| LOANS AND ALLOWANCE FOR LOAN LOSSES | 6. LOANS AND ALLOWANCE FOR LOAN LOSSES The activity in the CompanyÂ’s
allowance for loan losses (“ALLL”) for the three and six month periods ended June 30, 2016 and 2015 and related asset
balances at June 30, 2016 and December 31, 2015 is summarized as follows:
For the Three Months Ended June 30, 2016
Faith-
Based Residential
Commercial Non- Real Other
(Dollars in thousands) Commercial Real Estate Profit Estate Consumer Loans Unallocated Total
ALLL:
Total ending ALLL balances as of March 31, 2016 $ 547 $ 687 $ 1,395 $ 383 $ 23 $ 401 $ — $ 3,436
For the three months ended June 30, 2016
Charge-offs — (409 ) — (66 ) (32 ) (5 ) — (512 )
Recoveries — — — 2 14 1 — 17
Provision for loan losses (372 ) 847 (68 ) 24 14 (274 ) — 171
Total ending ALLL balances as of June 30, 2016 $ 175 $ 1,125 $ 1,327 $ 343 $ 19 $ 123 $ — $ 3,112
For the Three Months Ended June 30, 2015
Faith-
Based Residential
Commercial Non- Real Other
(Dollars in thousands) Commercial Real Estate Profit Estate Consumer Loans Unallocated Total
ALLL:
Total ending ALLL balances as of March 31, 2015 $ 271 $ 602 $ 1,440 $ 589 $ 29 $ 210 $ 305 $ 3,446
For the three months ended June 30, 2015
Charge-offs — — — (7 ) (1 ) (3 ) — (11 )
Recoveries — — — 2 1 1 — 4
Provision for loan losses 5 342 10 (190 ) (6 ) (4 ) (157 ) —
Total ending ALLL balances as of June 30, 2015 $ 276 $ 944 $ 1,450 $ 394 $ 23 $ 204 $ 148 $ 3,439
For the Six Months Ended June 30, 2016
Faith-
Based Residential
Commercial Non- Real Other
(Dollars in thousands) Commercial Real Estate Profit Estate Consumer Loans Unallocated Total
ALLL:
Total ending ALLL balances as of December 31, 2015 $ 329 $ 839 $ 1,229 $ 410 $ 21 $ 229 $ 378 $ 3,435
For the six months ended June 30, 2016
Charge-offs — (409 ) — (66 ) (32 ) (8 ) — (515 )
Recoveries — — — 5 14 2 — 21
Provision for loan losses (154 ) 695 98 (6 ) 16 (100 ) (378 ) 171
Total ending ALLL balances as of June 30, 2016 $ 175 $ 1,125 $ 1,327 $ 343 $ 19 $ 123 $ — $ 3,112
For the Six Months Ended June 30, 2015
Faith-
Based Residential
Commercial Non- Real Other
(Dollars in thousands) Commercial Real Estate Profit Estate Consumer Loans Unallocated Total
ALLL:
Total ending ALLL balances as of December 31, 2014 $ 353 $ 579 $ 1,234 $ 685 $ 28 $ 265 $ 296 $ 3,440
For the six months ended June 30, 2015
Charge-offs — — — (7 ) (1 ) (7 ) — (15 )
Recoveries — — — 12 1 1 — 14
Provision for loan losses (77 ) 365 216 (296 ) (5 ) (55 ) (148 ) —
Total ending ALLL balances as of June 30, 2015 $ 276 $ 944 $ 1,450 $ 394 $ 23 $ 204 $ 148 $ 3,439
June 30, 2016
Faith
Based
Commercial Non- Residential Other
(Dollars in thousands) Commercial Real Estate Profit Real Estate Consumer Loans Unallocated Total
ALLL:
Ending ALLL balance attributable to loans:
Individually evaluated for impairment $ — $ 544 $ 517 $ 40 $ — $ — $ — $ 1,101
Collectively evaluated for impairment 175 581 810 303 19 123 — 2,011
Total ending ALLL balance $ 175 $ 1,125 $ 1,327 $ 343 $ 19 $ 123 $ — $ 3,112
Loans:
Loans individually evaluated for impairment $ — $ 6,969 $ 13,277 $ 2,095 $ — $ — $ — $ 22,341
Loans collectively evaluated for impairment 10,099 41,434 65,331 19,056 979 4,247 — 141,146
Total ending loans balance $ 10,099 $ 48,403 $ 78,608 $ 21,151 $ 979 $ 4,247 $ — $ 163,487
December 31, 2015
Faith
Based
Commercial Non- Residential Other
(Dollars in thousands) Commercial Real Estate Profit Real Estate Consumer Loans Unallocated Total
ALLL:
Ending ALLL balance attributable to loans:
Individually evaluated for impairment $ — $ 303 $ 261 $ 67 $ — $ — $ — $ 631
Collectively evaluated for impairment 329 536 968 343 21 229 378 2,804
Total ending ALLL balance $ 329 $ 839 $ 1,229 $ 410 $ 21 $ 229 $ 378 $ 3,435
Loans:
Loans individually evaluated for impairment $ — $ 7,517 $ 16,325 $ 2,579 $ — $ — $ — $ 26,421
Loans collectively evaluated for impairment 7,540 36,523 69,130 19,960 1,035 4,240 — 138,428
Total ending loans balance $ 7,540 $ 44,040 $ 85,455 $ 22,539 $ 1,035 $ 4,240 $ — $ 164,849 The Bank experienced $495
thousand and $7 thousand in net charge-offs during the three months ended June 30, 2016 and 2015, respectively. Annualized net
charge-offs as a percent of average loan balances outstanding totaled 1.26% and 0.02% during the three month periods ended June
30, 2016 and 2015, respectively. The Bank experienced $494 thousand and $1 thousand in net charge-offs during the six months ended
June 30, 2016 and 2015, respectively. Annualized net charge-offs as a percent of average loan balances outstanding totaled 0.62%
and 0.00% during the six month periods ended June 30, 2016 and 2015, respectively. The decrease in unallocated
reserve to none at June 30, 2016 from $378 thousand at December 31, 2015 was attributable to decreases in cash flows and/or collateral
values of individually impaired loans. Loans A portfolio segment is defined
as the level at which an entity develops and documents a systematic methodology to determine its ALLL. The composition of the loan
portfolio, net of deferred fees and costs, by loan classification as of June 30, 2016 and December 31, 2015 was as follows:
(Dollars in thousands) June 30, 2016 December 31, 2015
Commercial $ 10,099 $ 7,540
Commercial real estate:
Construction 9,894 9,618
Owner occupied 20,662 18,941
Other 17,847 15,481
Faith-based non-profit:
Construction 1,738 4,800
Owner occupied 74,566 78,228
Other 2,304 2,427
Residential real estate:
First mortgage 15,792 16,467
Multifamily 2,610 2,701
Home equity 2,657 3,249
Construction 92 122
Consumer 979 1,035
Other loans 4,247 4,240
Loans, net of deferred fees 163,487 164,849
ALLL (3,112 ) (3,435 )
Loans, net of ALLL $ 160,375 $ 161,414 The Bank has a concentration
of loans to faith-based non-profit organizations, in which the Bank has specialized lending experience. As of June 30, 2016, the
percentage of loans in this segment, which included construction, real estate secured, and lines of credit, comprised 48.08% of
the total loan portfolio and the reserve for these loans was 36.15% of the total allowance. Historically, the Bank has experienced
low levels of loan losses in this niche; however, repayment of these loans is generally dependent on voluntary contributions, some
of which have been adversely affected by the economic downturn. Non-Performing
Loans and Leases - Generally, all classes of loans and leases are placed
on non-accrual status upon becoming contractually past due 90 days or more as to principal or interest (unless loans are adequately
secured by collateral, are in the process of collection, and are reasonably expected to result in repayment), or where substantial
doubt about full repayment of principal or interest is evident. When
a loan is placed on non-accrual status, regardless of class, the accrued and unpaid interest receivable is reversed and the loan
is accounted for on the cash or cost recovery method until qualifying for return to accrual status. All payments received on non-accrual
loans and leases are applied against the principal balance of the loan or lease. Loans may be returned to accrual status when all principal and interest amounts contractually due (including any arrearages) are reasonably
assured of repayment within a reasonable period, the borrower has demonstrated payment performance for a minimum of six months
in accordance with the original or revised contractual terms of the loan, and when doubt about repayment is resolved. Generally,
for all classes of loans and leases, a charge-off is recorded when it is probable that a loss has been incurred and when it is
possible to determine a reasonable estimate of the loss. For all classes of commercial loans and leases, a charge-off is determined
on a subjective basis after due consideration of the debtor's prospects for repayment and the fair value of collateral. For closed-end
consumer loans, the entire outstanding balance of the loan is charged-off during the month that the loan becomes 120 days past
due as to principal or interest. Consumer loans with non-real estate collateral are written down to the value of the collateral,
less estimated costs to sell, if repossession of collateral is assured and in process. For residential mortgage and home equity
loan classes, a partial charge-off is recorded at 120 days past due as to principal or interest for the amount that the loan balance
exceeds the fair value of the collateral less estimated costs to sell. Impaired Loans For
all classes of commercial loans, a quarterly evaluation of specific individual commercial borrowers with identified weaknesses
is performed to identify impaired loans. The identification of specific borrowers for review is based on a review of non-accrual
loans as well as those loans specifically identified by management as exhibiting above average levels of risk. When
a loan has been identified as being impaired, the amount of impairment is measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the estimated fair value of
the collateral, less any selling costs, if the loan is collateral-dependent. If the measurement of the impaired loan is less than
the recorded investment in the loan (net of deferred loan fees or costs and unamortized premiums or discounts), impairment is recognized
by creating or adjusting an existing allocation of the ALLL, or by recording a partial charge-off of the loan to its estimated
fair value. Interest payments made on impaired loans are typically applied to principal unless collectability of the principal
amount is reasonably assured, in which case interest income may be accrued or recognized on a cash basis. Income Recognition
on Impaired and Non-accrual Loans Loans may be returned to
accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment
within a reasonable period of time, and the borrower has demonstrated payment performance for a minimum of six months in accordance
with the contractual terms involving payments of cash or cash equivalents. During the non-accrual period, all payments received
will be applied to principal. After a loan is returned to accruing status, foregone interest will be accreted to interest income
on a pro-rata basis over the remaining term of the loan if full repayment of principal and interest is reasonably assured. In the case where a non-accrual
loan had been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized
on the remaining loan balance at the contractual interest rate. Receipts in excess of that amount are recorded as recoveries to
the ALLL until prior charged off balances have been fully recovered. The following tables present
current loans and the aging of past due loans as of June 30, 2016 and December 31, 2015:
90 Days
June 30, 2016 30-59 Days 60-89 Days Or More Total Past
(Dollars in thousands) Past Due Past Due Past Due Due Current Total
Commercial $ — $ — $ — $ — $ 10,099 $ 10,099
Commercial real estate:
Construction — — — — 9,894 9,894
Owner occupied 85 — — 85 20,577 20,662
Other 2,006 — — 2,006 15,841 17,847
Faith-based non-profit:
Construction — — — — 1,738 1,738
Owner occupied 145 940 — 1,085 73,481 74,566
Other — 64 — 64 2,240 2,304
Residential real estate:
First mortgage 251 330 861 1,442 14,350 15,792
Multifamily — — 18 18 2,592 2,610
Home equity 51 — 189 240 2,417 2,657
Construction — — 92 92 — 92
Consumer — — — — 979 979
Other loans — — — — 4,247 4,247
Total $ 2,538 $ 1,334 $ 1,160 $ 5,032 $ 158,455 $ 163,487
90 Days
December 31, 2015 30-59 Days 60-89 Days Or More Total Past
(Dollars in thousands) Past Due Past Due Past Due Due Current Total
Commercial $ — $ — $ — $ — $ 7,540 $ 7,540
Commercial real estate:
Construction 40 — — 40 9,578 9,618
Owner occupied 397 — — 397 18,544 18,941
Other — 71 — 71 15,410 15,481
Faith-based non-profit:
Construction — — — — 4,800 4,800
Owner occupied 237 — 355 592 77,636 78,228
Other — — — — 2,427 2,427
Residential real estate:
First mortgage 688 161 1,376 2,225 14,242 16,467
Multifamily 17 — — 17 2,684 2,701
Home equity 129 — 206 335 2,914 3,249
Construction 122 — — 122 — 122
Consumer — — — — 1,035 1,035
Other loans 3 — — 3 4,237 4,240
Total $ 1,633 $ 232 $ 1,937 $ 3,802 $ 161,047 $ 164,849 The recorded investment and
related information for impaired loans is summarized as follows for June 30, 2016, December 31, 2015 and June 30, 2015:
June 30, 2016
For the Six Months Ended For the Three Months Ended
Unpaid Average Average
Principal Recorded ALLL Interest Recorded Interest Recorded
(Dollars in thousands) Balance Investment Allocated Earned Investment Earned Investment
With no related allowance recorded:
Commercial $ — $ — $ — $ — $ — $ — $ —
Commercial real estate:
Construction — — — — — — —
Owner occupied 68 68 — 2 68 1 68
Other 82 82 — 3 1,983 2 1,300
Faith based non-profit:
Construction — — — — — — —
Owner occupied 3,106 3,109 — 75 4,849 15 4,270
Other — — — — — — —
Residential real estate:
First mortgage 1,566 1,539 — 9 1,673 3 1,583
Multifamily 17 17 — — 13 — 17
Home equity 273 273 — — 293 — 277
Construction — — — — — — —
Consumer — — — — — — —
Impaired loans with no allowance recorded $ 5,112 $ 5,088 $ — $ 89 $ 8,879 $ 21 $ 7,515
With an allowance recorded:
Commercial $ — $ — $ — $ — $ — $ — $ —
Commercial real estate:
Construction — — — — — — —
Owner occupied 4,609 4,614 215 101 4,638 47 4,622
Other 2,210 2,211 329 8 668 4 1,220
Faith based non-profit:
Construction — — — — — — —
Owner occupied 10,171 10,198 517 250 10,721 133 10,525
Other — — — — — — —
Residential real estate:
First mortgage 175 175 40 2 301 2 259
Multifamily — — — — — — —
Home equity — — — — — — —
Construction 92 92 — — 84 — 107
Consumer — — — — — — —
Impaired loans with allowance recorded $ 17,257 $ 17,290 $ 1,101 $ 361 $ 16,412 $ 186 $ 16,733
Total impaired loans $ 22,369 $ 22,378 $ 1,101 $ 450 $ 25,291 $ 207 $ 24,248
December 31, 2015
Interest
Unpaid Earned Average
Principal Recorded ALLL For the Recorded
(Dollars in thousands) Balance Investment Allocated Year Investment
With no related allowance recorded:
Commercial $ — $ — $ — $ — $ —
Commercial real estate:
Construction — — — — 137
Owner occupied 68 68 — 7 59
Other 2,813 2,815 — 85 3,685
Faith based non-profit:
Construction — — — — —
Owner occupied 5,413 5,426 — 230 5,197
Other — — — — —
Residential real estate:
First mortgage 1,926 1,898 — 24 2,211
Multifamily — — — — —
Home equity 338 338 — 10 140
Construction — — — — —
Consumer — — — — 1
Impaired loans with no allowance recorded $ 10,558 $ 10,545 $ — $ 356 $ 11,430
With an allowance recorded:
Commercial $ — $ — $ — $ — $ 1
Commercial real estate:
Construction — — — — 172
Owner occupied 4,637 4,677 303 190 4,712
Other — — — — 18
Faith based non-profit:
Construction — — — — —
Owner occupied 10,912 10,983 261 567 11,583
Other — — — — —
Residential real estate:
First mortgage 343 343 67 2 775
Multifamily — — — — —
Home equity — — — — 39
Construction — — — — —
Consumer — — — — —
Impaired loans with allowance recorded $ 15,892 $ 16,003 $ 631 $ 759 $ 17,300
Total impaired loans $ 26,450 $ 26,548 $ 631 $ 1,115 $ 28,730
June 30, 2015
For the Six Months Ended For the Three Months Ended
Unpaid Average Average
Principal Recorded ALLL Interest Recorded Interest Recorded
(Dollars in thousands) Balance Investment Allocated Earned Investment Earned Investment
With no related allowance recorded:
Commercial $ 6 $ — $ — $ — $ — $ — $ —
Commercial real estate:
Construction 77 77 — 3 78 2 78
Owner occupied 69 69 — 4 49 4 42
Other 3,995 3,762 — 19 3,834 15 3,862
Faith based non-profit:
Construction — — — — — — —
Owner occupied 1,446 1,448 — 33 5,668 — 7,747
Other — — — — — — —
Residential real estate:
First mortgage 2,344 2,303 — 101 2,473 42 2,618
Multifamily — — — — — — —
Home equity 197 152 — 4 100 3 67
Construction — — — — — — —
Consumer 40 2 — — 1 — 1
Impaired loans with no allowance recorded $ 8,174 $ 7,813 $ — $ 164 $ 12,203 $ 66 $ 14,415
With an allowance recorded:
Commercial $ 2 $ 2 $ 2 $ — $ 2 $ — $ 1
Commercial real estate:
Construction 272 272 1 10 275 5 277
Owner occupied 4,663 4,677 317 95 4,749 38 4,779
Other 71 72 3 2 18 2 —
Faith based non-profit:
Construction — — — — — — —
Owner occupied 15,451 15,506 347 373 11,097 223 9,061
Other — — — — — — —
Residential real estate:
First mortgage 287 287 15 — 1,186 — 1,471
Multifamily — — — — — — —
Home equity 4 4 1 — 59 — 94
Construction — — — — — — —
Consumer — — — — — — —
Impaired loans with allowance recorded $ 20,750 $ 20,820 $ 686 $ 480 $ 17,386 $ 268 $ 15,683
Impaired loans $ 28,924 $ 28,633 $ 686 $ 644 $ 29,589 $ 334 $ 30,098 Reserve for Credit
Losses Allowance for Loan
Losses (“ALLL”) The ALLL is management's
estimate of probable losses that are inherent in the loan portfolio. The ALLL is based on regular quarterly assessments. The methodologies
for measuring the appropriate level of the ALLL include the combination of a quantitative historical loss history by loan type
and a qualitative analysis for loans not classified as impaired or TDRs Accounting Standards Codification 450 reserve ("ASC
450 reserve"), and a specific allowance method for impaired and TDR loans ("ASC 310 reserve"). The qualitative analysis
for the ASC 450 reserve is patterned after the guidelines provided under SEC Staff Accounting Bulletin 102 and the Federal Financial
Institutions Examination Council (“FFIEC”) Interagency Policy Statement on the Allowance for Loan and Lease Losses
and include the following:
· Changes in lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices;
· Changes in national economic and business conditions and developments and the effect of unemployment on African Americans, who are the majority of our customers;
· Changes in the nature and volume of the loan portfolio;
· Changes in the experience, ability, and depth of lending management and staff;
· Changes in trends of the volume and severity of past due and classified loans; and changes in trends in the volume of non-accrual loans, troubled debt restructurings and classified loans;
· Changes in the quality of the loan review system and the degree of oversight by the Bank’s Board of Directors;
· The existence and effect of any concentrations of credit, and changes in the level of such concentrations; and
· The effect of external factors such as competition and legal and regulatory requirements. Management has developed,
from historical loan and economic information, quantitative drivers for certain qualitative factors. Management has identified
which factors, by nature, are subjective, such as lending policies, competition and regulatory requirements. The quantitative drivers
of qualitative factors, to which different weights are assigned based on managementÂ’s judgment, are reviewed and updated
quarterly based on an updated five-year rolling data beginning December 31, 2015 and previously a four-year rolling data. The change
in methodology resulted in a $425 thousand increase in the ALLL at December 31, 2015. A specific ALLL is established
for loans identified as impaired or TDRs, based on significant conditions or circumstances related to the specific credits. The
specific allowance amounts are determined by a method prescribed by ASC 310, Receivables. For commercial business,
faith-based non-profit, real estate and certain consumer loans, the measurement of loan impairment is based on the present value
of the expected future cash flows, discounted at the loan's effective interest rate, or on the fair value of the loan's collateral
if the loan is collateral dependent. Most consumer loans are smaller balance and homogeneous, and are evaluated for impairment
on a collective basis, applying the quantitative loss history and the qualitative factors. Impairment losses are included in the
ALLL through a charge to the provision for loan losses. The Company uses several
credit quality indicators to manage credit risk on an ongoing basis. The Company's credit risk rating system was developed to aid
in the risk management process by grouping credits with similar risk profiles into pass (which includes internal watch), special
mention, or criticized categories, which includes substandard, doubtful, and loss. Credit risk ratings are applied individually
to all classes of loans. Internal credit reviews and external contracted credit review examinations are used to determine and validate
loan risk grades. The credit review system takes into consideration factors such as: borrower's background and experience; historical
and current financial condition; credit history and payment performance; economic conditions and their impact on various industries;
type, market value and volatility of the market value of collateral; lien position; and the financial strength of guarantors. The process of assessing
the adequacy of the ALLL is necessarily subjective. Further, and particularly in periods of economic downturns, it is reasonably
possible that future credit losses may exceed historical loss levels and may also exceed management's current estimates of incurred
losses inherent within the loan portfolio. As such, there can be no assurance that future loan charge-offs will not exceed management's
current estimate of what constitutes a reasonable ALLL. The Company and the Bank
are subject to periodic examination by their federal and state regulators, and may be required by such regulators to recognize
additions to the allowance for loan losses based on the regulators' assessment of credit information available to them at the time
of their examinations. Reserve for Unfunded
Commitments The following table presents
non-accrual loans and loans past due over 90 days still on accrual by class of loans as of June 30, 2016 and December 31, 2015,
respectively:
90 Days
or More
Past Due
June 30, 2016 Still
(Dollars in thousands) Non-accrual Number Accruing Number
Commercial $ — — $ — —
Commercial real estate:
Construction — — — —
Owner occupied — — — —
Other 2,224 3 — —
Faith-based non-profit:
Construction — — — —
Owner occupied 13 1 — —
Other — — — —
Residential real estate:
First mortgage 1,507 30 — —
Multifamily 18 1 — —
Home equity 273 4 7 1
Construction 92 1 — —
Consumer — — — —
Other loans — — — —
Total $ 4,127 40 $ 7 1
90 Days
or More
Past Due
December 31, 2015 Still
(Dollars in thousands) Non-accrual Number Accruing Number
Commercial $ — — $ — —
Commercial real estate:
Construction — — — —
Owner occupied — — — —
Other 2,513 2 — —
Faith-based non-profit:
Construction — — — —
Owner occupied 15 1 355 3
Other — — — —
Residential real estate:
First mortgage 2,154 36 — —
Multifamily — — — —
Home equity 338 5 — —
Construction — — — —
Consumer — — — —
Other loans — — — —
Total $ 5,020 44 $ 355 3
Non-accrual loans and loans
past due over 90 days still accruing interest include both smaller balance homogenous loans that are collectively evaluated for
impairment and individually classified impaired loans. Loans for which principal or interest is in default for 90 days or more
are classified as a non-accrual unless they are well secured and in process of collection. Those loans over 90 days
still accruing interest were in the process of modification. In these cases, the borrowers are still making payments. Borrowers
have continued to make payments on these loans while administrative and legal due processes are proceeding which will enable the
Bank to extend or modify maturity dates. The Company categorizes loans
into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial
information, historical payment experience, credit documentation, public information, and current economic trends, among other
factors. The Company analyzes loans for reserves according to the loan's classification as to credit risk. This analysis includes
non-homogenous loans, such as commercial, commercial real estate and faith-based non–profit entities, and mortgage loans
in process of foreclosure for which the loan to value does not support repayment in full. This analysis is performed on at least
a quarterly basis. The Company uses the following definitions for risk ratings:
· Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Management believes that there is a moderate likelihood of some loss related to those loans and leases that are considered special mention.
· Substandard. Loans classified as substandard are inadequately protected by the current sound financial repayment capacity and debt service coverage of the obligor or of the collateral pledge, if any. Loans so classified have a well-defined weakness or weaknesses that may jeopardize the liquidation of our repayment according to the original terms of the debt. In addition to commercial and faith-based non-profit loans with identified weaknesses, substandard loans include loans within the mortgage and consumer portfolio segments that are past due 90 days or more as to principal or interest if the loan to value does not support full repayment. Substandard loans are evaluated for impairment on an individual loan basis unless the substandard loan is a smaller homogeneous loan that is not a TDR and is not in the process of foreclosure. These loans exhibit a distinct possibility that the Company will sustain some loss if the deficiencies related to the loss are not corrected in a timely manner.
· Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
· Loss. Based on current facts and circumstances, loans classified as loss are not expected to be repaid, or that collateral will be difficult to liquidate. Loans classified as loss are charged off to the ALLL with board approval.
· Pass. Loans not identified as special mention, substandard, doubtful or loss are classified as pass. The following is a breakdown of loans
by risk categories at March 31, 2016 and December 31, 2015:
June 30, 2016
(Dollars in thousands) Pass Special Mention Substandard Doubtful Total
Commercial $ 4,485 $ — $ 5,614 $ — $ 10,099
Commercial real estate:
Construction 9,894 — — — 9,894
Owner occupied 20,344 250 68 — 20,662
Other 14,707 246 2,894 — 17,847
Faith-based non-profit:
Construction 1,738 — — — 1,738
Owner occupied 57,700 6,801 10,065 — 74,566
Other 2,304 — — — 2,304
Residential real estate:
First mortgage 13,640 1 2,151 — 15,792
Multifamily 2,506 29 75 — 2,610
Home equity 2,384 — 273 — 2,657
Construction — — 92 — 92
Consumer 966 8 5 — 979
Other loans 4,247 — — — 4,247
Total $ 134,915 $ 7,335 $ 21,237 $ — $ 163,487
December 31, 2015
(Dollars in thousands) Pass Special Mention Substandard Doubtful Total
Commercial $ 1,869 $ — $ 5,671 $ — $ 7,540
Commercial real estate:
Construction 9,618 — — — 9,618
Owner occupied 18,601 272 68 — 18,941
Other 11,720 394 3,367 — 15,481
Faith-based non-profit:
Construction 4,800 — — — 4,800
Owner occupied 61,836 7,243 9,149 — 78,228
Other 2,427 — — — 2,427
Residential real estate:
First mortgage 13,733 256 2,478 — 16,467
Multifamily 2,613 30 58 — 2,701
Home equity 3,070 — 179 — 3,249
Construction 122 — — — 122
Consumer 1,020 10 5 — 1,035
Other loans 4,240 — — — 4,240
Total $ 135,669 $ 8,205 $ 20,975 $ — $ 164,849 Loans
Modified as a TDR - Loans are considered to have been modified
as a TDR when the Company makes certain concessions to a borrower experiencing financial difficulty. Concessions to the borrower
at modification may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended
to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a non-accrual loan that has been modified
as a TDR remains on non-accrual status for a period of six months to demonstrate that the borrower is able to meet the terms of
the modified loan. However, performance prior to the modification, or significant events that coincide with the modification, are
included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at
the time of loan modification or after a shorter performance period. In response to the extended economic downtown, management
has elected to offer concessions to borrowers with identified financial weaknesses, even if the borrowers have continued making
scheduled payments, working with the borrowers to enable them to continue to satisfy their loan repayment obligations to the Company. The following tables present TDRs as
of June 30, 2016 and December 31, 2015.
Troubled Debt Restructurings
June 30, 2016
Non-accrual Total
Accrual Status Status Modifications
(Dollars in thousands) Number Amount Number Amount Number Amount
Commercial real estate:
Owner occupied 4 $ 4,677 — $ — 4 4,677
Other 1 68 2 2,210 3 2,278
Faith-based non-profit:
Owner occupied 15 13,265 1 12 16 13,277
Residential real estate:
First mortgage 4 206 2 119 6 325
Total 24 $ 18,216 5 $ 2,341 29 $ 20,557
Troubled Debt Restructurings
December 31, 2015
Non-accrual Total
Accrual Status Status Modifications
(Dollars in thousands) Number Amount Number Amount Number Amount
Commercial real estate:
Owner occupied 4 $ 4,704 — $ — 4 4,704
Other 2 300 1 2,494 3 2,794
Faith-based non-profit:
Owner occupied 20 16,309 1 16 21 16,325
Residential real estate:
First mortgage 2 87 4 315 6 402
Total 28 $ 21,400 6 $ 2,825 34 $ 24,225 No loans were restructured
during the three or six months ended June 30, 2016 or during the three months ended June 30, 2015. Two loans totaling $129 thousand
were restructured during the six months ended June 30, 2015. The following table shows
loans newly restructured during the six months ended June 30, 2015.
TDR Modifications
For the Six Months Ended June 30, 2015
Pre-modification Outstanding Post-Modification Outstanding
(Dollars in thousands) Number of Loans Recorded Investment Recorded Investment
Below market interest rates
Residential real estate:
First mortgage 2 $ 129 $ 125
Total 2 $ 129 $ 125 There was one loan, a residential
real estate – first mortgage, in the amount of $120 thousand modified as a TDR and with a payment default, with the payment
default occurring within 12 months of the restructure date, and the payment default occurring during the three and six months ended
June 30, 2016. There were no loans modified as TDRs and with a payment default, with the payment default occurring within 12 months
of the restructure date, and the payment default occurring during the three or six months ended June 30, 2015. The Company defines
default as the loan becoming 90 days or more past due, foreclosed upon or charged-off. The following table shows TDR defaults for
the three and six months ended June 30, 2016 and 2015.
During the Three Months Ended
June 30, 2016 June 30, 2015
Default Default
Number of Recorded Number of Recorded
(Dollars in thousands) Loans Investment Loans Investment
Below market interest rate and extended payment terms — $ — — $ —
Below market interest rate — — — —
Extended payment terms 1 120 — —
Total 1 $ 120 — $ —
During the Six Months Ended
June 30, 2016 June 30, 2015
Default Default
Number of Recorded Number of Recorded
(Dollars in thousands) Loans Investment Loans Investment
Below market interest rate and extended payment terms — $ — — $ —
Below market interest rate — — — —
Extended payment terms 1 120 — —
Total 1 $ 120 — $ — TDR defaults can result in
a higher ALLL and a corresponding higher provision for loan losses because they generally negatively impact the timing of and expected
collections from these impaired loans. Impaired loans, which include TDRs, are evaluated for specific additions to the ALLL by
subtracting the recorded investment in these impaired loans from their fair values. Fair values are generally determined by the
present value of future cash flows, collateral value, or liquidation value. Defaults generally reduce the present value of the
future cash flows and can negatively influence the collateral values if the declining real estate values are affecting the sale
of collateral. |
