Loans Receivable, Net | (3) Loans Receivable, Net The components of loans receivable in the consolidated balance sheets as of December 31, 2015, and December 31, 2014, were as follows: December 31, 2015 December 31, 2014 Amount Percent Amount Percent Real estate loans: One-to-four family (closed end) first mortgages $ 145,999 26.0 % $ 150,551 27.6 % Second mortgages (closed end) 1,771 0.3 % 2,102 0.4 % Home equity lines of credit 33,644 6.0 % 34,238 6.3 % Multi-family 24,725 4.4 % 25,991 4.8 % Construction 34,878 6.2 % 24,241 4.4 % Land 22,453 4.0 % 26,654 4.9 % Farmland 42,246 7.5 % 42,874 7.8 % Non-residential real estate 149,711 26.6 % 150,596 27.6 % Total mortgage loans 455,427 81.0 % 457,247 83.8 % Consumer loans 20,324 3.6 % 14,438 2.6 % Commercial loans 86,743 15.4 % 74,154 13.6 % Total other loans 107,067 19.0 % 88,592 16.2 % Total loans, gross 562,494 100.0 % 545,839 100.0 % Deferred loan cost, net of fees (445 ) (286 ) Less allowance for loan losses (5,700 ) (6,289 ) Total loans $ 556,349 $ 539,264 Loans serviced for the benefit of others totaled approximately $36.9 million, $30.4 million and $32.6 million at December 31, 2015, 2014 and 2013, respectively. At December 31, 2015, approximately $22.8 million of the $36.9 million in loans serviced by the Company are serviced for the benefit of Freddie Mac. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow amounts, disbursing payments to investors and foreclosure processing. The servicing rights associated with these loans are not material to the Company’s consolidated financial statements. Qualified one-to-four family first mortgage loans, non-residential real estate loans, multi-family loans and commercial real estate loans are pledged to the Federal Home Loan Bank of Cincinnati as discussed in Note 7. The Company originates most fixed rate loans for immediate sale to FHLMC or other investors. Generally, the sale of such loans is arranged shortly after the loan application is tentatively approved through commitments. The Company conducts annual reviews on all loan relationships above $1.0 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. The Company uses the following risk definitions for commercial loan risk grades: Excellent - Very Good - Satisfactory - Acceptable - Watch - Special Mention - Substandard - Doubtful - Loss The following credit risk standards are assigned to consumer loans. Satisfactory - Substandard Assets - Loss Assets - 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 or using the fair value of the collateral if the loan is collateral dependent. Currently, it is management’s practice to classify all substandard or doubtful loans as impaired. Loan Origination/Risk Management The Company has certain lending policies and procedures in place that are designed 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 frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions. Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, the Company’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 made 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 and industrial 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. Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These 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 largely 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. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single market or industry. 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. The Company also utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans . With respect to loans to developers and builders that are secured by non-owner occupied properties that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the completed 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. The Company maintains an independent loan review function that is typically outsourced to firms that specialize in conducting loan reviews. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company policies and procedures. Most of the Company’s lending activity occurs in Western Kentucky and middle and western Tennessee. The majority of the Company’s loan portfolio consists of non-residential real estate loans and one-to-four family residential real estate loans. Loans by classification type and the related valuation allowance amounts at December 31, 2015, were as follows: Special Impaired Loans Specific Allowance for Pass Mention Substandard Doubtful Total Impairment Impaired One-to-four family mortgages $ 142,729 41 3,229 — 145,999 60 970 Home equity line of credit 33,475 — 169 — 33,644 — 201 Junior lien 1,720 35 16 — 1,771 — 8 Multi-family 21,644 — 3,081 — 24,725 138 89 Construction 34,878 — — — 34,878 — 377 Land 11,794 41 10,618 — 22,453 69 1,310 Non-residential real estate 138,865 2,489 8,357 — 149,711 134 1,005 Farmland 41,917 — 329 — 42,246 — 358 Consumer loans 20,123 — 201 — 20,324 49 309 Commercial loans 84,317 352 2,074 — 86,743 180 443 Total $ 531,462 2,958 28,074 — 562,494 630 5,070 Loans by classification type and the related valuation allowance amounts at December 31, 2014, were as follows: Special Impaired Loans Specific Allowance for Pass Mention Substandard Doubtful Total Impairment Impaired 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 December 31, 2015, were as follows: At December 31, 2015 For the year ended Recorded Unpaid Related Average Interest Impaired loans with no specific allowance One-to-four family mortgages $ 2,526 2,526 — 2,389 80 Home equity line of credit 169 169 — 457 7 Junior liens 16 16 — 17 1 Multi-family 2,128 2,128 — 2,797 126 Construction — — — — — Land 10,038 10,998 — 8,520 671 Non-residential real estate 7,640 7,640 — 283 404 Farmland 329 329 — 7,774 19 Consumer loans 5 5 — 3 — Commercial loans 1,274 1,274 — 1,599 73 Total 24,125 25,085 — 23,839 1,381 Impaired loans with a specific allowance One-to-four family mortgages $ 703 703 60 709 40 Home equity line of credit — — — — — Junior liens — — — — — Multi-family 953 953 138 318 17 Construction — — — — — Land 580 580 69 1,707 46 Non-residential real estate 717 717 134 836 28 Farmland — — — — — Consumer loans 196 196 49 194 — Commercial loans 800 800 180 514 15 Total 3,949 3,949 630 4,278 146 Total impaired loans $ 28,074 29,034 630 28,117 1,527 Impaired loans by classification type and the related valuation allowance amounts at December 31, 2014, were as follows: At December 31, 2014 For the year ended Recorded Unpaid Related Average Interest 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 The following table presents the balance in the allowance for loan losses and the recorded investment in loans as of December 31, 2015, and December 31, 2014, by portfolio segment and based on the impairment method as of December 31, 2015, and December 31, 2014. Commercial Land Commercial Residential Consumer Total December 31, 2015: Allowance for loan losses: Ending allowance balance attributable to loans: Individually evaluated for impairment $ 180 69 272 60 49 630 Collectively evaluated for impairment 443 1,687 1,452 1,179 309 5,070 Total ending allowance balance $ 623 1,756 1,724 1,239 358 5,700 Loans: Loans individually evaluated for impairment $ 2,074 10,618 11,767 3,414 201 28,074 Loans collectively evaluated for impairment 84,669 46,713 204,915 178,000 20,123 534,420 Total ending loans balance $ 86,743 57,331 216,682 181,414 20,324 562,494 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 The average recorded investment in impaired loans for the years ended December 31, 2015, 2014 and 2013 was $28.1 million, $38.5 million and $43.1 million, respectively. Interest income recognized on impaired loans for the years ended December 31, 2015 and December 31, 2014 and December 31, 2013, was $1.5 million, $2.0 million and $859,000, respectively. The following table provides a detail of the Company’s activity in the allowance for loan loss account allocated by loan type for the year ended December 31, 2015: Balance Charge Recovery General Specific Ending One-to-four family mortgages $ 1,198 (143 ) 39 (176 ) 112 1,030 Home equity line of credit 181 (92 ) 10 20 82 201 Junior liens 14 — 4 (6 ) (4 ) 8 Multi-family 85 — — 4 138 227 Construction 146 — — 231 — 377 Land 1,123 (911 ) — 850 317 1,379 Non-residential real estate 2,083 (222 ) 2 (944 ) 220 1,139 Farmland 461 — — 500 (603 ) 358 Consumer loans 494 (298 ) 118 (123 ) 167 358 Commercial loans 504 (201 ) 54 (61 ) 327 623 $ 6,289 (1,867 ) 227 295 756 5,700 The following table provides a detail of the Company’s activity in the allowance for loan loss account allocated by loan type for the year ended December 30, 2014: Balance Charge 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 Non-accrual loans totaled $7.4 million and $3.2 million at December 31, 2015, and December 31, 2014, respectively. All non-accrual 12/31/2015 12/31/2014 One-to-four family first mortgages $ 2,234 1,501 Home equity lines of credit 48 — Junior liens — — Multi-family 1,968 95 Land 1,553 215 Non-residential real estate 247 1,159 Farmland 166 115 Consumer loans 8 — Commercial loans 1,198 90 Total non-accrual loans $ 7,422 3,175 The table below presents loan balances at December 31, 2015, by loan classification allocated between past due, classified, performing and non-performing: Currently 30 - 89 Non-accrual Special Impaired Loans Currently Performing Substandard Doubtful Total One-to-four family mortgages $ 142,058 671 2,234 41 995 — $ 145,999 Home equity line of credit 33,396 79 48 — 121 — 33,644 Junior liens 1,720 — — 35 16 — 1,771 Multi-family 21,638 6 1,968 — 1,113 — 24,725 Construction 34,878 — — — — — 34,878 Land 11,047 747 1,553 41 9,065 — 22,453 Non-residential real estate 138,637 228 247 2,489 8,110 — 149,711 Farmland 41,853 64 166 — 163 — 42,246 Consumer loans 20,108 15 8 — 193 — 20,324 Commercial loans 84,272 45 1,198 352 876 — 86,743 Total $ 529,607 1,855 7,422 2,958 20,652 — 562,494 The table below presents loan balances at December 31, 2014, by loan classification allocated between performing and non-performing: Currently 30—89 Non-accrual Special Impaired Loans Currently Performing 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 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. Troubled Debt Restructuring On a periodic basis, the Company 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. a.) The restructuring constitutes a concession b.) The debtor is experiencing financial difficulties ASU 310 provides the following guidance for the Company’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 Company may have granted a concession. In that circumstance, the Company 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 Company must consider a variety of factors in assessing whether a restructuring resulting in a delay in payment is insignificant. At December 31, 2015, the Company had two loan relationships with a total of eight loans classified as performing TDR. The largest loan relationship classified as a TDR is collateralized by non-owner occupied commercial real estate and was placed on interest only payments in 2014. At July 31, 2015, both loans were removed from interest only and are now paying monthly principal and interest payments in accordance with the Company’s loan policy. At December 31, 2015, the loan relationship has a balance of approximately $3.3 million. The second TDR relationship includes six loans and is secured by a non-owner occupied commercial real estate loan. This loan relationship was placed on interest only payments in the third quarter of 2015. The owner has significant equity in the collateral and is attempting the sell the asset to use the equity for unanticipated financial obligations. The aggregate loan balance of this relationship is $2.2 million. A summary of the activity in loans classified as TDRs for the twelve month period ended December 31, 2015, is as follows: Balance at New Loss or Transferred to Loan Balance 12/31/14 TDR Foreclosure Non-accrual Amortization 12/31/15 Non-residential real estate $ 3,284 2,265 — — (13 ) $ 5,536 Total performing TDR $ 3,284 2,265 — — (13 ) $ 5,536 A summary of the activity in loans classified as TDRs for the year ended December 31, 2014, is as follows: Balance at New Loss or Transferred to Removed from (Taken to) Balance 12/31/13 TDR Foreclosure Held For Sale Non-accrual 12/31/14 Non-residential real estate $ — 10,271 — (6,987 ) — 3,284 Total performing TDR $ — 10,271 — (6,987 ) — $ 3,284 The Company originates loans to officers and directors and their affiliates at terms substantially identical to those available to other borrowers. Loans to officers and directors at December 31, 2015 and December 31, 2014, were approximately $3.8 million and $4.0 million, respectively. At December 31, 2015, funds committed that were undisbursed to officers and directors approximated $493,000. The following summarizes activity of loans to officers and directors and their affiliates for the years ended December 31, 2015, and December 31, 2014: 2015 2014 Balance at beginning of period 4,022 4,800 New loans 682 669 Principal repayments (860 ) (1,447 ) Balance at end of period 3,844 4,022 |