Loans | (5) LOANS Set forth below is selected data relating to the composition of the loan portfolio by type of loan at September 30, 2016, and December 31, 2015. At September 30, 2016, and December 31, 2015, there were no concentrations of loans exceeding 10% of total loans other than as disclosed below: September 30, 2016 September 30, 2016 December 31, 2015 December 31, 2015 (Dollars in thousands, except percentages) Real estate loans: One-to-four family (closed end) first mortgages $ 146,744 25.0 % 145,999 26.0 % Home equity lines of credit 34,563 5.9 % 33,644 6.0 % Junior liens 1,601 0.3 % 1,771 0.3 % Multi-family 32,418 5.5 % 24,725 4.4 % Construction 37,775 6.5 % 34,878 6.2 % Land 22,999 3.9 % 22,453 4.0 % Farmland 46,877 8.0 % 42,246 7.5 % Non-residential real estate 170,759 29.1 % 149,711 26.6 % Total mortgage loans 493,736 84.2 % 455,427 81.0 % Consumer loans 8,908 1.5 % 20,324 3.6 % Commercial loans 83,684 14.3 % 86,743 15.4 % Total other loans 92,592 15.8 % 107,067 19.0 % Total loans, gross 586,328 100.0 % 562,494 100.0 % Deferred loan cost, net of income (453 ) (445 ) Less allowance for loan losses (6,812 ) (5,700 ) Total loans $ 579,063 556,349 The Federal Home Loan Bank of Cincinnati has issued letters of credit in the Bank’s name totaling $45.6 million secured by the Bank’s loan portfolio to secure additional municipal deposits. The allowance for loan losses totaled $6.8 million at September 30, 2016, $5.7 million at December 31, 2015, and $5.5 million at September 30, 2015, respectively. The ratio of the allowance for loan losses to total loans was 1.16% at September 30, 2016, 1.01% at December 31, 2015, and 0.97% at September 30, 2015. At December 31, 2015 and September 30, 2016, the Company had no loans past due more than 90 days still accruing interest. The following table indicates the type and level of non-accrual loans at the periods indicated below: September 30, 2016 December 31, 2015 September 30, 2015 (Dollars in Thousands) One-to-four family mortgages $ 700 2,234 1,427 Home equity line of credit 124 48 48 Multi-family 1,772 1,968 1,968 Land 7,842 1,553 1,680 Non-residential real estate 248 247 672 Farmland — 166 168 Consumer loans 31 8 — Commercial loans 947 1,198 1,195 Total non-accrual loans $ 11,664 7,422 7,158 The following table provides a detail of the Company’s activity in the allowance for loan loss account by loan type for the nine month period ended September 30, 2016 (Dollars in Thousands): General Specific Ending Balance Charge off Recovery Provision Provision Balance 12/31/2015 2016 2016 2016 2016 9/30/2016 One-to-four family mortgages $ 1,030 — 164 162 (224 ) 1,132 Home equity line of credit 201 (30 ) 12 134 18 335 Junior liens 8 — 14 3 (14 ) 11 Multi-family 227 — — 68 213 508 Construction 377 — — 429 — 806 Land 1,379 — — (266 ) (69 ) 1,044 Non-residential real estate 1,139 — 6 138 (39 ) 1,244 Farmland 358 — — 657 — 1,015 Consumer loans 358 (322 ) 122 (166 ) 221 213 Commercial loans 623 (322 ) 290 (22 ) (65 ) 504 $ 5,700 (674 ) 608 1,137 41 6,812 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, 2015 (Dollars in Thousands): General Specific Ending Balance Charge off Recovery Provision Provision Balance 12/31/2014 2015 2015 2015 2015 12/31/2015 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 table below presents past due and non-accrual balances at September 30, 2016, by loan classification allocated between performing and non-performing: 30 - 89 Impaired Loans Currently Days Non-accrual Special Currently Performing Performing Past Due Loans Mention Substandard Doubtful Total (Dollars in Thousands) One-to-four family mortgages 144,121 466 700 753 704 — 146,744 Home equity line of credit 33,970 53 124 25 391 — 34,563 Junior liens 1,552 5 — 32 12 — 1,601 Multi-family 27,623 — 1,772 — 3,023 — 32,418 Construction 37,775 — — — — — 37,775 Land 14,562 — 7,842 37 558 — 22,999 Farmland 44,040 26 — 505 2,306 — 46,877 Non-residential real estate 160,096 — 248 5 10,410 — 170,759 Consumer loans 8,603 2 31 — 272 — 8,908 Commercial loans 79,450 34 947 666 2,587 — 83,684 Total 551,792 586 11,664 2,023 20,263 — 586,328 The table below presents past due and non-accrual balances at December 31, 2015, by loan classification allocated between performing and non-performing (Dollars in Thousands): 30 - 89 Impaired Loans Currently Days Non-accrual Special Currently Performing Performing Past Due Loans Mention 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 following table presents the balance in the allowance for loan losses and the recorded investment in loans as of September 30, 2016, and December 31, 2015, by portfolio segment and based on the impairment method as of September 30, 2016, and December 31, 2015. Land Development / Commercial Residential Commercial Construction Real Estate Real Estate Consumer Total September 30, 2016: Allowance for loan losses: Ending allowance balance attributable to loans: Individually evaluated for impairment $ 83 — 452 — 70 $ 605 Collectively evaluated for impairment 421 1,850 2,315 1,478 143 6,207 Total ending allowance balance $ 504 1,850 2,767 1,478 213 $ 6,812 Loans: Loans individually evaluated for impairment $ 3,534 8,400 17,759 1,931 303 $ 31,927 Loans collectively evaluated for impairment 80,150 52,374 232,295 180,977 8,605 554,401 Total ending loans balance $ 83,684 60,774 250,054 182,908 8,908 586,328 Land Development / Commercial Residential Commercial Construction Real Estate Real Estate Consumer Total (Dollars in Thousands) 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 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 nine month periods ended September 30, 2016, September 30, 2015, and the year ended December 31, 2015, was 0.02%, 0.37% and 0.29%, respectively. The ratios of allowance for loan losses to non-accrual loans at September 30, 2016, September 30, 2015, and December 31, 2015, were 58.40%, 76.70%, and 76.80%, 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 ninety days. 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 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 September 30, 2016, December 31, 2015, and September 30, 2015, the Company’s impaired loans totaled $31.9 million, $28.1 million and $23.5 million, respectively. At September 30, 2016, December 31, 2015 and September 30, 2015, the Company’s specific reserve for impaired loans totaled $605,000, $630,000 and $545,000 respectively. A summary of the Company’s impaired loans, including their respective regulatory classification and their respective specific reserve at September 30, 2016, and December 31, 2015, were as follows: Special Impaired Loans Specific Allowance for Loans not September 30, 2016 Pass Mention Substandard Doubtful Total Impairment Impaired (Dollars in Thousands) One-to-four family mortgages $ 144,587 753 1,404 — 146,744 — 1,132 Home equity line of credit 34,023 25 515 — 34,563 — 335 Junior liens 1,557 32 12 — 1,601 — 11 Multi-family 27,623 — 4,795 — 32,418 351 157 Construction 37,775 — — — 37,775 — 806 Land 14,562 37 8,400 — 22,999 — 1,044 Non-residential real estate 160,096 5 10,658 — 170,759 101 1,143 Farmland 44,066 505 2,306 — 46,877 — 1,015 Consumer loans 8,605 — 303 — 8,908 70 143 Commercial loans 79,484 666 3,534 — 83,684 83 421 Total $ 552,378 2,023 31,927 — 586,328 605 6,207 Special Impaired Loans Specific Allowance for Loans not December 31, 2015 Pass Mention Substandard Doubtful Total Impairment Impaired (Dollars in Thousands) 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 Impaired loans by classification type and the related valuation allowance amounts at September 30, 2016, were as follows: At September 30, 2016 For the nine month period ended Recorded Unpaid Related Average Interest (Dollars in Thousands) Impaired loans with no specific allowance: One-to-four family mortgages $ 1,404 1,404 — 1,627 53 Home equity line of credit 515 515 — 257 14 Junior liens 12 12 — 13 1 Multi-family 2,085 2,085 — 3,920 47 Construction — — — — — Land 8,400 9,357 — 11,012 512 Farmland 2,306 2,306 — 913 84 Non-residential real estate 9,951 9,951 — 8,850 336 Consumer loans 24 24 — 37 2 Commercial loans 2,599 2,599 — 4,444 119 Total 27,296 28,253 — 31,073 1,168 Impaired loans with a specific allowance: One-to-four family mortgages — — — 786 — Home equity line of credit — — — — — Junior liens — — — — — Multi-family 2,710 2,781 351 310 105 Construction — — — — — Land — — — 191 — Farmland — — — — — Non-residential real estate 707 707 101 712 22 Consumer loans 279 279 70 227 — Commercial loans 935 935 83 950 49 Total 4,631 4,702 605 3,176 176 Total impaired loans $ 31,927 32,955 605 34,249 1,344 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 (Dollars in Thousands) 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 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, 2015, the Company had eight loans, representing two lending relationships, classified as performing TDR’s. During the nine month period ended September 30, 2016, the Company added four loans to TDR status, representing one additional lending relationship, as a performing TDR. The loans added to TDR classification are paying interest only for one year while the customer attempts to sell the collateral. A summary of the activity in loans classified as TDRs for the nine month period ended September 30, 2016, is as follows: Balance New Loss or Loan Removed (Taken to) Balance at 12/31/15 TDR Foreclosure Amortization Non-accrual 09/30/16 (Dollars in Thousands) Multi-family real estate $ — 816 — — — 816 Non-residential real estate 5,536 228 — (77 ) — 5,687 Total performing TDR $ 5,536 1,044 — (77 ) — 6,503 A summary of the activity in loans classified as TDRs for the year ended December 31, 2015, is as follows: Balance at New Loss or Loan Removed (Taken to) Balance at 12/31/14 TDR Foreclosure Amortization Non-accrual 12/31/15 (Dollars in Thousands) Non-residential real estate $ 3,284 2,265 — (13 ) — 5,536 Total performing TDR $ 3,284 2,265 — (13 ) — 5,536 |