| 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 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 management’s 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 borrower’s
ability to repay, estimated value of any underlying collateral and prevailing economic conditions. While management uses the best
information available to make such evaluations, future adjustments to the allowance may be necessary if economic conditions differ
substantially from the assumptions used in making the evaluations. 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 Company’s 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 borrower’s
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 loan’s effective interest rate, the loan’s 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: One-to-four Family 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 borrower’s 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 borrower’s
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 borrower’s 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 six months ended June 30, 2017 and 2016:
Three months ended June 30, 2017 One-to-four All other Commercial Consumer loans Total
(In thousands)
Beginning balance $ 1,444 $ 1,129 $ 465 $ 6 $ 3,044
Provision charged (credited) (111 ) (34 ) 229 (1 ) 83
Losses charged off — — — — —
Recoveries 29 — 1 — 30
Ending balance $ 1,362 $ 1,095 $ 695 $ 5 $ 3,157
Three months ended June 30, 2016 One-to-four All other Commercial Consumer loans Total
(In thousands)
Beginning balance $ 1,279 $ 1,207 $ 281 $ 4 $ 2,771
Provision charged (credited) 303 (245 ) (47 ) — 11
Losses charged off — (5 ) — (1 ) (6 )
Recoveries — — — — —
Ending balance $ 1,582 $ 957 $ 234 $ 3 $ 2,776
Six months ended June 30, 2017 One-to-four All other Commercial Consumer loans Total
(In thousands)
Beginning balance $ 1,479 $ 1,108 $ 447 $ 6 $ 3,040
Provision charged (credited) (123 ) (13 ) 247 (1 ) 110
Losses charged off (23 ) — — — (23 )
Recoveries 29 — 1 — 30
Ending balance $ 1,362 $ 1,095 $ 695 $ 5 $ 3,157
Six months ended June 30, 2016 One-to-four All other Commercial Consumer loans Total
(In thousands)
Beginning balance $ 1,346 $ 1,210 $ 279 $ 2 $ 2,837
Provision charged (credited) 235 (248 ) (45 ) 2 (56 )
Losses charged off — (5 ) — (1 ) (6 )
Recoveries 1 — — — 1
Ending balance $ 1,582 $ 957 $ 234 $ 3 $ 2,776 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 June 30, 2017 and
December 31, 2016:
June 30, 2017 One-to-four All other Commercial Consumer Total
Allowance Balances: (In thousands)
Ending balance:
Individually evaluated $ 254 $ 148 $ 437 $ 1 $ 840
Collectively evaluated 1,108 947 258 4 2,317
Total allowance for loan $ 1,362 $ 1,095 $ 695 $ 5 $ 3,157
Loan Balances:
Ending balance:
Individually evaluated $ 1,475 $ 1,057 $ 558 $ 1 $ 3,091
Collectively evaluated 190,839 126,828 26,079 1,933 345,679
Total balance $ 192,314 $ 127,885 $ 26,637 $ 1,934 $ 348,770
December 31, 2016 One-to-four All other Commercial Consumer Total
Allowance Balances: (In thousands)
Ending balance:
Individually evaluated $ 323 $ 151 $ 184 $ — $ 658
Collectively evaluated 1,156 957 263 6 2,382
Total allowance for loan $ 1,479 $ 1,108 $ 447 $ 6 $ 3,040
Loan Balances:
Ending balance:
Individually evaluated $ 1,527 $ 1,067 $ 547 $ — $ 3,141
Collectively evaluated 191,897 120,890 22,668 2,193 337,648
Total balance $ 193,424 $ 121,957 $ 23,215 $ 2,193 $ 340,789 Total loans in the above tables do not include deferred
loan origination fees of $745,000 and $747,000 or loans in process of $7.0 million and $4.7 million, respectively, for June 30,
2017 and December 31, 2016 . The following tables present the credit risk profile
of the Bank’s loan portfolio based on rating category and payment activity as of June 30, 2017 and December 31, 2016:
June 30, 2017 One-to-four All other Commercial Consumer loans
(In thousands)
Rating *
Pass (Risk 1-4) $ 188,982 $ 123,352 $ 25,909 $ 1,933
Special Mention (Risk 5) — 1,927 35 —
Substandard (Risk 6) 3,332 2,606 693 1
Total $ 192,314 $ 127,885 $ 26,637 $ 1,934
December 31, 2016 One-to-four All other Commercial Consumer loans
(In thousands)
Rating *
Pass (Risk 1-4) $ 189,975 $ 119,503 $ 22,427 $ 2,193
Special Mention (Risk 5) — — — —
Substandard (Risk 6) 3,449 2,454 788 —
Total $ 193,424 $ 121,957 $ 23,215 $ 2,193 There were no loans classified as Doubtful (Risk 7)
at either June 30, 2017 or at December 31, 2016. 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 Bank’s 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 Management’s 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 borrower’s 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
Bank’s loan portfolio aging analysis for June 30, 2017 and December 31, 2016:
June 30, 2017 30-59 Days 60-89 Days Greater Total Past Current Total Loans Total Loans >
(In thousands)
One-to-four family $ 126 $ 119 $ 399 $ 644 $ 191,670 $ 192,314 $ 17
All other mortgage — — 63 63 127,822 127,885 —
Commercial 525 — 23 548 26,089 26,637 —
Consumer loans 7 — — 7 1,927 1,934 —
Total $ 658 $ 119 $ 485 $ 1,262 $ 347,508 $ 348,770 $ 17
December 31, 2016 30-59 Days 60-89 Days Greater Total Past Current Total Loans Total Loans >
(In thousands)
One-to-four family $ 442 $ 419 $ 959 $ 1,820 $ 191,604 $ 193,424 $ —
All other mortgage — — 63 63 121,894 121,957 —
Commercial 16 — 22 38 23,177 23,215 —
Consumer loans 8 — — 8 2,185 2,193 —
Total $ 466 $ 419 $ 1,044 $ 1,929 $ 338,860 $ 340,789 $ —
Nonaccrual loans were comprised of the following at:
Nonaccrual loans June 30, 2017 December 31, 2016
(In thousands)
One-to-four family residential loans $ 1,407 $ 1,473
All other mortgage loans 63 63
Commercial business loans 548 22
Consumer loans — —
Total $ 2,018 $ 1,558 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 Company’s impaired loans at June 30, 2017 and December 31, 2016 in combination with activity for the
three and six months ended June 30, 2017 and 2016 is presented below:
As of June 30, 2017 Three months ended June 30, 2017 Six months ended June 30, 2017
Recorded Unpaid Specific Average Interest Income Average Interest
(In thousands)
Loans without a
One-to-four $ 1,137 $ 1,151 $ — $ 1,170 $ 9 $ 1,153 $ 18
All other 218 218 — 221 5 222 9
Commercial — — — — — — —
Consumer loans — — — — — — —
Loans with a
One-to-four 338 338 254 360 — 375 —
All other 839 839 148 838 13 839 26
Commercial 558 558 437 566 7 559 15
Consumer loans 1 1 1 1 — — —
Total:
One-to-four $ 1,475 $ 1,489 $ 254 $ 1,530 $ 9 1,528 $ 18
All other 1,057 1,057 148 1,059 18 1,061 35
Commercial 558 558 437 566 7 559 15
Consumer loans 1 1 1 1 — — —
$ 3,091 $ 3,105 $ 840 $ 3,156 $ 34 $ 3,148 $ 68
As of December 31, 2016 Three months ended June 30, 2016 Six months ended June 30, 2016
Recorded Unpaid Specific Average Interest Average Interest
(In thousands)
Loans without a
One-to-four family $ 1,121 $ 1,189 $ — $ 900 $ 10 $ 1,008 $ 20
All other mortgage 226 226 — 1,034 17 689 35
Commercial — — — — — — —
Loans with a
One-to-four family 406 406 323 772 — 1,036 —
All other mortgage 841 841 151 213 — 496 —
Commercial 547 547 184 41 1 38 1
Total:
One-to-four family $ 1,527 $ 1,595 $ 323 $ 1,672 $ 10 $ 2,044 $ 20
All other mortgage 1,067 1,067 151 1,247 17 1,185 35
Commercial 547 547 184 41 1 38 1
$ 3,141 $ 3,209 $ 658 $ 2,960 $ 28 $ 3,267 $ 56
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 two TDR classifications of $134,000 that occurred in the 2017 year-to-date
period. One of these borrowers received a rate concession, while the second borrower was advanced additional funds. 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 that were classified
as TDR’s during the 2016 year-to-date period were to the same borrower and were on a nonaccrual status. 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 six months ended June 30, 2017 and 2016. 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 Restructurings Number Pre- Post- Number Pre- Post-
(dollars in thousands) (dollars in thousands)
June 30, 2017
One-to-four family — $ — $ — 2 $ 134 $ 134
June 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 June 30, 2017 and December
31, 2016.
June 30, 2017 December 31, 2016
Recorded Investment
(In thousands)
One-to-four family residential loans $ 230 $ 2 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 June
30, 2017 and December 31, 2016.
June 30, 2017 December 31, 2016
Recorded Investment
(In thousands)
One-to-four family residential loans $ 199 $ 97 |
