NOTE 8 – LOANS AND ALLOWANCE FOR CREDIT LOSSES

The components of loans, net of deferred loan costs (fees), are as follows:

	September 30,			December 31,
	2016			2015
Mortgage loans:
One-to-four family residential loans	$	102,562,294		$	99,254,737
Multi-family residential loans		4,259,956			3,969,207
Total mortgage loans		106,822,250			103,223,944

Other loans:
Non-residential real estate loans		22,727,775			20,177,322
Commercial loans		13,058,919			12,069,815
Consumer direct		2,691,540			1,651,371
Purchased auto		11,951,610			5,211,755
Total other loans		50,429,844			39,110,263
Gross loans		157,252,094			142,334,207
Less: Allowance for loan losses		(2,308,154	)		(2,224,006	)
Loans, net	$	154,943,940		$	140,110,201

The following table reflects the carrying amount of loans acquired in the Twin Oaks merger, which are included in the loan categories above as of the dates indicated.

	September 30,			December 31,
	2016			2015
Mortgage loans:
One-to-four family residential loans	$	18,792,141		$	20,752,355
Multi-family residential loans		274,018			294,020
Total mortgage loans		19,066,159			21,046,375

Other loans:
Non-residential real estate loans		2,580,186			2,685,987
Commercial loans		840,174			852,077
Consumer direct		241,921			541,174
Total other loans		3,662,281			4,079,238
Gross loans		22,728,440			25,125,613
Less: Allowance for loan losses		(100,000	)		(85,000	)
Loans, net	$	22,628,440		$	25,040,613

Purchases of loans receivable, segregated by class of loans, for the periods indicated were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Purchased auto loans	$	1,010,717	$	-	$	9,351,997	$	-

Net (charge-offs) / recoveries, segregated by class of loans, for the periods indicated were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
One-to-four family	$	17,802		$	(157,703	)	$	(173,225	)	$	(73,744	)
Multi-family		3,972			4,472			11,915			(21,477	)
Non-residential		-			(18,307	)		-			(18,307	)
Commercial		-			-			-			-
Consumer direct		1,551			(11,906	)		5,005			(55,577	)
Purchased auto		(28,212	)		(20,185	)		(62,047	)		(40,915	)
Net (charge-offs)/recoveries	$	(4,887	)	$	(203,629	)	$	(218,352	)	$	(210,020	)

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2016 and 2015:

September 30, 2016	One-to-Four Family			Multi-family			Non- residential		Commercial		Consumer Direct		Purchased Auto			Total
Balance at beginning of period	$	1,574,598		$	167,485		$	275,347	$	53,256	$	60,491	$	156,864		$	2,288,041
Provision charged to income		(28,679	)		(132,076	)		98,221		21,914		22,610		43,010			25,000
Loans charged off		(2,698	)		-			-		-		-		(29,718	)		(32,416	)
Recoveries of loans previously charged off		20,500			3,972			-		-		1,551		1,506			27,529
Balance at end of period	$	1,563,721		$	39,381		$	373,568	$	75,170	$	84,652	$	171,662		$	2,308,154

September 30, 2015	One-to-Four Family			Multi-family		Non- residential			Commercial		Consumer Direct			Purchased Auto			Total
Balance at beginning of period	$	1,986,275		$	143,970	$	243,010		$	32,650	$	29,199		$	93,112		$	2,528,216
Provision charged to income		(122,360	)		18,729		67,433			12,777		18,628			4,793			-
Loans charged off		(158,302	)		-		(18,307	)		-		(13,647	)		(21,772	)		(212,028	)
Recoveries of loans previously charged off		599			4,472		-			-		1,741			1,587			8,399
Balance at end of period	$	1,706,212		$	167,171	$	292,136		$	45,427	$	35,921		$	77,720		$	2,324,587

The following table presents the activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2016 and 2015:

September 30, 2016	One-to-Four Family			Multi-family			Non- residential		Commercial		Consumer Direct		Purchased Auto			Total
Balance at beginning of period	$	1,727,582		$	142,237		$	198,340	$	51,306	$	37,187	$	67,354		$	2,224,006
Provision charged to income		9,364			(114,771	)		175,228		23,864		42,460		166,355			302,500
Loans charged off		(233,264	)		-			-		-		-		(68,011	)		(301,275	)
Recoveries of loans previously charged off		60,039			11,915			-		-		5,005		5,964			82,923
Balance at end of period	$	1,563,721		$	39,381		$	373,568	$	75,170	$	84,652	$	171,662		$	2,308,154

September 30, 2015	One-to-Four Family			Multi-family			Non- residential			Commercial		Consumer Direct			Purchased Auto			Total
Balance at beginning of period	$	1,812,448		$	121,918		$	245,098		$	35,947	$	10,804		$	88,392		$	2,314,607
Provision charged to income		(32,492	)		66,730			65,345			9,480		80,694			30,243			220,000
Loans charged off		(168,359	)		(33,892	)		(18,307	)		-		(60,055	)		(46,062	)		(326,675	)
Recoveries of loans previously charged off		94,615			12,415			-			-		4,478			5,147			116,655
Balance at end of period	$	1,706,212		$	167,171		$	292,136		$	45,427	$	35,921		$	77,720		$	2,324,587

The following table presents the recorded investment in loans and the related allowances allocated by portfolio segment and based on impairment method as of September 30, 2016 and December 31, 2015:

September 30, 2016	One-to-four Family		Multi-family		Non- residential		Commercial		Consumer Direct		Purchased Auto		Total
Loans individually evaluated for impairment	$	1,739,851	$	-	$	1,880,189	$	-	$	-	$	12,569	$	3,632,609
Loans acquired with deteriorated credit quality		479,835		-		-		-		-		-		479,835
Loans collectively evaluated for impairment		100,342,608		4,259,956		20,847,586		13,058,919		2,691,540		11,939,041		153,139,650
Ending Balance	$	102,562,294	$	4,259,956	$	22,727,775	$	13,058,919	$	2,691,540	$	11,951,610	$	157,252,094

Period-end amount allocated to:
Loans individually evaluated for impairment	$	211,410	$	-	$	252,352	$	-	$	-	$	6,285	$	470,047
Loans acquired with deteriorated credit quality		35,368		-		-		-		-		-		35,368
Loans collectively evaluated for impairment		1,316,943		39,381		121,216		75,170		84,652		165,377		1,802,739
Balance at end of period	$	1,563,721	$	39,381	$	373,568	$	75,170	$	84,652	$	171,662	$	2,308,154

December 31, 2015	One-to-four Family		Multi-family		Non- residential		Commercial		Consumer Direct		Purchased Auto		Total
Loans individually evaluated for impairment	$	2,311,855	$	-	$	2,069,922	$	-	$	-	$	3,069	$	4,384,846
Loans acquired with deteriorated credit quality		575,605		-		-		-		-		-		575,605
Loans collectively evaluated for impairment		96,367,277		3,969,207		18,107,400		12,069,815		1,651,371		5,208,686		137,373,756
Ending Balance	$	99,254,737	$	3,969,207	$	20,177,322	$	12,069,815	$	1,651,371	$	5,211,755	$	142,334,207

Period-end amount allocated to:
Loans individually evaluated for impairment	$	295,770	$	-	$	75,086	$	-	$	-	$	-	$	370,856
Loans acquired with deteriorated credit quality		15,828		-		-		-		-		-		15,828
Loans collectively evaluated for impairment		1,415,984		142,237		123,254		51,306		37,187		67,354		1,837,322
Balance at end of period	$	1,727,582	$	142,237	$	198,340	$	51,306	$	37,187	$	67,354	$	2,224,006

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions.

The following table presents loans individually evaluated for impairment and loans acquired with deteriorated credit quality, by class of loans, as of September 30, 2016 and December 31, 2015:

September 30, 2016	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
One-to-four family	$	2,303,698	$	1,022,446	$	1,197,240	$	2,219,686	$	246,778	$	2,715,325
Multi-family		-		-		-		-		-		-
Non-residential		1,880,189		-		1,880,189		1,880,189		252,352		1,956,910
Commercial		-		-		-		-		-		-
Consumer direct		-		-		-		-		-		-
Purchased auto		12,569		-		12,569		12,569		6,285		6,826
	$	4,196,456	$	1,022,446	$	3,089,998	$	4,112,444	$	505,415	$	4,679,061

December 31, 2015	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
One-to-four family	$	3,014,703	$	1,902,819	$	984,641	$	2,887,460	$	311,598	$	3,596,800
Multi-family		-		-		-		-		-		-
Non-residential		2,069,922		389,961		1,679,961		2,069,922		75,086		2,114,684
Commercial		-		-		-		-		-		21,789
Consumer direct		-		-		-		-		-		3,464
Purchased auto		3,069		3,069		-		3,069		-		6,574
	$	5,087,694	$	2,295,849	$	2,664,602	$	4,960,451	$	386,684	$	5,743,311

For the three and nine months ended September 30, 2016, the Company recognized approximately $3,000 in cash basis interest income on impaired loans. For the three and nine months ended September 30, 2015, the Company recognized no accrued or cash basis interest income on impaired loans.

At September 30, 2016, there were 35 impaired loans, including loans acquired with deteriorated credit quality, totaling approximately $4.1 million, compared to 34 impaired loans totaling approximately $5.0 million at December 31, 2015. The change in impaired loans was a result of writing down and moving two impaired loans totaling approximately $0.1 million to OREO, the pay-off or charge-off of six impaired loans totaling approximately $0.5 million, upgrading and returning seven loans totaling approximately $0.8 million to accrual status, and payments of approximately $0.3 million, offset by the addition of 14 loans totaling approximately $0.9 million to the impaired loan list.

Our loan portfolio also includes certain loans that have been modified in a troubled debt restructuring (“TDR”), where economic concessions have been granted to borrowers who have experienced financial difficulties. These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forbearance or other actions. TDRs are classified as non-performing at the time of restructuring and typically are returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period of at least six months.

When we modify loans in a TDR, we evaluate any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, or use the current fair value of the collateral, less estimated selling costs, for collateral dependent loans. If we determine that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance. In periods subsequent to modification, we evaluate all TDRs, including those that have payment defaults, for possible impairment and recognize impairment through the allowance.

Impaired loans at September 30, 2016 included $2.4 million of loans whose terms have been modified in troubled debt restructurings, compared to $2.6 million at December 31, 2015. The amount of TDR loans included in impaired loans decreased approximately $0.2 million as a result of principal payments and decreased approximately $0.1 million as a result of moving one TDR to OREO, off-set by an increase due to the restructure of two impaired loans totaling approximately $0.1 million. The remaining restructured loans are being monitored by management and remain on nonaccrual status as they have not, per accounting guidelines, performed in accordance with their restructured terms for the requisite period of time (generally at least six consecutive months) to be returned to accrual status.

There were no new loans classified as TDRs during the three months ended September 30, 2016 and 2015.

Loans classified as TDRs during the nine months ended September 30, 2016 and 2015, segregated by class, are shown in the tables below.

	Nine Months Ended						Nine Months Ended
	September 30, 2016						September 30, 2015

	Number of Modifications		Recorded Investment		Increase in Allowance		Number of Modifications		Recorded Investment		Increase in Allowance
	(as of period end)						(as of period end)
One-to-four family		2	$	80,814	$	-		-	$	-	$	-
Multi-family		-		-		-		-		-		-
Non-residential		-		-		-		-		-		-
Commercial		-		-		-		-		-		-
Consumer direct		-		-		-		-		-		-
Purchased auto		-		-		-		-		-		-
		2	$	80,814	$	-		-	$	-	$	-

There were no TDR loans that were restructured during the twelve months prior to September 30, 2016 and 2015 that had payment defaults (i.e., 60 days or more past due following a modification), during the three or nine months ended September 30, 2016 and 2015.

All TDRs are evaluated for possible impairment and any impairment identified is recognized through the allowance. Additionally, the qualitative factors are updated quarterly for trends in economic and non-performing factors, including collateral securing TDRs.

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still on accrual status, by class of loans, as September 30, 2016 and December 31, 2015:

September 30, 2016	Nonaccrual		Loans Past Due Over 90 Days Still Accruing
One-to-four family	$	2,310,070	$	-
Multi-family		-		-
Non-residential		1,880,189		-
Commercial		-		-
Consumer direct		-		-
Purchased auto		12,569		-
	$	4,202,828	$	-

December 31, 2015	Nonaccrual		Loans Past Due Over 90 Days Still Acc ruing
One-to-four family	$	2,982,386	$	-
Multi-family		-		-
Non-residential		2,069,922		-
Commercial		-		-
Consumer direct		-		-
Purchased auto		3,069		-
	$	5,055,377	$	-

The following table presents the aging of the recorded investment in loans, by class of loans, as of September 30, 2016 and December 31, 2015:

September 30, 2016	Loans 30-59 Days Past Due		Loans 60-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Loans
One-to-four family	$	1,757,833	$	149,293	$	691,864	$	2,598,990	$	99,963,304	$	102,562,294
Multi-family		-		-		-		-		4,259,956		4,259,956
Non-residential		604,620		272,228		-		876,848		21,850,927		22,727,775
Commercial		828		-		-		828		13,058,091		13,058,919
Consumer direct		-		-		-		-		2,691,540		2,691,540
Purchased auto		17,935		-		12,569		30,504		11,921,106		11,951,610
	$	2,381,216	$	421,521	$	704,433	$	3,507,170	$	153,744,924	$	157,252,094

December 31, 2015	Loans 30-59 Days Past Due		Loans 60-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Loans
One-to-four family	$	1,251,155	$	753,597	$	737,042	$	2,741,794	$	96,512,943	$	99,254,737
Multi-family		31,274		-		-		31,274		3,937,933		3,969,207
Non-residential		847,216		112,739		18,127		978,082		19,199,240		20,177,322
Commercial		9,086		-		-		9,086		12,060,729		12,069,815
Consumer direct		4,814		-		-		4,814		1,646,557		1,651,371
Purchased auto		2,391		-		3,069		5,460		5,206,295		5,211,755
	$	2,145,936	$	866,336	$	758,238	$	3,770,510	$	138,563,697	$	142,334,207

Credit Quality Indicators:

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 individually by classifying the loans as to credit risk. For commercial and non-residential real estate loans, the Company’s credit quality indicator is internally assigned risk ratings. Each commercial and non-residential real estate loan is assigned a risk rating upon origination. The risk rating is reviewed annually, at a minimum, and on an as needed basis depending on the specific circumstances of the loan.

For residential real estate loans, multi-family, consumer direct and purchased auto loans, the Company’s credit quality indicator is performance determined by delinquency status. Delinquency status is updated regularly by the Company’s loan system for real estate loans, multi-family and consumer direct loans. The Company receives monthly reports on the delinquency status of the purchased auto loan portfolio from the servicing company. Generally, when residential real estate loans, multi-family and consumer direct loans become over 90 days past due, they are classified as substandard. Periodically, based on subsequent performance over 6-12 months, these loans could be upgraded to special mention.

The Company uses the following definitions for risk ratings:

●

Pass – loans classified as pass are of a higher quality and do not fit any of the other “rated” categories below (e.g., special mention, substandard or doubtful). The likelihood of loss is considered remote.

●

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 Company 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.

●

Not Rated – loans in this bucket are not evaluated on an individual basis.

As of September 30, 2016, and December 31, 2015, the risk category of loans by class is as follows:

September 30, 2016	Pass		Special Mention		Substandard		Doubtful		Not Rated
One-to-four family	$	-	$	838,707	$	2,219,686	$	-	$	99,503,901
Multi-family		-		127,330		-		-		4,132,626
Non-residential		20,652,597		194,989		1,880,189		-		-
Commercial		13,058,919		-		-		-		-
Consumer direct		-		-		-		-		2,691,540
Purchased auto		-		-		12,569		-		11,939,041
Total	$	33,711,516	$	1,161,026	$	4,112,444	$	-	$	118,267,108

December 31, 2015	Pass		Special Mention		Substandard		Doubtful		Not Rated
One-to-four family	$	-	$	692,601	$	2,887,460	$	-	$	95,674,676
Multi-family		-		-		-		-		3,969,207
Non-residential		18,083,194		24,206		2,069,922		-		-
Commercial		12,069,815		-		-		-		-
Consumer direct		-		-		-		-		1,651,371
Purchased auto		-		-		3,069		-		5,208,686
Total	$	30,153,009	$	716,807	$	4,960,451	$	-	$	106,503,940

At September 30, 2016, the Company held approximately $33,000 of foreclosed residential real estate property, compared to approximately $313,000 at December 31, 2015. In addition, the Company also held approximately $86,000 and $234,000, in consumer mortgage loans collateralized by residential real estate properties that were in the process of foreclosure at September 30, 2016 and December 31, 2015, respectively.