NOTE 3—LOANS

Major classifications of loans were as follows as of June 30:

	2016			2015
Commercial	$	43,207		$	32,155
Commercial real estate:
Construction		7,783			1,295
Other		153,097			143,680
1 – 4 Family residential real estate:
Owner occupied		31,012			30,027
Non-owner occupied		14,471			14,555
Construction		1,256			234
Consumer		5,812			6,965
Subtotal		256,638			228,911
Less: Deferred loan fees and costs		(360	)		(392	)
Allowance for loan losses		(3,566	)		(2,432	)
Net loans	$	252,712		$	226,087

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the activity in the allowance for loan losses by portfolio segment for the year ending June 30, 2016:

						1-4 Family
			Commercial			Residential
			Real			Real
	Commercial		Estate			Estate			Consumer			Total

Allowance for loan losses:
Beginning balance	$	316	$	1,660		$	289		$	167		$	2,432
Provision for loan losses		189		862			414			33			1,498
Loans charged-off		—		(4	)		(311	)		(80	)		(395	)
Recoveries		—		—			10			21			31
Total ending allowance balance	$	505	$	2,518		$	402		$	141		$	3,566

The following table presents the activity in the allowance for loan losses by portfolio segment for the year ending June 30, 2015:

							1-4 Family
				Commercial			Residential
				Real			Real
	Commercial			Estate			Estate			Consumer			Total

Allowance for loan losses:
Beginning balance	$	307		$	1,440		$	294		$	364		$	2,405
Provision for loan losses		26			532			36			(164	)		430
Loans charged-off		(17	)		(313	)		(43	)		(78	)		(451	)
Recoveries		—			1			2			45			48
Total ending allowance balance	$	316		$	1,660		$	289		$	167		$	2,432

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2016. Included in the recorded investment in loans is $549 of accrued interest receivable net of deferred loans fees and costs of $360.

					1-4 Family
			Commercial		Residential
			Real		Real
	Commercial		Estate		Estate		Consumer		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	868	$	6	$	—	$	874
Collectively evaluated for impairment		505		1,650		396		141		2,692

Total ending allowance balance	$	505	$	2,518	$	402	$	141	$	3,566

Recorded investment in loans:
Loans individually evaluated for impairment	$	1,029	$	5,105	$	758	$	—	$	6,892
Loans collectively evaluated for impairment		42,219		155,734		46,166		5,816		249,935

Total ending loans balance	$	43,248	$	160,839	$	46,924	$	5,816	$	256,827

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2015. Included in the recorded investment in loans is $501 of accrued interest receivable net of deferred loans fees and costs of $392.

					1-4 Family
			Commercial		Residential
			Real		Real
	Commercial		Estate		Estate		Consumer		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	58	$	12	$	—	$	70
Collectively evaluated for impairment		316		1,602		277		167		2,362

Total ending allowance balance	$	316	$	1,660	$	289	$	167	$	2,432

Recorded investment in loans:
Loans individually evaluated for impairment	$	—	$	2,786	$	615	$	—	$	3,401
Loans collectively evaluated for impairment		32,210		142,139		44,304		6,966		225,619

Total ending loans balance	$	32,210	$	144,925	$	44,919	$	6,966	$	229,020

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents information related to loans individually evaluated for impairment by class of loans as of and for the year ended June 30, 2016:

	Unpaid				Allowance for		Average		Interest		Cash Basis
	Principal		Recorded		Loan Losses		Recorded		Income		Interest
	Balance		Investment		Allocated		Investment		Recognized		Recognized

With no related allowance recorded:
Commercial	$	1,033	$	1,029	$	—	$	95	$	—	$	—
Commercial real estate:
Construction		386		384		—		52		—		—
Other		2,121		2,106		—		2,344		—		—
1-4 Family residential real estate:
Owner occupied		175		174		—		357		2		2
Non-owner occupied		722		407		—		435		—		—
With an allowance recorded:
Commercial real estate:
Other		2,802		2,615		868		1,103		8		8
1-4 Family residential real estate:
Owner occupied		177		177		6		149		—		—
Non-owner occupied		—		—		—		115		—		—
Total	$	7,416	$	6,892	$	874	$	4,650	$	10	$	10

The following table presents information related to loans individually evaluated for impairment by class of loans as of and for the year ended June 30, 2015:

	Unpaid				Allowance for		Average		Interest		Cash Basis
	Principal		Recorded		Loan Losses		Recorded		Income		Interest
	Balance		Investment		Allocated		Investment		Recognized		Recognized

With no related allowance recorded:
Commercial real estate:
Other	$	2,432	$	2,082	$	—	$	1,844	$	145	$	145
1-4 Family residential real estate:
Owner occupied		58		35		—		187		34		34
Non-owner occupied		—		—		—		48		15		15
With an allowance recorded:
Commercial real estate:
Other		740		704		58		761		36		36
1-4 Family residential real estate:
Owner occupied		122		123		4		125		7		7
Non-owner occupied		512		457		8		483		19		19
Total	$	3,864	$	3,401	$	70	$	3,448	$	256	$	256

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the recorded investment in non-accrual and loans past due over 90 days still on accrual by class of loans as of June 30, 2016 and 2015:

	June 30, 2016				June 30, 2015
			Loans Past Due				Loans Past Due
			Over 90 Days				Over 90 Days
			Still				Still
	Non-accrual		Accruing		Non-accrual		Accruing
Commercial	$	1,009	$	—	$	—	$	—
Commercial real estate:
Construction		384		—		—		—
Other		4,000		—		2,079		—
1 – 4 Family residential:
Owner occupied		234		—		190		—
Non-owner occupied		407		—		—		—
Consumer		—		—		—		—
Total	$	6,034	$	—	$	2,269	$	—

Non-accrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

The following table presents the aging of the recorded investment in past due loans as of June 30, 2016 by class of loans:

	Days Past Due
	30 - 59		60 - 89		90 Days or		Total		Loans Not
	Days		Days		Greater		Past Due		Past Due		Total
Commercial	$	123	$	—	$	—	$	123	$	43,125	$	43,248
Commercial real estate:
Construction		—		—		—		—		7,764		7,764
Other		59		—		2,110		2,169		150,906		153,075
1-4 Family residential:
Owner occupied		15		—		218		233		30,947		31,180
Non-owner occupied		—		—		196		196		14,278		14,474
Construction		—		—		—		—		1,270		1,270
Consumer		7		—		—		7		5,809		5,816
Total	$	204	$	—	$	2,524	$	2,728	$	254,099	$	256,827

The above table of past due loans includes the recorded investment in non-accrual loans of $2,524 in the 90 days or greater category and $3,510 in the loans not past due category.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the aging of the recorded investment in past due loans as of June 30, 2015 by class of loans:

	Days Past Due
	30 - 59		60 - 89		90 Days or		Total		Loans Not
	Days		Days		Greater		Past Due		Past Due		Total
Commercial	$	—	$	25	$	—	$	25	$	32,185	$	32,210
Commercial real estate:
Construction		—		—		—		—		1,270		1,270
Other		62		—		30		92		143,563		143,655
1-4 Family residential:
Owner occupied		268		68		139		475		29,654		30,129
Non-owner occupied		—		8		—		8		14,547		14,555
Construction		—		—		—		—		235		235
Consumer		17		—		—		17		6,949		6,966
Total	$	347	$	101	$	169	$	617	$	228,403	$	229,020

The above table of past due loans includes the recorded investment in non-accrual loans of $169 in the 90 days or greater category and $2,100 in the loans not past due category.

Troubled Debt Restructurings:

As of June 30, 2016, the recorded investment of loans classified as troubled debt restructurings was $3,529 with $43 of specific reserves allocated to these loans. As of June 30, 2015, the recorded investment of loans classified as troubled debt restructurings was $1,335 with $70 of specific reserves allocated to these loans.

During the fiscal year ended June 30, 2016, the terms of certain loans to one borrower were modified as troubled debt restructurings. The modification of the terms of such loans included a combination of a reduction in the monthly payment amounts, an extension of the maturity date on one loan, and the extension of additional credit to provide operating funds to the borrower. The following table presents loans by class modified as troubled debt restructurings that occurred during the year ended June 30, 2016:

			Pre-Modification		Post-Modification
	Number of		Outstanding Recorded		Outstanding Recorded
	Loans		Investment		Investment
Commercial		3	$	1,058	$	1,029
Commercial real estate:
Other		3		1,294		1,487
Total		6	$	2,352	$	2,516

The troubled debt restructurings described above did not increase the allowance for loan losses or result in any charge-offs during the twelve months ended June 30, 2016. As of June 30, 2016, the Corporation had committed to lend an additional $207 as part of the restructuring described above. There were no loans classified as troubled debt restructurings that were modified within the last twelve months for which there was a payment default.

During the fiscal year ended June 30, 2015, there were no loan modifications completed that were classified as troubled debt restructurings nor had the Corporation committed to lend any additional amounts to customers with outstanding loans that were classified as troubled debt restructurings. There was no increase to the allowance for loan losses or any charge offs from troubled debt restructurings during the twelve month period ended June 30, 2015. There were no loans classified as troubled debt restructurings for which there was a payment default during the 2015 fiscal year. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Credit Quality Indicators:

The Corporation 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 Corporation analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with a total outstanding loan relationship greater than $100 thousand and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a monthly basis. The Corporation 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.

Substandard.

Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

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.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are either less than $100 thousand or are included in groups of homogeneous loans. These loans are evaluated based on delinquency status, which was discussed previously.

As of June 30, 2016, and based on the most recent analysis performed, the recorded investment by risk category of loans by class of loans is as follows:

			Special						Not
	Pass		Mention		Substandard		Doubtful		Rated
Commercial	$	35,243	$	6,190	$	1,162	$	—	$	653
Commercial real estate:
Construction		7,305		—		384		—		75
Other		144,101		2,482		4,026		2,150		316
1-4 Family residential real estate:
Owner occupied		3,506		72		349		47		27,206
Non-owner occupied		12,999		406		486		196		387
Construction		235		—		—		—		1,035
Consumer		210		—		6		—		5,600
Total	$	203,599	$	9,150	$	6,413	$	2,393	$	35,272

As of June 30, 2015, and based on the most recent analysis performed, the recorded investment by risk category of loans by class of loans is as follows:

			Special						Not
	Pass		Mention		Substandard		Doubtful		Rated
Commercial	$	27,359	$	4,030	$	96	$	—	$	725
Commercial real estate:
Construction		1,224		—		46		—		—
Other		133,452		4,473		2,876		2,032		822
1-4 Family residential real estate:
Owner occupied		4,029		—		—		35		26,065
Non-owner occupied		12,602		475		1,025		—		453
Construction		235		—		—		—		—
Consumer		—		—		—		—		6,966
Total	$	178,901	$	8,978	$	4,043	$	2,067	$	35,031

The Bank has granted loans to certain of its executive officers, directors and their affiliates. A summary of activity during the year ended June 30, 2016 of related party loans were as follows:

Principal balance, July 1	$	4,520
New loans		577
Repayments		(373	)
Principal balance, June 30	$	4,724