| Allowance for Loan Losses | Note 4 - Allowance for Loan Losses
Management segregates the loan portfolio into loan types and analyzes the risk level for each loan type when determining its allowance for loan losses. The loan types are as follows:
Real Estate Loans:
·
One- to Four-Family – are loans secured by first lien collateral on residential real estate primarily held in the Western New York region. These loans can be affected by economic conditions and the value of underlying properties. Western New York’s housing market has consistently demonstrated stability in home prices despite economic conditions. Furthermore, the Company has conservative underwriting standards and its residential lending policies and procedures ensure that its one- to four-family residential mortgage loans generally conform to secondary market guidelines.
·
Home Equity - are loans or lines of credit secured by first or second liens on owner-occupied residential real estate primarily held in the Western New York region. These loans can also be affected by economic conditions and the values of underlying properties. Home equity loans may have increased risk of loss if the Company does not hold the first mortgage resulting in the Company being in a secondary position in the event of collateral liquidation. The Company does not originate interest only home equity loans.
·
Commercial Real Estate – are loans used to finance the purchase of real property, which generally consists of developed real estate that is held as first lien collateral for the loan. These loans are secured by real estate properties that are primarily held in the Western New York region. Commercial real estate lending involves additional risks compared with one- to four-family residential lending, because payments on loans secured by commercial real estate properties are often dependent on the successful operation or management of the properties, and/or the collateral value of the commercial real estate securing the loan, and repayment of such loans may be subject to adverse conditions in the real estate market or economic conditions to a greater extent than one- to four-family residential mortgage loans. Also, commercial real estate loans typically involve relatively large loan balances to single borrowers or groups of related borrowers. Accordingly, the nature of these types of loans make them more difficult for the Company to monitor and evaluate.
·
Construction – are loans to finance the construction of either one- to four-family owner occupied homes or commercial real estate. At the end of the construction period, the loan automatically converts to either a one- to four-family or commercial mortgage, as applicable. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion compared to the actual cost of construction. The Company limits its risk during construction as disbursements are not made until the required work for each advance has been completed and an updated lien search is performed. The completion of the construction progress is verified by inspections performed by a Company loan officer or an independent appraisal firm. Construction delays may also impair the borrower’s ability to repay the loan.
Other Loans:
·
Commercial – includes business installment loans, lines of credit, and other commercial loans. Most of our commercial loans have fixed interest rates, and are for terms generally not in excess of 5 years. Whenever possible, we collateralize these loans with a lien on business assets and equipment and require the personal guarantees from principals of the borrower. Commercial loans generally involve a higher degree of credit risk because the collateral underlying the loans may be in the form of intangible assets and/or inventory subject to market obsolescence. Commercial loans can also involve relatively large loan balances to a single borrower or groups of related borrowers, with the repayment of such loans typically dependent on the successful operation of the commercial business and the income stream of the borrower. Such risks can be significantly affected by economic conditions. Although commercial loans may be collateralized by equipment or other business assets, the liquidation of collateral in the event of a borrower default may be an insufficient source of repayment because the equipment or other business assets may be obsolete or of limited use, among other things. Accordingly, the repayment of a commercial loan depends primarily on the credit worthiness of the borrowers (and any guarantors), while liquidation of collateral is a secondary and often insufficient source of repayment.
·
Consumer – consist of loans secured by collateral such as an automobile or a deposit account, unsecured loans and lines of credit. Consumer loans tend to have a higher credit risk due to the loans being either unsecured or secured by rapidly depreciable assets. Furthermore, consumer loan payments are dependent on the borrower’s continuing financial stability, and therefore are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.
The allowance for loan losses is a valuation account that reflects the Company’s evaluation of the losses inherent in its loan portfolio. In order to determine the adequacy of the allowance for loan losses, the Company estimates losses by loan type using historical loss factors, as well as other environmental factors, such as trends in loan volume and loan type, loan concentrations, changes in the experience, ability and depth of the Company’s lending management, and national and local economic conditions. The Company's determination as to the classification of loans and the amount of loss allowances are subject to review by bank regulators, which can require the establishment of additional loss allowances.
The Company also reviews all loans on which the collectability of principal may not be reasonably assured, by reviewing payment status, financial conditions and estimated value of loan collateral. These loans are assigned an internal loan grade, and the Company assigns an amount of loss allowances to these classified loans based on loan grade.
The following tables summarize the activity in the allowance for loan losses for the three and nine months ended September 30, 2016 and 2015 and the distribution of the allowance for loan losses and loan receivable by loan portfolio class and impairment method as of September 30, 2016:
Real Estate Loans
Other Loans
One- to Four-Family
Home Equity
Commercial
Construction
Commercial
Consumer
Unallocated
Total
(Dollars in thousands)
September 30, 2016
Allowance for Loan Losses:
Balance – July 1, 2016
$ 424
$ 129
$ 1,064
$ 129
$ 275
$ 22
$ 17
$ 2,060
Charge-offs
(16)
-
-
-
(46)
(8)
-
(70)
Recoveries
1
-
-
-
-
4
-
5
Provision (Credit)
12
(13)
50
-
72
12
(8)
125
Balance – September 30, 2016
$ 421
$ 116
$ 1,114
$ 129
$ 301
$ 30
$ 9
$ 2,120
Balance – January 1, 2016
$ 351
$ 120
$ 1,204
$ 59
$ 197
$ 22
$ 32
$ 1,985
Charge-offs
(65)
(18)
(1)
-
(76)
(40)
-
(200)
Recoveries
11
1
-
-
1
12
-
25
Provision (Credit)
124
13
(89)
70
179
36
(23)
310
Balance – September 30, 2016
$ 421
$ 116
$ 1,114
$ 129
$ 301
$ 30
$ 9
$ 2,120
Ending balance: individually evaluated for impairment
$
-
$
-
$ 5
$
-
$ 10
$
-
$
-
$ 15
Ending balance: collectively evaluated for impairment
$ 421
$ 116
$ 1,109
$ 129
$ 291
$ 30
$ 9
$ 2,105
Gross Loans Receivable (1) :
Ending balance
$ 151,069
$ 34,062
$ 97,062
$ 11,707
$ 24,167
$ 1,472
$
-
$ 319,539
Ending balance: individually evaluated for impairment
$ 191
$ 4
$ 3,260
$
-
$ 177
$
-
$
-
$ 3,632
Ending balance: collectively evaluated for impairment
$ 150,878
$ 34,058
$ 93,802
$ 11,707
$ 23,990
$ 1,472
$
-
$ 315,907
(1)
Gross Loans Receivable does not include allowance for loan losses of $ (2,120) or deferred loan costs of $ 3,002 .
Real Estate Loans
Other Loans
One- to Four-Family
Home Equity
Commercial
Construction
Commercial
Consumer
Unallocated
Total
(Dollars in thousands)
September 30, 2015
Allowance for Loan Losses:
Balance – July 1, 2015
$ 393
$ 103
$ 1,394
$
-
$ 187
$ 27
$ 21
$ 2,125
Charge-offs
(40)
-
-
-
(5)
(15)
-
(60)
Recoveries
-
-
-
-
-
2
-
2
Provision (Credit)
17
(2)
(42)
-
43
7
7
30
Balance – September 30, 2015
$ 370
$ 101
$ 1,352
$
-
$ 225
$ 21
$ 28
$ 2,097
Balance – January 1, 2015
$ 446
$ 106
$ 1,163
$
-
$ 184
$ 22
$
-
$ 1,921
Charge-offs
(58)
(17)
-
-
(9)
(34)
-
(118)
Recoveries
12
8
21
-
7
6
-
54
Provision (Credit)
(30)
4
168
-
43
27
28
240
Balance – September 30, 2015
$ 370
$ 101
$ 1,352
$
-
$ 225
$ 21
$ 28
$ 2,097
The following table summarizes the distribution of the allowance for loan losses and loans receivable by loan portfolio class as of December 31, 2015:
Real Estate Loans
Other Loans
One- to Four-Family
Home Equity
Commercial
Construction
Commercial
Consumer
Unallocated
Total
(Dollars in thousands)
December 31, 2015
Allowance for Loan Losses:
Balance – December 31, 2015
$ 351
$ 120
$ 1,204
$ 59
$ 197
$ 22
$ 32
$ 1,985
Ending balance: individually evaluated for impairment
$
-
$
-
$ 20
$
-
$
-
$
-
$
-
$ 20
Ending balance: collectively evaluated for impairment
$ 351
$ 120
$ 1,184
$ 59
$ 197
$ 22
$ 32
$ 1,965
Gross Loans Receivable (1) :
Ending Balance
$ 157,307
$ 32,770
$ 83,967
$ 4,849
$ 15,741
$ 1,507
$
-
$ 296,141
Ending balance: individually evaluated for impairment
$ 202
$ 8
$ 1,545
$
-
$ 80
$
-
$
-
$ 1,835
Ending balance: collectively evaluated for impairment
$ 157,105
$ 32,762
$ 82,422
$ 4,849
$ 15,661
$ 1,507
$
-
$ 294,306
(1)
Gross Loans Receivable does not include allowance for loan losses of $ (1,985) or deferred loan costs of $ 2,945 .
Although the allocations noted above are by loan type, the allowance for loan losses is general in nature and is available to offset losses from any loan in the Company’s portfolio. The unallocated component of the allowance for loan losses reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for existing specific and general losses in the portfolio.
A loan is considered impaired when, based on current information and events, it is probable that the Company will not be able to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Factors considered in determining impairment include payment status, collateral value and the probability of collecting scheduled payments when due. Impairment is measured on a loan-by-loan basis for commercial real estate loans and commercial loans. Larger groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer, home equity, or one- to four-family loans for impairment disclosure, unless they are subject to a troubled debt restructuring.
The following is a summary of information pertaining to impaired loans for the periods indicated:
Unpaid
Average
Interest
Recorded
Principal
Related
Recorded
Income
Investment
Balance
Allowance
Investment
Recognized
For the Nine Months Ended
At September 30, 2016
September 30, 2016
(Dollars in thousands)
With no related allowance recorded:
Residential, one- to four-family
$ 191
$ 191
$
-
$ 236
$ 11
Home equity
4
4
-
7
-
Commercial real estate
3,071
3,071
-
3,134
51
Commercial loans
63
63
-
75
-
With an allowance recorded:
Commercial real estate
189
189
5
193
8
Commercial loans
114
114
10
143
6
Total
$ 3,632
$ 3,632
$ 15
$ 3,788
$ 76
Unpaid
Average
Interest
Recorded
Principal
Related
Recorded
Income
Investment
Balance
Allowance
Investment
Recognized
For the Year Ended
At December 31, 2015
December 31, 2015
(Dollars in thousands)
With no related allowance recorded:
Residential, one- to four-family
$ 202
$ 202
$
-
$ 207
$ 14
Home equity
8
8
-
9
-
Commercial real estate
1,503
1,503
-
1,931
-
Commercial loans
80
80
-
94
2
With an allowance recorded:
Commercial real estate
42
42
20
612
2
Total
$ 1,835
$ 1,835
$ 20
$ 2,853
$ 18
The following table provides an analysis of past due loans and non-accruing loans as of the dates indicated:
90 Days or
30-59 Days
60-89 Days
More
Total Past
Current
Total Loans
Loans on
Past Due
Past Due
Past Due
Due
Due
Receivable
Non-Accrual
(Dollars in thousands)
September 30, 2016:
Real Estate Loans:
Residential, one- to four-family
$ 1,250
$ 552
$ 904
$ 2,706
$ 148,363
$ 151,069
$ 2,012
Home equity
50
165
185
400
33,662
34,062
337
Commercial
-
-
3,071
3,071
93,991
97,062
3,071
Construction
-
-
-
-
11,707
11,707
-
Other Loans:
Commercial
27
2
62
91
24,076
24,167
222
Consumer
9
2
48
59
1,413
1,472
27
Total
$ 1,336
$ 721
$ 4,270
$ 6,327
$ 313,212
$ 319,539
$ 5,669
90 Days or
30-59 Days
60-89 Days
More
Total Past
Current
Total Loans
Loans on
Past Due
Past Due
Past Due
Due
Due
Receivable
Non-Accrual
(Dollars in thousands)
December 31, 2015:
Real Estate Loans:
Residential, one- to four-family
$ 1,519
$ 789
$ 1,291
$ 3,599
$ 153,708
$ 157,307
$ 2,462
Home equity
188
32
354
574
32,196
32,770
361
Commercial
-
-
1,248
1,248
82,719
83,967
1,545
Construction
-
-
-
-
4,849
4,849
-
Other Loans:
Commercial
38
-
30
68
15,673
15,741
132
Consumer
17
5
28
50
1,457
1,507
6
Total
$ 1,762
$ 826
$ 2,951
$ 5,539
$ 290,602
$ 296,141
$ 4,506
The accrual of interest on loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due. A loan does not have to be 90 days delinquent in order to be classified as non-accrual. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. If ultimate collection of principal is in doubt, all cash receipts on impaired loans are applied to reduce the principal balance . Interest income not recognized on non-accrual loans during the nine month periods ended September 30, 2016 and 2015 was $ 257,000 and $313,000 , respectively.
The Company’s policies provide for the classification of loans as follows:
·
Pass/Performing;
·
Special Mention – does not currently expose the Company to a sufficient degree of risk but does possess credit deficiencies or potential weaknesses deserving the Company’s close attention;
·
Substandard – has one or more well-defined weaknesses and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. A substandard asset would be one inadequately protected by the current net worth and paying capacity of the obligor or pledged collateral, if applicable;
·
Doubtful – has all the weaknesses inherent in substandard loans with the additional characteristic that the weaknesses present make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss; and
·
Loss – loan is considered uncollectible and continuance without the establishment of a specific valuation reserve is not warranted.
The Company’s Asset Classification Committee is responsible for monitoring risk ratings and making changes as deemed appropriate. Each commercial loan is individually assigned a loan classification. The Company’s consumer loans, including residential one- to four-family loans and home equity loans, are not classified as described above. Instead, the Company uses the delinquency status as the basis for classifying these loans. Unless the loan is well secured and in the process of collection, all consumer loans that are more than 90 days past due are classified.
The following table summarizes the internal loan grades applied to the Company’s loan portfolio as of September 30, 2016 and December 31, 2015:
Pass/Performing
Special Mention
Substandard
Doubtful
Loss
Total
(Dollars in thousands)
September 30, 2016
Real Estate Loans:
Residential, one- to four-family
$ 148,236
$
-
$ 2,833
$
-
$
-
$ 151,069
Home equity
33,508
-
554
-
-
34,062
Commercial
93,473
57
3,532
-
-
97,062
Construction
11,707
-
-
-
-
11,707
Other Loans:
Commercial
23,857
23
287
-
-
24,167
Consumer
1,466
-
5
-
1
1,472
Total
$ 312,247
$ 80
$ 7,211
$
-
$ 1
$ 319,539
Pass/Performing
Special Mention
Substandard
Doubtful
Loss
Total
(Dollars in thousands)
December 31, 2015
Real Estate Loans:
Residential, one- to four-family
$ 154,473
$
-
$ 2,617
$ 217
$
-
$ 157,307
Home equity
32,210
-
560
-
-
32,770
Commercial
76,953
4,741
2,273
-
-
83,967
Construction
4,849
-
-
-
-
4,849
Other Loans:
Commercial
15,237
262
242
-
-
15,741
Consumer
1,504
-
1
-
2
1,507
Total
$ 285,226
$ 5,003
$ 5,693
$ 217
$ 2
$ 296,141
Troubled debt restructurings (“TDRs”) occur when we grant borrowers concessions that we would not otherwise grant but for economic or legal reasons pertaining to the borrower’s financial difficulties. A concession is made when the terms of the loan modification are more favorable than the terms the borrower would have received in the current market under similar financial difficulties. These concessions may include, but are not limited to, modifications of the terms of the debt, the transfer of assets or the issuance of an equity interest by the borrower to satisfy all or part of the debt, or the addition of borrower(s). The Company identifies loans for potential TDRs primarily through direct communication with the borrower and evaluation of the borrower’s financial statements, revenue projections, tax returns, and credit reports. Even if the borrower is not presently in default, management will consider the likelihood that cash flow shortages, adverse economic conditions, and negative trends may result in a payment default in the near future. Generally, we will not return a TDR to accrual status until the borrower has demonstrated the ability to make principal and interest payments under the restructured terms for at least six consecutive months. The Company’s TDRs are impaired loans, which may result in specific allocations and subsequent charge-offs if appropriate.
The following table summarizes the loans that were classified as TDRs as of the dates indicated:
Non-Accruing
Accruing
TDRs That Have Defaulted on Modified Terms Year to Date
Number of Loans
Recorded Investment
Number of Loans
Recorded Investment
Number of Loans
Recorded Investment
Number of Loans
Recorded Investment
(Dollars in thousands)
At September 30, 2016
Real Estate Loans:
Residential, one- to four-family
5
$ 191
-
$
-
5
$ 191
-
$
-
Home equity
1
4
-
-
1
4
-
-
Other Loans:
-
-
-
-
-
-
-
-
Commercial
1
114
1
114
-
-
-
-
Total
7
$ 309
1
$ 114
6
$ 195
-
$
-
At December 31, 2015
Real Estate Loans:
Residential, one- to four-family
5
$ 216
-
$
-
5
$ 216
-
$
-
Home equity
2
8
-
-
2
8
-
-
Total
7
$ 224
-
$
-
7
$ 224
-
$
-
No additional loan commitments were outstanding to these borrowers at September 30, 2016 and at December 31, 2015.
The following table details the activity in loans which were first deemed to be TDRs during the three and nine months ended September 30, 2016:
For The Three Months Ended September 30,
2016
Number of Loans
Pre-Modification Outstanding Recorded Investment
Post-Modification Outstanding Recorded Investment
(Dollars in thousands)
Real Estate Loans:
Residential, one- to four-family
-
$
-
$
-
Other Loans:
Commercial
1
118
118
Total
1
$ 118
$ 118
For The Nine Months Ended September 30,
2016
Number of Loans
Pre-Modification Outstanding Recorded Investment
Post-Modification Outstanding Recorded Investment
(Dollars in thousands)
Real Estate Loans:
Residential, one- to four-family
1
$ 31
$ 31
Other Loans:
Commercial
1
118
118
Total
2
$ 149
$ 149
There were no loans restructured and classified as TDRs during the three and nine months ended September 30, 2015.
Some loan modifications classified as TDRs may not ultimately result in full collection of principal and interest, as modified, which may result in potential losses. These potential losses have been factored into our overall estimate of the allowance for loan losses.
Foreclosed real estate consists of property acquired in settlement of loans which is carried at its fair value less estimated selling costs. Write-downs from cost to fair value less estimated selling costs are recorded at the date of acquisition or repossession and are charged to the allowance for loan losses. Foreclosed real estate was $750,000 and $712,000 at September 30, 2016 and December 31, 2015, respectively, and was included as a component of other assets on the consolidated statements of financial condition. The recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceeds are in process according to local requirements of the applicable jurisdiction was $ 652,000 and $708,000 at September 30, 2016 and December 31, 2015, respectively. |
