Loans and Allowance for Loan Losses

Loans consisted of the following as of:

	March 31,		December 31,
(Dollars in thousands)	2014		2013

One-to-four family residential real estate	$	126,166	$	125,087
Construction and land		24,013		23,776
Commercial real estate		120,403		119,390
Commercial loans		58,991		61,383
Agriculture loans		58,713		62,287
Municipal loans		9,478		8,846
Consumer loans		19,394		18,600
Total gross loans		417,158		419,369
Net deferred loan costs and loans in process		33		187
Allowance for loan losses		(5,640)		(5,540)
Loans, net	$	411,551	$	414,016

The following tables provide information on the Company’s allowance for loan losses by loan class and allowance methodology:

	Three months ended March 31, 2014
(Dollars in thousands)	One-to-four family residential real estate		Construction and land		Commercial real estate		Commercial loans		Agriculture loans		Municipal loans		Consumer loans		Total

Balance at December 31, 2013	$	732	$	1,343	$	1,970	$	769	$	545	$	47	$	134	$	5,540
Charge-offs		(20)		-		-		(6)		-		-		(42)		(68)
Recoveries		3		3		-		1		-		-		11		18
Provision for loan losses		32		(410)		(455)		1,042		(110)		6		45		150
Balance at March 31, 2014		747		936		1,515		1,806		435		53		148		5,640

Allowance for loan losses:
Individually evaluated for loss		77		61		74		800		-		-		24		1,036
Collectively evaluated for loss		670		875		1,441		1,006		435		53		124		4,604
Total		747		936		1,806		1,515		435		53		148		5,640

Loan balances:
Individually evaluated for loss		349		8,113		2,884		3,299		-		706		57		15,408
Collectively evaluated for loss		125,817		15,900		117,519		55,692		58,713		8,772		19,337		401,750
Total	$	126,166	$	24,013	$	120,403	$	58,991	$	58,713	$	9,478	$	19,394	$	417,158

	Three ended March 31, 2013
(Dollars in thousands)	One-to-four family residential real estate		Construction and land		Commercial real estate		Commercial loans		Agriculture loans		Municipal loans		Consumer loans		Total

Balance at December 31, 2012	$	714	$	1,214	$	1,313	$	707	$	367	$	107	$	159	$	4,581
Charge-offs		(23)		-		-		(199)		-		-		(47)		(269)
Recoveries		8		2		-		1		-		-		11		22
Provision for loan losses		(121)		(82)		295		106		140		(6)		(32)		300
Balance at March 31, 2013		578		1,134		1,608		615		507		101		91		4,634

Allowance for loan losses:
Individually evaluated for loss		28		332		-		49		-		65		-		474
Collectively evaluated for loss		550		802		1,608		566		507		36		91		4,160
Total		578		1,134		1,608		615		507		101		91		4,634

Loan balances:
Individually evaluated for loss		757		8,603		2,833		236		5		772		27		13,233
Collectively evaluated for loss		90,623		15,591		90,259		58,804		31,771		5,753		12,654		305,455
Total	$	91,380	$	24,194	$	93,092	$	59,040	$	31,776	$	6,525	$	12,681	$	318,688

The Company’s key credit quality indicator is a loan’s performance status, defined as accruing or non-accruing. Performing loans are considered to have a lower risk of loss. Non-accrual loans are those which the Company believes have a higher risk of loss. Loans are placed on non-accrual or are charged off at an earlier date if collection of principal or interest is considered doubtful. The accrual of interest on non-performing loans is discontinued at the time the loan is 90 days delinquent, unless the credit is well secured and in process of collection. The following tables present information on the Company’s past due and non-accrual loans by loan class:

(Dollars in thousands)	As of March 31, 2014
	30-59 days delinquent and accruing			60-89 days delinquent and accruing			90 days or more delinquent and accruing			Total past due loans accruing			Non-accrual loans			Total

One-to-four family residential real estate	$	634		$	15		$	-		$	649		$	343		$	992
Construction and land		13			147			3,819			3,979			2,163			6,142
Commercial real estate		759			290			-			1,049			2,605			3,654
Commercial loans		116			12			-			128			3,299			3,427
Agriculture loans		437			-			-			437			-			437
Municipal loans		-			-			-			-			65			65
Consumer loans		203			-			-			203			57			260
Total	$	2,162		$	464		$	3,819		$	6,445		$	8,532		$	14,977

Percent of gross loans		0.52	%		0.11	%		0.92	%		1.54	%		2.05	%		3.59	%

(Dollars in thousands)	As of December 31, 2013
	30-59 days delinquent and accruing			60-89 days delinquent and accruing			90 days or more delinquent and accruing			Total past due loans accruing			Non-accrual loans			Total

One-to-four family residential real estate	$	311		$	793		$	-		$	1,104		$	776		$	1,880
Construction and land		18			-			-			18			2,165			2,183
Commercial real estate		-			9			-			9			2,658			2,667
Commercial loans		187			-			-			187			4,148			4,335
Agriculture loans		23			-			-			23			-			23
Municipal loans		-			-			-			-			65			65
Consumer loans		85			11			-			96			24			120
Total	$	624		$	813		$	-		$	1,437		$	9,836		$	11,273

Percent of gross loans		0.15	%		0.19	%		0.00	%		0.34	%		2.35	%		2.69	%

The Company’s impaired loans decreased from $16.8 million at December 31, 2013 to $15.4 million at March 31, 2014. The difference between the unpaid contractual principal and the impaired loan balance is a result of charge-offs recorded against impaired loans. The difference in the Company’s non-accrual loan balances and impaired loan balances at March 31, 2014 and December 31, 2013, was related to troubled debt restructurings (“TDR”) that are accruing interest, but still classified as impaired. The following tables present information on impaired loans:

(Dollars in thousands)	As of March 31, 2014
	Unpaid contractual principal		Impaired loan balance		Impaired loans without an allowance		Impaired loans with an allowance		Related allowance recorded		Year-to- date average loan balance		Year-to- date interest income recognized

One-to-four family residential real estate	$	349	$	349	$	187	$	162	$	77	$	352	$	-
Construction and land		9,848		8,113		6,076		2,037		61		8,143		75
Commercial real estate		2,884		2,884		278		2,606		74		2,917		4
Commercial loans		3,299		3,299		149		3,150		800		4,045		-
Municipal loans		772		706		706		-		-		706		5
Consumer loans		57		57		38		19		24		59		-
Total impaired loans	$	17,209	$	15,408	$	7,434	$	7,974	$	1,036	$	16,222	$	84

(Dollars in thousands)	As of December 31, 2013
	Unpaid contractual principal		Impaired loan balance		Impaired loans without an allowance		Impaired loans with an allowance		Related allowance recorded		Year-to- date average loan balance		Year-to- date interest income recognized

One-to-four family residential real estate	$	782	$	782	$	326	$	456	$	82	$	800	$	-
Construction and land		9,895		8,160		6,098		2,062		234		8,383		279
Commercial real estate		2,936		2,936		278		2,658		140		3,046		18
Commercial loans		4,148		4,148		4,115		33		488		192		-
Municipal loans		772		706		706		-		-		772		20
Consumer loans		24		24		6		18		7		26		-
Total impaired loans	$	18,557	$	16,756	$	11,529	$	5,227	$	951	$	13,219	$	317

At March 31, 2014, the Company had seven loan relationships consisting of eleven outstanding loans that were classified as TDRs, none of which were restructured in the three months ended March 31, 2014.

The Company evaluates each TDR individually and returns the loan to accrual status when a payment history is established after the restructuring and future payments are reasonably assured. There were no loans as of March 31, 2014 that had been modified as TDRs and then subsequently defaulted. At March 31, 2014, there were no commitments to lend additional funds to any loans classified as a TDR. As of March 31, 2014, the Company had $61,000 of allowance recorded against loans classified as TDRs compared to $234,000 recorded at December 31, 2013.

The following table presents information on loans that are classified as TDRs:

(Dollars in thousands)
	As of March 31, 2014						As of December 31, 2013
	Number of loans		Non-accrual balance		Accruing balance		Number of loans		Non-accrual balance		Accruing balance

One-to-four family residential real estate		1	$	-	$	6		1	$	-	$	6
Construction and land		7		624		5,951		7		627		5,995
Commercial real estate		1		-		278		1		-		278
Municipal loans		2		-		641		2		-		641
Total troubled debt restructurings		11	$	624	$	6,876		11	$	627	$	6,920

The Company services one-to-four family residential real estate loans for others with outstanding principal balances of $339.7 million and $338.3 million at March 31, 2014 and December 31, 2013, respectively. Gross service fee income related to such loans was $229,000 and $169,000 for the quarters ended March 31, 2014 and 2013, respectively, and is included in fees and service charges in the consolidated statements of earnings.

The Company had a mortgage repurchase reserve of $454,000 at March 31, 2014 compared to $468,000 at December 31, 2013. The mortgage repurchase reserve represents the Company’s best estimate of probable losses that the Company has incurred related to the repurchase obligation of one-to-four family residential real estate loans previously sold or to reimburse investors for credit losses incurred on loans previously sold where a breach of the contractual representations and warranties occurred. Because the level of mortgage repurchase losses depends upon economic factors, investor demand strategies and other external conditions that may change over the life of the underlying loans, mortgage repurchase losses are difficult to estimate and require considerable judgment. The Company charged a $19,000 loss against the mortgage repurchase reserve and recorded a $5,000 provision to the reserve during the first three months of 2014.