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 concentrated with single borrowers or groups of related borrowers. · 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 a Company loan officer or through inspections performed by an independent appraisal firm. Construction loans also expose us to the risk of construction delays which may 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, as 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. Although the allocations noted below 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. The following tables summarize the activity in the allowance for loan losses for the three and six months ended June 30, 2019 and 2018 and the distribution of the allowance for loan losses and loans receivable by loan portfolio class and impairment method as of June 30, 2019 and December 31, 2018: Real Estate Loans Other Loans One- to Four-Family (2) Home Equity Commercial Construction - Commercial Commercial Consumer Unallocated Total (Dollars in thousands) June 30, 2019 Allowance for Loan Losses: Balance – April 1, 2019 $ 489 $ 122 $ 2,042 $ 330 $ 414 $ 28 $ 90 $ 3,515 Charge-offs - - - - (7) - (7) Recoveries - 1 1 - 3 - 5 Provision (Credit) (100) 21 734 49 (281) 6 (79) 350 Balance – June 30, 2019 $ 389 $ 144 $ 2,777 $ 379 $ 133 $ 30 $ 11 $ 3,863 Balance – January 1, 2019 $ 471 $ 91 $ 2,020 $ 250 $ 507 $ 25 $ 84 $ 3,448 Charge-offs - (4) - - - (21) - (25) Recoveries 8 1 2 - - 4 - 15 Provision (Credit) (90) 56 755 129 (374) 22 (73) 425 Balance – June 30, 2019 $ 389 $ 144 $ 2,777 $ 379 $ 133 $ 30 $ 11 $ 3,863 Ending balance: individually evaluated for impairment $ - $ - $ 40 $ - $ - $ - $ - $ 40 Ending balance: collectively evaluated for impairment $ 389 $ 144 $ 2,737 $ 379 $ 133 $ 30 $ 11 $ 3,823 Gross Loans Receivable (1) : Ending balance $ 155,546 $ 42,985 $ 192,161 $ 28,071 $ 20,823 $ 1,066 $ - $ 440,652 Ending balance: individually evaluated for impairment $ 174 $ - $ 294 $ - $ - $ - $ - $ 468 Ending balance: collectively evaluated for impairment $ 155,372 $ 42,985 $ 191,867 $ 28,071 $ 20,823 $ 1,066 $ - $ 440,184 (1) Gross Loans Receivable does not include allowance for loan losses of $ ( 3,863 ) or deferred loan costs of $ 3,386 . (2) Includes one- to four-family construction loans. Real Estate Loans Other Loans One- to Four-Family (1) Home Equity Commercial Construction - Commercial Commercial Consumer Unallocated Total (Dollars in thousands) June 30, 2018 Allowance for Loan Losses: Balance – April 1, 2018 $ 476 $ 128 $ 1,705 $ 350 $ 630 $ 30 $ 48 $ 3,367 Charge-offs - - - - - (11) - (11) Recoveries - 1 - - 1 1 - 3 Provision (Credit) (36) (43) 182 (21) 27 10 (4) 115 Balance – June 30, 2018 $ 440 $ 86 $ 1,887 $ 329 $ 658 $ 30 $ 44 $ 3,474 Balance – January 1, 2018 $ 511 $ 122 $ 1,663 $ 347 $ 544 $ 35 $ 61 $ 3,283 Charge-offs - - - - - (23) - (23) Recoveries 18 1 - - 1 4 - 24 Provision (Credit) (89) (37) 224 (18) 113 14 (17) 190 Balance – June 30, 2018 $ 440 $ 86 $ 1,887 $ 329 $ 658 $ 30 $ 44 $ 3,474 (1) Includes one– to four-family construction loans. Real Estate Loans Other Loans One- to Four-Family (2) Home Equity Commercial Construction - Commercial Commercial Consumer Unallocated Total (Dollars in thousands) December 31, 2018 Allowance for Loan Losses: Balance – December 31, 2018 $ 471 $ 91 $ 2,020 $ 250 $ 507 $ 25 $ 84 $ 3,448 Ending balance: individually evaluated for impairment $ - $ - $ 30 $ - $ - $ - $ - $ 30 Ending balance: collectively evaluated for impairment $ 471 $ 91 $ 1,990 $ 250 $ 507 $ 25 $ 84 $ 3,418 Gross Loans Receivable (1) : Ending Balance $ 155,024 $ 41,830 $ 150,475 $ 22,252 $ 21,825 $ 1,156 $ - $ 392,562 Ending balance: individually evaluated for impairment $ 178 $ - $ 382 $ - $ - $ - $ - $ 560 Ending balance: collectively evaluated for impairment $ 154,846 $ 41,830 $ 150,093 $ 22,252 $ 21,825 $ 1,156 $ - $ 392,002 (1) Gross Loans Receivable does not include allowance for loan losses of $ ( 3,448 ) or deferred loan costs of $ 3,357 . (2) Includes one- to four-family construction loans. 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 at or for the periods indicated: Unpaid Average Interest Recorded Principal Related Recorded Income Investment Balance Allowance Investment Recognized For the Six Months Ended At June 30, 2019 June 30, 2019 (Dollars in thousands) With no related allowance recorded: Residential, one- to four-family $ 174 $ 174 $ - $ 176 $ 5 Commercial real estate (1) - - - 76 - Total impaired loans with no related allowance 174 174 - 252 5 With an allowance recorded: Commercial real estate 294 294 40 302 - Total impaired loans with an allowance 294 294 40 302 - Total of impaired loans: Residential, one- to four-family 174 174 - 176 5 Commercial real estate 294 294 40 378 - Total impaired loans $ 468 $ 468 $ 40 $ 554 $ 5 (1) This loan was paid off during the six months ended June 30, 2019. Unpaid Average Interest Recorded Principal Related Recorded Income Investment Balance Allowance Investment Recognized For the Year Ended At December 31, 2018 December 31, 2018 (Dollars in thousands) With no related allowance recorded: Residential, one- to four-family $ 178 $ 178 $ - $ 180 $ 12 Home equity (1) - - - 17 - Commercial real estate 134 134 - 356 - Commercial loans - - - 59 1 Total impaired loans with no related allowance 312 312 - 612 13 With an allowance recorded: Commercial real estate (2) 248 248 30 1,249 4 Total impaired loans with an allowance 248 248 30 1,249 4 Total of impaired loans: Residential, one- to four-family 178 178 - 180 12 Home equity - - - 17 - Commercial real estate 382 382 30 1,605 4 Commercial loans - - - 59 1 Total impaired loans $ 560 $ 560 $ 30 $ 1,861 $ 17 (1) These loans were either paid off or foreclosed upon during the year ended December 31, 2018. (2) Two commercial real estate loans with a combined recorded investment of $1.4 million and a related allowance of $60,000 were foreclosed upon during the year ended December 31, 2018. The following tables provide an analysis of past due loans and non-accruing loans as of the dates indicated: 30-59 Days 60-89 Days 90 Days or More Total Past Current Total Loans Loans on Non- Past Due Past Due Past Due Due Due Receivable Accrual (Dollars in thousands) June 30, 2019: Real Estate Loans: Residential, one- to four-family (1) $ 703 $ 378 $ 1,101 $ 2,182 $ 153,364 $ 155,546 $ 2,399 Home equity 135 87 608 830 42,155 42,985 675 Commercial 283 - 294 577 191,584 192,161 294 Construction - Commercial - - - - 28,071 28,071 - Other Loans: Commercial - - - - 20,823 20,823 - Consumer 2 - 8 10 1,056 1,066 8 Total $ 1,123 $ 465 $ 2,011 $ 3,599 $ 437,053 $ 440,652 $ 3,376 30-59 Days 60-89 Days 90 Days or More Total Past Current Total Loans Loans on Non- Past Due Past Due Past Due Due Due Receivable Accrual (Dollars in thousands) December 31, 2018: Real Estate Loans: Residential, one- to four-family (1) $ 851 $ 342 $ 1,361 $ 2,554 $ 152,470 $ 155,024 $ 2,310 Home equity 211 187 333 731 41,099 41,830 337 Commercial 76 - 306 382 150,093 150,475 382 Construction - Commercial - - - - 22,252 22,252 - Other Loans: Commercial - - 15 15 21,810 21,825 15 Consumer 5 - - 5 1,151 1,156 - Total $ 1,143 $ 529 $ 2,015 $ 3,687 $ 388,875 $ 392,562 $ 3,044 (1) Includes one- to four-family construction loans. 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. 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 six month periods ended June 30, 2019 and 2018 was $73,000 and $143,000 , 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. Generally, all consumer loans more than 90 days past due are classified and placed in non-accrual. Such loans that are well-secured and in the process of collection will remain in accrual status. The following tables summarize the internal loan grades applied to the Company’s loan portfolio as of June 30, 2019 and December 31, 2018: Pass/Performing Special Mention Substandard Doubtful Loss Total (Dollars in thousands) June 30, 2019 Real Estate Loans: Residential, one- to four-family (1) $ 153,016 $ - $ 2,530 $ - $ - $ 155,546 Home equity 41,967 - 1,018 - - 42,985 Commercial 188,588 2,657 916 - - 192,161 Construction - Commercial 28,071 - - - - 28,071 Other Loans: Commercial 20,694 129 - - - 20,823 Consumer 1,056 - 10 - - 1,066 Total $ 433,392 $ 2,786 $ 4,474 $ - $ - $ 440,652 Pass/Performing Special Mention Substandard Doubtful Loss Total (Dollars in thousands) December 31, 2018 Real Estate Loans: Residential, one- to four-family (1) $ 152,039 $ - $ 2,985 $ - $ - $ 155,024 Home equity 41,346 - 484 - - 41,830 Commercial 148,149 376 1,950 - - 150,475 Construction - Commercial 22,252 - - - - 22,252 Other Loans: Commercial 20,722 61 1,042 - - 21,825 Consumer 1,153 - 3 - - 1,156 Total $ 385,661 $ 437 $ 6,464 $ - $ - $ 392,562 (1) Includes one- to four-family construction loans. 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. 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. 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 June 30, 2019 Real Estate Loans: Residential, one- to four-family 5 $ 174 1 $ 32 4 $ 142 - $ - At December 31, 2018 Real Estate Loans: Residential, one- to four-family 5 $ 178 1 $ 34 4 $ 144 1 $ 34 No additional loan commitments were outstanding to these borrowers at June 30, 2019 and December 31, 2018. There were no loans restructured and classified as TDRs during the three and six month periods ended June 30, 2019 and 2018. 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 $752,000 and $678,000 at June 30, 2019 and December 31, 2018, 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 proceedings are in process according to local requirements of the applicable jurisdiction was $1.0 million and $1.1 million at June 30, 2019 and December 31, 2018, respectively. |