Loans | (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 Charge off Recovery General Specific Ending 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 Charge off Recovery General Specific Ending 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 Commercial Residential 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 Commercial Residential 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 Watch out-of asset-based asset-based one-time Special Mention A Substandard past-due A loan classified Doubtful charge-off 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. • 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 New Loss or Transferred to Removed Non-accrual Balance at (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 New Loss or Transferred to Removed Non-accrual Balance (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 |