Loans Receivable, Net | (3) Loans Receivable, Net: The components of loans receivable in the consolidated balance sheets as of December 31, 2016, and December 31, 2015, were as follows: December 31, 2016 December 31, 2015 Amount Percent Amount Percent Real estate loans: One-to-four family first mortgages $ 147,962 24.2 % $ 145,999 26.0 % Home equity line of credit 35,684 5.8 % 33,644 6.0 % Second mortgages 1,452 0.3 % 1,771 0.3 % Multi-family 34,284 5.6 % 24,725 4.4 % Construction 39,255 6.4 % 34,878 6.2 % Land 23,840 3.9 % 22,453 4.0 % Farmland 47,796 7.8 % 42,246 7.5 % Non-residential real estate 182,940 30.0 % 149,711 26.6 % Total mortgage loans 513,213 84.0 % 455,427 81.0 % Consumer loans 8,717 1.4 % 20,324 3.6 % Commercial loans 88,907 14.6 % 86,743 15.4 % Total other loans 97,624 16.0 % 107,067 19.0 % Total loans 610,837 100.0 % 562,494 100.0 % Deferred loan cost, net of fees (439 ) (445 ) Less allowance for loan losses (6,112 ) (5,700 ) Total loans, net $ 604,286 $ 556,349 Loans serviced for the benefit of others totaled approximately $33.5 million and $36.9 million at December 31, 2016 and 2015, respectively. At December 31, 2016, approximately $19.7 million of the $33.5 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 are pledged to the Federal Home Loan Bank of Cincinnati as discussed in Note 6. At December 31, 2016, the carrying amount of loans eligible and pledged to the Federal Home Loan Bank of Cincinnati was $135.7 million. The Company originates most fixed rate loans for immediate sale to outside investors, including Freddie Mac. Generally, the agreement to sell such loans occurs shortly after the loan application is tentatively approved through best effort commitments, not binding the Company to deliver a loan that does not close. 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 - Loss - 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. 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, farmland and agri-business commercial loans and one-to-four family residential real estate loans. Loans by classification type and the related valuation allowance amounts at December 31, 2016 were as follows: Special Impaired Loans Specific Allowance for Pass Mention Substandard Doubtful Total One-to-four family mortgages $ 145,965 744 1,253 — 147,962 — 852 Home equity line of credit 35,109 25 550 — 35,684 — 260 Junior liens 1,411 30 11 — 1,452 — 8 Multi-family 31,280 — 3,004 — 34,284 — 412 Construction 39,255 — — — 39,255 — 277 Land 15,581 35 8,224 — 23,840 1,036 724 Non-residential real estate 172,395 3 10,542 — 182,940 — 964 Farmland 44,832 674 2,290 — 47,796 — 778 Consumer loans 8,382 — 335 — 8,717 84 124 Commercial loans 85,174 603 3,130 — 88,907 28 565 Total $ 579,384 2,114 29,339 — 610,837 1,148 4,964 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 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 liens 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 December 31, 2016 were as follows: At December 31, 2016 For the year ended Unpaid Average Interest Recorded Principal Related Recorded Income Investment Balance Allowance Investment Recognized Impaired loans with no specific allowance One-to-four family mortgages $ 1,253 1,253 — 1,470 67 Home equity line of credit 550 550 — 390 24 Junior liens 11 11 — 13 1 Multi-family 3,004 3,004 — 3,005 172 Construction — — — — — Land 1,553 2,513 — 7,868 38 Non-residential real estate 10,542 10,542 — 9,363 485 Farmland 2,290 2,290 — 1,563 120 Consumer loans — — — 21 1 Commercial loans 2,865 2,865 — 3,168 112 Total 22,068 23,028 — 26,861 1,020 Impaired loans with a specific allowance One-to-four family mortgages $ — — — 452 — Home equity line of credit — — — — — Junior liens — — — — — Multi-family — — — 910 — Construction — — — — — Land 6,671 6,671 1,036 1,811 485 Non-residential real estate — — — — — Farmland — — — 533 — Consumer loans 335 335 84 273 — Commercial loans 265 265 28 754 24 Total 7,271 7,271 1,148 4,733 509 Total impaired loans $ 29,339 30,299 1,148 31,594 1,529 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 Unpaid Average Interest Recorded Principal Related Recorded Income Investment Balance Allowance Investment Recognized 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 The following table presents the balance in the allowance for loan losses and the recorded investment in loans as of December 31, 2016, and December 31, 2015, by portfolio segment and based on the impairment method as of December 31, 2016, and December 31, 2015. Commercial Land Commercial Residential Consumer Total December 31, 2016: Allowance for loan losses: Ending allowance balance attributable to loans: Individually evaluated for impairment $ 28 1,036 — — 84 1,148 Collectively evaluated for impairment 565 1,001 2,154 1,120 124 4,964 Total ending allowance balance $ 593 2,037 2,154 1,120 208 6,112 Loans: Loans individually evaluated for impairment $ 3,130 8,224 15,836 1,814 335 29,339 Loans collectively evaluated for impairment 85,777 54,871 249,184 183,284 8,382 581,498 Total ending loans balance $ 88,907 63,095 265,020 185,098 8,717 610,837 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 The average recorded investment in impaired loans for the years ended December 31, 2016 and 2015 was $31.6 million and $28.1 million, respectively. The Company recognized $1.5 million of interest income on impaired loans for the years ended December 31, 2016 and December 31, 2015, respectively, and $2.0 million for the year ended December 31, 2014. 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, 2016: Balance Charge off Recovery General Specific Ending One-to-four family mortgages $ 1,030 — 167 (118 ) (227 ) 852 Home equity line of credit 201 (30 ) 14 59 16 260 Junior liens 8 — 14 — (14 ) 8 Multi-family 227 (421 ) — 323 283 412 Construction 377 — — (100 ) — 277 Land 1,379 — — (586 ) 967 1,760 Non-residential real estate 1,139 — 10 (41 ) (144 ) 964 Farmland 358 — — 420 — 778 Consumer loans 358 (422 ) 293 (187 ) 166 208 Commercial loans 623 (595 ) 141 122 302 593 $ 5,700 (1,468 ) 639 (108 ) 1,349 6,112 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, 2015: Balance Charge off 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 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 Non-accrual loans totaled $9.1 million and $7.4 million at December 31, 2016, and December 31, 2015, respectively. All non-accrual loans noted below are classified as either substandard or doubtful. Interest income foregone on such loans totaled $108,000 at December 31, 2016, $337,000 at December 31, 2015, and $76,000 at December 31, 2014, respectively. The Company is not committed to lend additional funds to borrowers whose loans have been placed on a non-accrual basis. There were no loans past due more than three months and still accruing interest as of December 31, 2016, and December 31, 2015. For the years ended December 31, 2016, and December 31, 2015, the components of the Company’s balances of non-accrual loans are as follows: 12/31/2016 12/31/2015 One-to-four family first mortgages $ 270 2,234 Home equity lines of credit 402 48 Multi-family — 1,968 Land 7,675 1,553 Non-residential real estate 208 247 Farmland — 166 Consumer loans 3 8 Commercial loans 516 1,198 Total non-accrual loans $ 9,074 7,422 The table below presents gross loan balances excluding deferred loan fees of $439,000 at December 31, 2016, by loan classification allocated between past due, classified, performing and non-performing: Currently 30 - 89 Non-accrual Special Impaired Loans Performing Past Due Loans Mention Substandard Doubtful Total One-to-four family mortgages $ 145,069 896 270 744 983 — $ 147,962 Home equity line of credit 35,087 22 402 25 148 — 35,684 Junior liens 1,407 4 — 30 11 — 1,452 Multi-family 31,280 — — — 3,004 — 34,284 Construction 39,255 — — — — — 39,255 Land 15,581 — 7,675 35 549 — 23,840 Non-residential real estate 172,395 — 208 3 10,334 — 182,940 Farmland 44,832 — — 674 2,290 — 47,796 Consumer loans 8,354 28 3 — 332 — 8,717 Commercial loans 84,913 261 516 603 2,614 — 88,907 Total $ 578,173 1,211 9,074 2,114 20,265 — 610,837 The table below presents gross loan balances excluding deferred loan fees of $445,000 at December 31, 2015, by loan classification allocated between past due, classified, performing and non-performing: Currently 30 - 89 Non-accrual Special Impaired Loans 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 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 TDR, ASC 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 ASC 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, 2016, the Company had three 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, 2016, the loan relationship has a balance of approximately $3.2 million. The second TDR relationship includes two loans secured by a non-owner occupied commercial real estate property. For a period of one year beginning in the third quarter of 2015, this loan relationship was modified to allow the customer to make interest only payments. The owner has significant equity in the collateral and is attempting to the sell the asset to use the equity for unanticipated financial obligations. The aggregate loan balance of this relationship is $2.2 million. At December 31, 2016, the owner is making principal and interest payments on this loan. The third TDR relationship consist of three multi-family properties and one non-residential real estate property in which the loans payments were modified as interest only beginning in January 2016. The aggregate loan balance of this relationship is $1.1 million. There were no loans as of December 31, 2016 that have been modified as TDRs during 2016 and then subsequently defaulted in 2016 on their modified terms. At December 31, 2016, there are no commitments to lend additional funds to any borrower whose loan terms have been modified in a TDR. A summary of the activity in loans classified as TDRs for the year ended December 31, 2016, is as follows: Balance at New Loss on Transferred to Loan Balance at 12/31/15 TDR Foreclosure Non-accrual Amortization 12/31/16 Multi-family real estate $ — 816 — — (1 ) 815 Non-residential real estate 5,536 228 — — (118 ) 5,646 Total performing TDR $ 5,536 1,044 — — (119 ) 6,461 A summary of the activity in loans classified as TDRs for the year ended December 31, 2015, is as follows: Balance at New Loss on Transferred to Loan Balance at 12/31/14 TDR Foreclosure Held For Sale 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 The Company originates loans to officers and directors and their affiliates at terms substantially equivalent to those available to other borrowers. Loans to officers and directors at December 31, 2016, and December 31, 2015, were approximately $4.9 million and $3.8 million, respectively. At December 31, 2016 and December 31, 2015, funds committed that were undisbursed to officers and directors approximated $380,000 and $493,000, respectively. The following summarizes activity of loans to officers and directors and their affiliates for the years ended December 31, 2016, and December 31, 2015: 2016 2015 Balance at beginning of period $ 3,844 4,022 New loans 1,651 682 Principal repayments (601 ) (860 ) Balance at end of period $ 4,894 3,844 |