| Credit Quality of Loans and the Allowance for Loan Losses | Note 4: Credit Quality
of Loans and the Allowance for Loan Losses Loans Loans that management has the intent
and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances
adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated
loans and unamortized premiums or discounts on purchased loans. For loans amortized at cost, interest
income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well
as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan. The accrual of interest on mortgage
and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well secured and in process
of collection. Past due status is determined based on contractual terms of the loan. In all cases, loans are placed on nonaccrual
or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected
for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted
for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when
all the principal and interest amounts contractually due are brought current for a period of six months and future payments are
reasonably assured. Allowance for Loan Losses The allowance for loan losses is
established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged
against the allowance when management believes the collectibility of a loan balance is in question. Subsequent recoveries, if any,
are credited to the allowance. The allowance for loan losses is
evaluated on a regular basis by management and is based upon managements periodic review of the collectibility of the loans
in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrowers
ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently
subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of allocated
and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified
as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the
impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical
charge-off experience and expected loss given default derived from the Companys internal risk rating process. Other adjustments
may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are
not fully reflected in the historical loss or risk rating data. A loan is considered impaired when,
based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal
or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining
impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments
when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management
determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrowers
prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on
a loan-by-loan basis for commercial and construction loans by using the present value of expected future cash flows discounted
at the loans effective interest rate, the loans obtainable market price or the fair value of the collateral if the
loan is collateral dependent. Large groups of smaller balance homogenous loans are collectively evaluated for impairment. Accordingly,
the Company does not separately identify individual consumer and residential loans for impairment measurements, unless such loans
are the subject of a restructuring agreement due to financial difficulties of the borrower. The risk characteristics of
each portfolio segment are as follows: Residential Real Estate Loans For residential mortgage loans
that are secured by one-to-four family residences and are generally owner occupied, the Company generally establishes a maximum
loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured
by a subordinate interest in one-to-four family residences. Repayment can also be impacted by changes in property values on residential
properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers. All Other Mortgage Loans All other mortgage loans consist
of residential construction loans, nonresidential real estate loans, land loans and multi-family real estate loans. Residential construction loan proceeds
are disbursed in increments as construction progresses and as inspections warrant. Construction loans are typically structured
as permanent one-to-four family loans originated by the Company with a 12-month construction phase. Accordingly, upon completion
of the construction phase, there is no change in interest rate or term to maturity of the original construction loan, nor is a
new permanent loan originated. These loans are generally owner occupied and the Company generally establishes a maximum loan-to-value
ratio and requires private mortgage insurance if that ratio is exceeded. Nonresidential real estate loans
are negotiated on a case-by-case basis. Loans secured by nonresidential real estate generally involve a greater degree of risk
than one-to-four family residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions
on income-producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the
repayment of loans secured by nonresidential real estate is typically dependent upon the successful operation of the related real
estate project. If the cash flow from the project is reduced, the borrowers ability to repay the loan may be impaired. The Company also originates a limited
number of land loans secured by individual improved and unimproved lots for future residential construction. In addition, the Company
originates loans to commercial customers with land held as the collateral. Multi-family real estate loans
generally involve a greater degree of credit risk than one-to-four family residential mortgage loans and carry larger loan balances.
This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income-producing properties, and the increased difficulty of evaluating
and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family real estate is typically dependent
upon the successful operation of the related real estate property. If the cash flow from the project is reduced, the borrowers
ability to repay the loan may be impaired. Commercial Business Loans Commercial business loans carry
a higher degree of risk than one-to-four family residential loans. Such lending typically involves large loan balances concentrated
in a single borrower or groups of related borrowers for rental or business properties. In addition, the payment experience on loans
secured by income-producing properties is typically dependent on the success of the operation of the related project and thus is
typically affected by adverse conditions in the real estate market and in the economy. The Company originates commercial loans
generally in the $50,000 to $1,000,000 range with the majority of these loans being under $500,000. Commercial loans are generally
underwritten based on the borrowers ability to pay and assets such as buildings, land and equipment are taken as additional
loan collateral. Each loan is evaluated for a level of risk and assigned a rating from 1 (the highest quality rating)
to 7 (the lowest quality rating). Consumer Loans Consumer loans entail greater credit
risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate
rapidly, such as automobiles, mobile homes, boats, and recreational vehicles. In such cases, repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does
not warrant further substantial collection efforts against the borrower. In particular, amounts realizable on the sale of repossessed
automobiles may be significantly reduced based upon the condition of the automobiles and the lack of demand for used automobiles. The following presents by portfolio
segment the activity in the allowance for loan losses for the three and nine months ended September 30, 2016 and 2015:
Three months ended One-to-four All other Commercial Consumer Unallocated Total
(In thousands)
Beginning balance $ 1,582 $ 957 $ 234 $ 3 $ $ 2,776
Provision charged (105 ) 238 75 208
Losses charged (78 ) (78 )
Recoveries 1 1
Ending balance $ 1,477 $ 1,117 $ 310 $ 3 $ $ 2,907
Three months ended One-to-four All other Commercial Consumer Unallocated Total
(In thousands)
Beginning balance $ 1,115 $ 1,164 $ 346 $ 5 $ 38 $ 2,668
Provision charged 562 (99 ) (68 ) (38 ) 357
Losses charged (278 ) (278 )
Recoveries 2 1 3
Ending balance $ 1,401 $ 1,065 $ 279 $ 5 $ $ 2,750
Nine months ended One-to-four All other Commercial Consumer Unallocated Total
(In thousands)
Beginning balance $ 1,346 $ 1,210 $ 279 $ 2 $ $ 2,837
Provision charged 130 (10 ) 30 2 152
Losses charged (83 ) (1 ) (84 )
Recoveries 1 1 2
Ending balance $ 1,477 $ 1,117 $ 310 $ 3 $ $ 2,907
Nine months ended One-to-four All other Commercial Consumer Unallocated Total
(In thousands)
Beginning balance $ 1,533 $ 885 $ 343 $ 8 $ $ 2,769
Provision charged 959 180 (65 ) (3 ) 1,071
Losses charged (1,137 ) (1,137 )
Recoveries 46 1 47
Ending balance $ 1,401 $ 1,065 $ 279 $ 5 $ $ 2,750 The following tables present the balance in the allowance
for loan losses and the recorded investment in loans based on the portfolio segment and impairment method as of September 30, 2016
and December 31, 2015:
September 30, 2016 One-to-four All other Commercial Consumer Total
Allowance Balances: (In thousands)
Ending balance:
Individually evaluated $ 397 $ 54 $ 44 $ $ 495
Collectively evaluated 1,080 1,063 266 3 2,412
Total allowance for loan losses $ 1,477 $ 1,117 $ 310 $ 3 $ 2,907
Loan Balances:
Ending balance:
Individually evaluated $ 1,690 $ 1,133 $ 44 $ $ 2,867
Collectively evaluated 184,325 121,563 21,373 1,860 329,121
Total balance $ 186,015 $ 122,696 $ 21,417 $ 1,860 $ 331,988
December 31, 2015 One-to-four All other Commercial Consumer Total
Allowance Balances: (In thousands)
Ending balance:
Individually evaluated for $ 506 $ 13 $ 33 $ $ 552
Collectively evaluated for 840 1,197 246 2 2,285
Total allowance for loan losses $ 1,346 $ 1,210 $ 279 $ 2 $ 2,837
Loan Balances:
Ending balance:
Individually evaluated for $ 2,789 $ 1,061 $ 33 $ $ 3,883
Collectively evaluated for 176,943 104,060 17,998 1,904 300,905
Total balance $ 179,732 $ 105,121 $ 18,031 $ 1,904 $ 304,788 Total loans in the above tables do not include deferred
loan origination fees of $761 and $765 or loans in process of $6.9 million and $8.1 million, respectively, for September 30, 2016
and December 31, 2015. The following tables present the credit risk profile
of the Banks loan portfolio based on rating category and payment activity as of September 30, 2016 and December 31, 2015:
September 30, 2016 One-to-four All other mortgage Commercial Consumer loans
(In thousands)
Rating *
Pass (Risk 1-4) $ 182,553 $ 118,645 $ 20,686 $ 1,860
Special Mention (Risk 5) 282 128 537
Substandard (Risk 6) 3,180 3,923 194
Total $ 186,015 $ 122,696 $ 21,417 $ 1,860
December 31, 2015 One-to-four All other mortgage Commercial Consumer loans
(In thousands)
Rating *
Pass (Risk 1-4) $ 172,617 $ 100,961 $ 17,893 $ 1,904
Special Mention (Risk 5) 1,406 1,881 105
Substandard (Risk 6) 5,709 2,279 33
Total $ 179,732 $ 105,121 $ 18,031 $ 1,904 * Ratings are generally assigned to consumer and residential
mortgage loans on a pass or fail basis, where fail results in a substandard classification.
Commercial loans, both secured by real estate or other assets or unsecured, are analyzed in accordance with an analytical matrix
codified in the Banks loan policy that produces a risk rating as described below. Risk 1 is unquestioned credit quality
for any credit product. Loans are secured by cash and near cash collateral with immediate access to proceeds. Risk 2 is very low risk with strong
credit and repayment sources. Borrower is well capitalized in a stable industry, financial ratios exceed peers and financial trends
are positive. Risk 3 is very favorable risk with
highly adequate credit strength and repayment sources. Borrower has good overall financial condition and adequate capitalization. Risk 4 is acceptable, average risk
with adequate credit strength and repayment sources. Collateral positions must be within Bank policies. Risk 5 or Special Mention,
also known as watch, has potential weakness that deserves Managements close attention. This risk includes
loans where the borrower has developed financial uncertainties or the borrower is resolving the financial uncertainties. Bank credits
have been secured or negotiations will be ongoing to secure further collateral. Risk 6 or Substandard
loans are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged. This
risk category contains loans that exhibit a weakening of the borrowers credit strength with limited credit access and all
nonperforming loans. Risk 7 or
Doubtful loans are significantly under protected by the current net worth and paying capacity of the borrower
or of the collateral pledged. This risk category contains loans that are likely to experience a loss of some magnitude, but
where the amount of the expected loss is not known with enough certainty to allow for an accurate calculation of a loss
amount for charge- off. This category is considered to be temporary until a charge-off amount can be reasonably
determined. The following tables present the
Banks loan portfolio aging analysis for September 30, 2016 and December 31, 2015:
September 30, 2016 30-59 Days 60-89 Days Greater Total Past Current Total Loans
(In thousands)
One-to-four family $ 1,366 $ 155 $ 706 $ 2,227 $ 183,788 $ 186,015
All other mortgage loans 115 115 122,581 122,696
Commercial business 15 42 22 79 21,338 21,417
Consumer loans 1,860 1,860
Total $ 1,496 $ 197 $ 728 $ 2,421 $ 329,567 $ 331,988
December 31, 2015 30-59 Days 60-89 Days Greater Total Past Current Total Loans
(In thousands)
One-to-four family $ 516 $ 329 $ 903 $ 1,748 $ 177,984 $ 179,732
All other mortgage loans 298 209 507 104,614 105,121
Commercial business 68 68 17,963 18,031
Consumer loans 1,904 1,904
Total $ 882 $ 329 $ 1,112 $ 2,323 $ 302,465 $ 304,788
There were no loans greater than 90 days and still accruing
at either September 30, 2016 or December 31, 2015. Nonaccrual loans were comprised of the following at:
Nonaccrual loans September 30, 2016 December 31, 2015
(In thousands)
One-to-four family residential loans $ 1,392 $ 1,733
Nonresidential real estate loans 166 208
All other mortgage loans
Commercial business loans
Consumer loans
Total $ 1,558 $ 1,941 A loan is considered impaired, in
accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable
the Bank will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired
loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions
have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest
rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. Information
with respect to the Companys impaired loans at September 30, 2016 and December 31, 2015 in combination with activity for
the three and nine months ended September 30, 2016 and 2015 is presented below:
As of September 30, 2016 Three months ended September 30, 2016 Nine months ended September 30, 2016
Recorded Unpaid Principal Balance Specific Average Investment in Interest Income Recognized Average Investment in Interest Income
(In thousands)
Loans without a
One-to-four family $ 1,154 $ 1,168 $ $ 1,024 $ 10 $ 1,044 $ 30
All other mortgage 1,060 1,060 1,045 17 782 52
Commercial business
Loans with a
One-to-four family 536 536 397 652 911
All other mortgage 73 73 54 159 1 390
Commercial business 44 44 44 49 40 1
Total:
One-to-four family $ 1,690 $ 1,704 $ 397 $ 1,676 $ 10 $ 1,956 $ 30
All other mortgage 1,133 1,133 54 1,204 18 1,173 52
Commercial business 44 44 44 49 40 1
$ 2,867 $ 2,881 $ 495 $ 2,929 $ 28 $ 3,168 $ 83
As of December 31, 2015 Three months ended September 30, 2015 Nine months ended September 30, 2015
Recorded Unpaid Specific Average Interest Average Interest
(In thousands)
Loans without a
One-to-four family $ 1,224 $ 1,238 $ $ 1,317 $ 10 $ 1,464 $ 31
All other mortgage 533 532
Commercial business 18 9
Loans with a
One-to-four family 1,565 1,875 506 1,468 15 1,498 42
All other mortgage 1,061 1,061 13 610 18 314 54
Commercial business 33 33 33 85 110 1
Total:
One-to-four family $ 2,789 $ 3,113 $ 506 $ 2,785 $ 25 $ 2,962 $ 73
All other mortgage 1,061 1,061 13 1,143 18 846 54
Commercial business 33 33 33 103 119 1
$ 3,883 $ 4,207 $ 552 $ 4,031 $ 43 $ 3,927 $ 128 The interest income recognized
in the above tables reflects interest income recognized and is not materially different from the cash basis method. All TDR classifications are due
to concessions being granted to borrowers experiencing financial difficulties. Concessions to borrowers can include exceptions
to loan policy including high loan-to-value ratios, no private mortgage insurance (PMI) and high debt-to-income ratios,
as well as term and rate exceptions. There were $412,000 of TDR classifications that occurred in the 2016 year to date period and
included the renewal of an interest only loan as the customer repayments had not been in accordance with the original loan terms. The remaining loans are to the same borrower and are on
a nonaccrual status. There were no TDR classifications that occurred during the 2015 quarter-to-date or year-to-date period. Each
TDR has been individually evaluated for impairment with the appropriate specific valuation allowance included in the allowance
for loan losses calculation. There were no TDR classifications which defaulted during the three and nine month periods ended September
30, 2016 and 2015. The Company considers TDRs that become 90 days or more past due under modified terms as subsequently defaulted.
Quarter-to-Date Year-to-Date
Troubled Debt Number of loans Pre- Post- Number Pre- modification Post-
(dollars in thousands) (dollars in thousands)
September 30, 2016
One-to-four family $ $ 8 $ 412 $ 412 Foreclosed assets held for sale include those properties
that the Bank has obtained legal title to, through a formal foreclosure process, or the borrower conveying all interest in the
property to the Bank through the completion of a deed in lieu of foreclosure, or similar legal agreement. The following table presents
the balance of mortgage loans collateralized by residential real estate properties held as foreclosed assets at September 30, 2016
and December 31, 2015.
September 30, 2016 December 31, 2015
Recorded Investment
(In thousands)
One-to-four family residential loans $ 4 $ 14 Banks foreclose on certain properties in the normal course
of business when it is more probable than not that the loan balance will not be recovered through scheduled payments. Foreclosure
is usually a last resort and begins after all other collection efforts have been exhausted. The following table presents the balance
of those mortgage loans collateralized by residential real estate properties that are in the formal process of foreclosure at September
30, 2016 and December 31, 2015.
September 30, 2016 December 31, 2015
Recorded Investment
(In thousands)
One-to-four family residential loans $ 179 $ 171 |
