LOANS

6 Months Ended

Jun. 30, 2015

NOTE G — LOANS

Loans typically provide higher yields than the other types of earning assets, and, thus, one of the Company's goals is for loans to be the largest category of the Company's earning assets. At June 30, 2015 and December 31, 2014, average loans accounted for 71.5% and 67.8% of average earning assets, respectively. The Company controls and mitigates the inherent credit and liquidity risks through the composition of its loan portfolio.

The following table shows the composition of the loan portfolio by category:

Composition of Loan Portfolio

	June 30, 2015				December 31, 2014
			Percent				Percent
			of				of
	Amount		Total		Amount		Total
	(Dollars in thousands)

Mortgage loans held for sale	$	1,864	0.3	%	$	2,103	0.3	%
Commercial, financial and agricultural		116,352	15.9			106,109	15.0
Real Estate:
Mortgage-commercial		245,537	33.5			238,602	33.8
Mortgage-residential		259,610	35.4			256,406	36.3
Construction		93,152	12.7			84,935	12.0
Consumer and other		16,386	2.2			18,479	2.6
Total loans		732,901	100	%		706,634	100	%
Allowance for loan losses		(6,419)				(6,095)
Net loans	$	726,482			$	700,539

In the context of this discussion, a "real estate mortgage loan" is defined as any loan, other than a loan for construction purposes, secured by real estate, regardless of the purpose of the loan. The Company follows the common practice of financial institutions in the Company’s market area of obtaining a security interest in real estate whenever possible, in addition to any other available collateral. This collateral is taken to reinforce the likelihood of the ultimate repayment of the loan and tends to increase the magnitude of the real estate loan portfolio component. Generally, the Company limits its loan-to-value ratio to 80%. Management attempts to maintain a conservative philosophy regarding its underwriting guidelines and believes it will reduce the risk elements of its loan portfolio through strategies that diversify the lending mix.

Loans held for sale consist of mortgage loans originated by the Bank and sold into the secondary market. Commitments from investors to purchase the loans are obtained upon origination.

Activity in the allowance for loan losses for the period was as follows:

(In thousands)

	Three Months		Six Months
	Ended		Ended
	June 30, 2015		June 30, 2015

Balance at beginning of period	$	5,928	$	6,095
Loans charged-off:
Real Estate		(7)		(349)
Installment and Other		(38)		(63)
Commercial, Financial and Agriculture		-		-
Total		(45)		(412)
Recoveries on loans previously charged-off:
Real Estate		520		553
Installment and Other		13		24
Commercial, Financial and Agriculture		3		9
Total		536		586
Net recoveries		491		174
Provision for Loan Losses		-		150
Balance at end of period	$	6,419	$	6,419

The following tables represent how the allowance for loan losses is allocated to a particular loan type, as well as the percentage of the category to total loans at June 30, 2015 and December 31, 2014.

Allocation of the Allowance for Loan Losses

	June 30, 2015
	(Dollars in thousands)
			% of loans
			in each category
	Amount		to total loans

Commercial Non Real Estate	$	830		15.7	%
Commercial Real Estate		2,788		58.1
Consumer Real Estate		1,512		23.4
Consumer		148		2.7
Unallocated		1,141		.1
Total	$	6,419		100	%

	December 31, 2014
	(Dollars in thousands)
			% of loans
			in each category
	Amount		to total loans

Commercial Non Real Estate	$	713		15.3	%
Commercial Real Estate		3,355		57.9
Consumer Real Estate		1,852		24.2
Consumer		175		2.6
Unallocated		-		-
Total	$	6,095		100	%

The following table represents the Company’s impaired loans at June 30, 2015, and December 31, 2014.

	June 30,		December 31,
	2015		2014
	(In thousands)
Impaired Loans:
Impaired loans without a valuation allowance	$	4,622	$	4,702
Impaired loans with a valuation allowance		4,499		4,858
Total impaired loans	$	9,121	$	9,560
Allowance for loan losses on impaired loans at period end		1,008		968

Total nonaccrual loans		6,513		6,056

Past due 90 days or more and still accruing		92		669
Average investment in impaired loans		9,101		7,077

The following table is a summary of interest recognized and cash-basis interest earned on impaired loans:

	Three Months	Six Months
	Ended	Ended
	June 30, 2015	June 30, 2015

Interest income recognized during impairment	-	-
Cash-basis interest income recognized	36	70

The gross interest income that would have been recorded in the period that ended if the nonaccrual loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination, if held for part of the three months and six months ended June 30, 2015 was $105,000 and $199,000, respectively, and $64,000 and $97,000 for the three months and six months ended June 30, 2014. The Company had no loan commitments to borrowers in non-accrual status at June 30, 2015 and December 31, 2014.

The following tables provide the ending balances in the Company's loans (excluding mortgage loans held for sale) and allowance for loan losses, broken down by portfolio segment as of June 30, 2015 and December 31, 2014. The tables also provide additional detail as to the amount of our loans and allowance that correspond to individual versus collective impairment evaluation. The impairment evaluation corresponds to the Company's systematic methodology for estimating its Allowance for Loan Losses.

June 30, 2015

					Commercial,
			Installment		Financial
	Real		and		and
	Estate		Other		Agriculture		Total
	(In thousands)
Loans
Individually evaluated	$	8,811	$	35	$	275	$	9,121
Collectively evaluated		587,022		19,840		115,054		721,916
Total	$	595,833	$	19,875	$	115,329	$	731,037

Allowance for Loan Losses
Individually evaluated	$	958	$	27	$	23	$	1,008
Collectively evaluated		3,342		1,262		807		5,411
Total	$	4,300	$	1,289	$	830	$	6,419

December 31, 2014

					Commercial,
			Installment		Financial
	Real		and		and
	Estate		Other		Agriculture		Total
	(In thousands)
Loans
Individually evaluated	$	9,282	$	38	$	240	$	9,560
Collectively evaluated		568,952		18,610		107,409		694,971
Total	$	578,234	$	18,648	$	107,649	$	704,531

Allowance for Loan Losses
Individually evaluated	$	922	$	29	$	17	$	968
Collectively evaluated		4,285		146		696		5,127
Total	$	5,207	$	175	$	713	$	6,095

The following tables provide additional detail of impaired loans broken out according to class as of June 30, 2015 and December 31, 2014. The recorded investment included in the following tables represent customer balances net of any partial charge-offs recognized on the loans, net of any deferred fees and costs. As nearly all of our impaired loans at June 30, 2015, are on nonaccrual status, recorded investment excludes any insignificant amount of accrued interest receivable on loans 90-days or more past due and still accruing. The unpaid balance represents the recorded balance prior to any partial charge-offs.

June 30, 2015

							Average		Interest
							Recorded		Income
	Recorded		Unpaid		Related		Investment		Recognized
	Investment		Balance		Allowance		YTD		YTD
	(In thousands)
Impaired loans with no related allowance:
Commercial installment	$	-	$	-	$	-	$	2	$	-
Commercial real estate		4,343		4,343		-		4,544		13
Consumer real estate		271		271		-		188		-
Consumer installment		8		8		-		9		-
Total	$	4,622	$	4,622	$	-	$	4,743	$	13

Impaired loans with a related allowance:
Commercial installment	$	275	$	275	$	23	$	250	$	7
Commercial real estate		3,244		3,244		454		2,765		44
Consumer real estate		953		953		504		1,315		6
Consumer installment		27		27		27		28		-
Total	$	4,499	$	4,499	$	1,008	$	4,358	$	57

Total Impaired Loans:
Commercial installment	$	275	$	275	$	23	$	252	$	7
Commercial real estate		7,587		7,587		454		7,309		57
Consumer real estate		1,224		1,224		504		1,503		6
Consumer installment		35		35		27		37		-
Total Impaired Loans	$	9,121	$	9,121	$	1,008	$	9,101	$	70

On January 1, 2015, the Company adopted Accounting Standards Update (ASU) 2014-4, Receivables – Troubled Debt Restructuring by Creditors. As of June 30, 2015, the Company had $1.5 million of foreclosed residential real estate property obtained by physical possession and no consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings are in process according to local jurisdictions.

December 31, 2014

							Average		Interest
							Recorded		Income
	Recorded		Unpaid		Related		Investment		Recognized
	Investment		Balance		Allowance		YTD		YTD
	(In thousands)
Impaired loans with no related allowance:
Commercial installment	$	-	$	-	$	-	$	50	$	-
Commercial real estate		4,665		4,665		-		2,654		142
Consumer real estate		27		27		-		179		-
Consumer installment		10		10		-		11		-
Total	$	4,702	$	4,702	$	-	$	2,894	$	142

Impaired loans with a related allowance:
Commercial installment	$	240	$	240	$	18	$	189	$	20
Commercial real estate		2,558		2,558		315		2,415		59
Consumer real estate		2,032		2,032		607		1,546		33
Consumer installment		28		28		28		33		2
Total	$	4,858	$	4,858	$	968	$	4,183	$	114

Total Impaired Loans:
Commercial installment	$	240	$	240	$	18	$	239	$	20
Commercial real estate		7,223		7,223		315		5,069		201
Consumer real estate		2,059		2,059		607		1,725		33
Consumer installment		38		38		28		44		2
Total Impaired Loans	$	9,560	$	9,560	$	968	$	7,077	$	256

Loans acquired with deteriorated credit quality are those purchased in the BCB Holding Company, Inc. acquisition (See Note C -Business Combination for further information). These loans were recorded at estimated fair value at the acquisition date with no carryover of the related allowance for loan losses. The acquired loans were segregated as of the acquisition date between those considered to be performing (acquired non-impaired loans) and those with evidence of credit deterioration (acquired impaired loans). Acquired loans are considered impaired if there is evidence of credit deterioration and if it is probable, at acquisition, all contractually required payments will not be collected.

The following table presents information regarding the contractually required payments receivable, cash flows expected to be collected and the estimated fair value of loans acquired in the BCB acquisition as of July 1, 2014, the closing date of the transaction:

	December 31, 2014
	(In thousands)
	Commercial,
	financial
	and		Mortgage-		Mortgage-		Commercial
	agricultural		Commercial		Residential		and other		Total
Contractually required payments	$	1,519	$	29,648	$	7,933	$	976	$	40,076
Cash flows expected to be collected		1,570		37,869		9,697		1,032		50,168
Fair value of loans acquired		1,513		28,875		7,048		957		38,393

Total outstanding acquired impaired loans were $3,269,204 as of June 30, 2015 and $3,480,190 as of December 31, 2014. The outstanding balance of these loans is the undiscounted sum of all amounts, including amounts deemed principal, interest, fees, penalties, and other under the loans, owed at the reporting date, whether or not currently due and whether or not any such amounts have been charged off.

Changes in the carrying amount and accretable yield for acquired impaired loans were as follows at June 30, 2015 and December 31, 2014: (in thousands)

	June 30, 2015				December 31, 2014
			Carrying				Carrying
	Accretable		Amount of		Accretable		Amount of
	Yield		Loans		Yield		Loans
Balance at beginning of period	$	1,417	$	2,063	$	-	$	-
Additions due to BCB acquisition on July 1, 2014		-		-		1,603		2,325
Accretion		(70)		70		(186)		186
Payments received, net		-		(211)		-		(448)
Balance at end of period	$	1,347	$	1,922	$	1,417	$	2,063

The following tables provide detail of troubled debt restructurings (TDRs) at June 30, 2015.

For the Three Months Ending June 30, 2015

Outstanding

Recorded

Investment

Interest

Investment

Post-

Number of

Income

Pre-Modification

Modification

Loans

Recognized

Commercial installment

Commercial real estate

Consumer real estate

Consumer installment

Total

For the Six Months Ending June 30, 2015

Outstanding

Recorded

Investment

Interest

Investment

Post-

Number of

Income

Pre-Modification

Modification

Loans

Recognized

Commercial installment

Commercial real estate

Consumer real estate

Consumer installment

Total

During the three month period ending June, 2015, there were no loans modified as TDR.

The balance of troubled debt restructurings (TDRs) at June 30, 2015 and December 31, 2014 was $6.6 million and $6.8 million, respectively, calculated for regulatory reporting purposes. As of June 30, 2015, the company had no additional amount committed on any loan classified as troubled debt restructuring.

The following tables set forth the amounts and past due status for the Bank TDRs at June 30, 2015 and December 31, 2014:

(in thousands)

	June 30, 2015
					Past Due
					90 days
	Current Loans		Past Due		and still		Non-		Total
			30-89		accruing		accrual

Commercial installment	$	221	$	-	$	-	$	55	$	276
Commercial real estate		1,674		-		-		2,642		4,316
Consumer real estate		704		-		-		1,253		1,957
Consumer installment		9		-		-		32		41
Total	$	2,608	$	-	$	-	$	3,982	$	6,590
Allowance for loan losses	$	107	$	-	$	-	$	190	$	297

(in thousands)

	December 31, 2014
					Past Due
					90 days
			Past Due		and still		Non-
	Current Loans		30-89		accruing		accrual		Total

Commercial installment	$	233	$	-	$	-	$	-	$	233
Commercial real estate		1,685		-		-		2,729		4,414
Consumer real estate		952		622		-		449		2,023
Consumer installment		10		-		-		103		113
Total	$	2,880	$	622	$	-	$	3,281	$	6,783
Allowance for loan losses	$	120	$	11	$	103	$	-	$	234

The following tables summarize by class our loans classified as past due in excess of 30 days or more in addition to those loans classified as non-accrual:

	June 30, 2015
	(In thousands)
			Past Due				Total
			90 Days				Past Due
	Past Due		or More				and
	30 to 89		and Still		Non-		Non-		Total
	Days		Accruing		Accrual		Accrual		Loans

Real Estate-construction	$	323	$	-	$	3,246	$	3,569	$	93,152
Real Estate-mortgage		838		92		2,059		2,989		259,610
Real Estate-non farm non residential		1,985		-		1,064		3,049		245,537
Commercial		500		-		109		609		116,352
Consumer		51		-		35		86		16,386
Total	$	3,697	$	92	$	6,513	$	10,302	$	731,037

	December 31, 2014
	(In thousands)
			Past Due				Total
			90 Days				Past Due
			or More				and
	Past Due		and Still		Non-		Non-		Total
	30 to 89 Days		Accruing		Accrual		Accrual		Loans

Real Estate-construction	$	428	$	-	$	2,747	$	3,175	$	84,935
Real Estate-mortgage		3,208		208		2,164		5,580		256,406
Real Estate-non farm non residential		3,408		461		1,102		4,971		238,601
Commercial		29		-		5		34		106,109
Consumer		90		-		38		128		18,480
Total	$	7,163	$	669	$	6,056	$	13,888	$	704,531

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 uses the following definitions for risk ratings, which are consistent with the definitions used in supervisory guidance:

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 Company’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.

As of June 30, 2015 and December 31, 2014, and based on the most recent analysis performed, the risk categories of loans by class of loans (excluding mortgage loans held for sale) were as follows:

($ in thousands)

June 30, 2015

							Commercial,
			Real		Installment		Financial
	Real Estate		Estate		and		and
	Commercial		Mortgage		Other		Agriculture		Total

Pass	$	403,194	$	169,139	$	19,791	$	114,527	$	706,651
Special Mention		4,443		187		-		170		4,800
Substandard		17,328		1,921		84		659		19,992
Doubtful		-		-		-		-		-
Subtotal		424,965		171,247		19,875		115,356		731,443
Less:
Unearned discount		301		78		-		27		406

Loans, net of unearned discount	$	424,664	$	171,169	$	19,875	$	115,329	$	731,037

December 31, 2014

							Commercial,
			Real		Installment		Financial
	Real Estate		Estate		and		and
	Commercial		Mortgage		Other		Agriculture		Total

Pass	$	388,568	$	167,827	$	18,558	$	107,126	$	682,079
Special Mention		4,756		191		-		498		5,445
Substandard		14,727		2,567		90		63		17,447
Doubtful		-		-		-		-		-
Subtotal		408,051		170,585		18,648		107,687		704,971
Less:
Unearned discount		320		82		-		38		440

Loans, net of unearned discount	$	407,731	$	170,503	$	18,648	$	107,649	$	704,531