial and industrial:
Commercial	$444	$47	$397	$444	$330	$446	-
SBA  loans	178	130	48	178	48	210	3
Asset-based	-	-	-	-	-	-	-
Total Commercial and industrial	622	177	445	622	378	656	3
Commercial real estate:
Commercial mortgages	630	630	-	630	-	579	-
SBA  Loans	-	-	-	-	-	-	-
Religious Organizations	630	630	-	630	-	630	-
Total Commercial real estate	1,260	1,260	-	1,260	-	1,370	-
Total Loans	$1,882	$1,437	$445	$1,882	$378	$1,865	$3

Credit Quality Indicators.  For commercial loans, management uses internally assigned risk ratings as the best indicator of credit quality.  Each loan’s internal risk weighting is assigned at origination and updated at least annually and more frequently if circumstances warrant a change in risk rating.  The Bank uses a 1 through 8 loan grading system that follows regulatory accepted definitions as follows:

·       Risk ratings of “1” through “3” are used for loans that are performing and meet and are expected to continue to meet all of the terms and conditions set forth in the original loan documentation and are generally current on principal and interest payments.  Loans with these risk ratings are reflected as “Good/Excellent” and “Satisfactory” in the following table.

·       Risk ratings of “4” are assigned to “Pass/Watch” loans which may require a higher degree of regular, careful attention.  Borrowers may be exhibiting weaker balance sheets and positive but inconsistent cash flow coverage. Borrowers in this classification generally exhibit a higher level of credit risk and are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Loans with this rating would not normally be acceptable as new credits unless they are adequately secured and/or carry substantial guarantors. Loans with this rating are reflected as “Pass” in the following table.

·       Risk ratings of “5” are assigned to “Special Mention” loans that do not presently expose the Bank to a significant degree of risks, but have potential weaknesses/deficiencies deserving Management’s closer attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date. No loss of principal or interest is envisioned.  Borrower is experiencing adverse operating trends, which potentially could impair debt, services capacity and may necessitate restructuring of credit.  Secondary sources of repayment are accessible and considered adequate to cover the Bank's exposure. However a restructuring of the debt should result in repayment.  The asset is currently protected, but is potentially weak.  This category may include credits with inadequate loan agreements, control over the collateral or an unbalanced position in the balance sheet which has not reached a point where the liquidation is jeopardized but exceptions are considered material. These borrowers would have limited ability to obtain credit elsewhere.

·       Risk ratings of “6” are assigned to ‘Substandard” loans which are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets must have a well-defined weakness. They are characterized by the distinct possibility that some loss is possible if the deficiencies are not corrected. The borrower’s recent performance indicated an inability to repay the debt, even if restructured. Primary source of repayment is gone or severely impaired and the Bank may have to rely upon the secondary source. Secondary sources of repayment (e.g., guarantors and collateral) should be adequate for a full recovery. Flaws in documentation may leave the bank in a subordinated or unsecured position when the collateral is needed for the repayment.

·       Risk ratings of “7” are assigned to “Doubtful” loans which have all the weaknesses inherent in those classified “Substandard” with the added characteristic that the weakness makes the collection or liquidation in full, on the basis of current existing facts, conditions, and values, highly questionable and improbable.  The borrower's recent performance indicates an inability to repay the debt.  Recovery from secondary sources is uncertain.  The possibility of a loss is extremely high, but because of certain important and reasonably- specific pending factors, its classification as a loss is deferred.

·       Risk rating of “8” are assigned to “Loss” loans which are considered non-collectible and do not warrant classification as active assets.  They are recommended for charge-off if attempts to recover will be long term in nature.  This classification does not mean that an asset has no recovery or salvage value, but rather, that it is not practical or desirable to defer writing off the loss, although a future recovery may be possible.  Loss should always be taken in the period in which they surface and are identified as non-collectible as a result there is no tabular presentation.

For consumer and residential mortgage loans, management uses performing versus nonperforming as the best indicator of credit quality.  Nonperforming loans consist of loans that are not accruing interest (nonaccrual loans) as a result of principal or interest being in default for a period of 90 days or more or when the ability to collect principal and interest according to contractual terms is in doubt.  These credit quality indicators are updated on an ongoing basis.  A loan is placed on nonaccrual status as soon as management believes there is doubt as to the ultimate ability to collect interest on a loan.

The tables below detail the Bank’s loans by class according to their credit quality indictors discussed above.

			Commercial Loans, December 31, 2014
	Good/ Excellent	Satisfactory	Pass	Special Mention	Substandard	Doubtful	Total
Commercial and industrial:
Commercial	$300	$1,321	$474	$220	$113	$135	$2,563
SBA loans	-	80	-	-	88	-	168
Asset-based	-	1,734	124	-	46	-	1,904
	300	3,135	598	220	247	135	4,635
Commercial real estate:
Commercial mortgages	-	13,024	724	57	1,348	317	15,470
SBA Loans	-	237	170	-	118	-	525
Construction	-	3,423	-	-	-	-	3,423
Religious organizations	-	9,730	1,185	703	520	-	12,138
	-	26,414	2,079	760	1,986	317	31,556
Total commercial loans	$300	$29,549	$2,677	$980	$2,233	$452	$36,173

	Residential Mortgage and Consumer Loans December 31, 2014
	- Performing/Nonperforming
	Performing	Nonperforming	Total
Consumer Real Estate:
Home equity	$679	$368	$1,047
Home equity line of credit	22	-	22
1-4 family residential mortgages	2,034	194	2,228
	2,735	562	3,297
Consumer Other:
Consumer Installment	7	-	7
Student loans	1,221	-	1,221
Other	145	-	145
	1,373	-	1,373
Total consumer loans	$4,108	$562	$4,670
Total loans				$ 40,861

			Commercial Loans, December 31, 2013
	Good/ Excellent	Satisfactory	Pass	Special Mention	Substandard	Doubtful	Total
Commercial and industrial:
Commercial	$250	$296	$220	-	$52	$393	$1,211
SBA loans	-	367	-	40	178	-	585
Asset-based	-	1,897	124	46	-	-	2,067
	250	2,560	344	86	230	393	3,863
Commercial real estate:
Commercial mortgages	-	15,232	883	-	912	316	17,343
SBA Loans	-	395	171	-	-	-	566
Construction	-	2,456	-	-	-	-	2,456
Religious organizations	-	10,414	931	623	629	-	12,597
	-	28,497	1,985	623	1,541	316	32,962
Total commercial loans	$250	$31,057	$2,329	$709	$1,771	$709	$36,825

	Residential Mortgage and Consumer Loans December 31, 2013
	Performing	Nonperforming	Total
Consumer Real Estate:
Home equity	$1,061	$115	$1,176
Home equity line of credit	24	-	24
1-4 family residential mortgages	2,467	242	2,709
	3,552	357	3,909
Consumer Other:
Consumer Installment	16	-	16
Student loans	1,366	-	1,366
Other	148	-	148
	1,530	-	1,530
Total  consumer loans	$5,082	$357	$5,439
Total loans				$42,264

Allowance for loan losses.  The determination of the allowance for loan losses involves a higher degree of judgment and complexity than its other significant accounting policies. The allowance is the accumulation of three components that are calculated based on various independent methodologies that are based on management’s estimates.  The three components are as follows:

· Specific Loan Evaluation Component – Includes the specific evaluation of impaired loans.  

· Historical Charge-Off Component – Applies a rolling, eight-quarter historical charge-off rate to all pools of non-classified loans.

· Qualitative Factors Component – The loan portfolio is broken down into multiple homogenous sub classifications, upon which multiple factors (such as delinquency trends, economic conditions, concentrations, growth/volume trends, and management/staff ability) are evaluated, resulting in an allowance amount for each of the sub classifications. The sum of these amounts comprises the Qualitative Factors Component.

All of these factors may be susceptible to significant change.   In 2014, management reduced the qualitative factor from “high” to “moderate” related to the economy as there continues to be improvement in the economic conditions in the region. The average historical loss factor for commercial and industrial loans increased as a result of the $253,000 charge-off during 2014. With the exception of this segment, the average eight rolling quarter net loss factors have declined during the year as a result of a lower level of net charge-offs in 2014.  To the extent actual outcomes differ from management’s estimates, additional provisions for loan losses may be required that would adversely impact earnings in future periods.

According to the Bank’s policy, a loss (“charge-off”) is to be recognized and charged to the allowance for loan losses as soon as a loan is recognized as uncollectible.  All credits that are 90 days or more past due must be analyzed for the Bank’s ability to collect the outstanding principal and/or interest.  Once a loss is known to exist, the charge-off approval process must be followed for all loan types.  

An analysis of the activity in the allowance for loan losses for the years 2014 and 2013 is as follows:

(in 000's)		For the Year Ended December 31, 2014
	Commercial and industrial	Commercial real estate	Consumer real estate	Consumer and other loans	Total
Beginning balance	$483	$280	$59	$17	$839
Provision for loan losses	169	20	(28)	1	162
Charge-offs	(253)	-	(19)	(30)	(302)
Recoveries	4	-	8	24	36
Net charge-offs	(249)	-	(11)	(6)	(266)
Ending balance	$403	$300	$20	$12	$735

		For the Year Ended December 31, 2014
	Commercial and industrial	Commercial real estate	Consumer real estate	Consumer and other loans	Total
Beginning balance	$483	$280	$59	$17	$839
Provision for loan losses	169	20	(28)	1	162
Charge-offs	(253)	-	(19)	(30)	(302)
Recoveries	4	-	8	24	36
Net charge-offs	(249)	-	(11)	(6)	(266)
Ending balance	$403	$300	$20	$12	$735

(in 000's)		For the Year Ended December 31, 2013
	Commercial and industrial	Commercial real estate	Consumer real estate	Consumer and other loans	Total
Beginning balance	$891	$308	$5	-	$1,204
Provision for loan losses	113	(106)	50	18	75
Charge-offs	(524)	-	(5)	(10)	(539)
Recoveries	3	78	9	9	99
Net charge-offs	(521)	78	4	(1)	(440)
Ending balance	$483	$280	$59	$17	$839

(in 000's)		As of December 31, 2014
	Commercial and industrial	Commercial real estate	Consumer real estate	Consumer and other loans	Total
Period-end amount allocated to:
Loans individually evaluated for impairment	$247	$27	-	-	$274
Loans collectively  evaluated for impairment	156	273	20	12	461
	$403	$300	$20	$12	$735
Loans, ending balance:
Loans individually evaluated for impairment	$382	$1,623	-	-	$2,005
Loans collectively  evaluated for impairment	4,253	29,933	3,297	1,373	$38,856
Total	$4,635	$31,566	$3,297	$1,373	$40,861

(in 000's)		As of December 31, 2013
	Commercial and industrial	Commercial real estate	Consumer real estate	Consumer and other loans	Total
Period-end amount allocated to:
Loans individually evaluated for impairment	$378	-	-	-	$378
Loans collectively  evaluated for impairment	105	280	59	17	461
	$483	$280	$59	$17	$839
Loans, ending balance:
Loans individually evaluated for impairment	$622	$1,260	-	-	$1,882
Loans collectively  evaluated for impairment	3,241	31,702	3,909	1,530	40,382
Total	$3,863	$32,962	$3,909	$1,530	$42,264

Troubled debt restructurings (“TDRs”).  TDRs occur when a creditor, for economic or legal reasons related to a debtor’s financial condition, grants a concession to the debtor that it would not otherwise consider, such as a below market interest rate, extending the maturity of a loan, or a combination of both. The Company made modifications to certain loans in its commercial loan portfolio that included the term out of lines of credit to begin the amortization of principal.  The terms of these loans do not include any financial concessions and are consistent with the current market.  Management reviews all loan modifications to determine whether the modification qualifies as a TDR (i.e. whether the creditor has been granted a concession or is experiencing financial difficulties).  Based on this review and evaluation, none of the loans modified during 2014 and 2013 met the criteria of a TDR.  In addition, the Company had no loans classified as TDRs at December 31, 2014 and 2013.