Disclosures About Credit Quality and the Allowance for Losses on Loans | 12 Months Ended |
Sep. 30, 2013 |
Disclosures About Credit Quality and the Allowance for Losses on Loans | ' |
Note 4 - Disclosures About Credit Quality and the Allowance for Losses on Loans |
Classes |
For purposes of determining the allowance for loan losses, the Company has segmented certain loans in the portfolio by product type. Loans are segmented into the following pools: residential real estate loans, commercial, construction, home equity loans, automobile loans and other consumer loans. The company also separates these segments into classes based on the associated risks within these segments. Commercial loans are divided into the following five classes: construction, land acquisition and development, commercial loans secured by real estate, commercial loans unsecured and leases. Residential loans are divided into two classes, residential owner occupied and residential rental properties. Each class of loan requires significant judgment to determine the estimation method that fits the credit risk characteristics of its portfolio segment. Management must use judgment in establishing additional input metrics for the modeling process. Historical loss percentages are also utilized to assist in projecting potential future losses. |
Based on credit risk assessment and management’s analysis of leading predictors of losses, additional loss multipliers are applied to loan balances. During the period management has applied additional loss estimations based on the current environmental factors, geographical concentrations, the state of the local economy and current bankruptcy rates. |
Impaired loans are reviewed individually for potential loss. In instances where loan balances exceed estimated realizable values, specific loss allocations are identified and established. |
Under our methodology for calculating the allowance for loan losses, loss rates are determined for the following loan pools: construction, residential owner occupied, residential rental loans, home equity loans, loan acquisition and development, secured commercial loans, unsecured commercial loans, leases and consumer loans. Loss rates are then applied to loan balances of these portfolio segments exclusive of loans with specific loss allocations that were reviewed individually. This methodology provides an in-depth analysis of the Bank’s portfolio and reflects the probable inherent losses within it. Reserve allocations are then reviewed and consolidated. This process is performed on a quarterly basis. |
During the twelve months ended September 30, 2012, we modified our loss reserve assessment approach to expand analysis of loss rates from a period of the previous one year to the prior two years on a rolling quarter-to-quarter basis. The result was then annualized and applied to loan pools specified above. Also during the twelve months ended September 30, 2012, the Company isolated a segment of the loan portfolio, residential rental loans loans, to perform more detailed analysis for potential losses. |
A two year look back period of charge-off experience is considered to more reasonably approximate current loss exposure within the portfolio. As mentioned above, we also employed a more detailed approach in reviewing residential rental loans during the twelve months ended September 30, 2012. Loss rates for this category have been noticeably higher than other types of loans. Additionally, geographic concentration is considered to be more of a risk factor for this type of product. Loans within this category are segregated by internal risk ratings, with higher reserves allocated as risk ratings reflect more potential for loss. This same approach was used during the twelve months ended September 30, 2013. |
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The Allowance for Losses and Recorded Investment in loans for the twelve months ended September 30, 2013 are as follows: |
Allowance for Losses on Loans |
For the period ended September 30, 2013 |
(Dollars in thousands) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Residential | | | Residential | | | Commercial | | | Construction | | | Home | | | Automobile | | | Other | | | Total | |
Rental | Equity | Consumer |
| | Loans | | | Loans | | | Loans | | | Loans | | | Loans | | | Loans | | | Loans | | | Loans | |
Twelve Months ended September 30, 2013 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for losses on loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning Balance | | $ | 140 | | | $ | 2,232 | | | $ | 1,477 | | | $ | 1,492 | | | $ | 119 | | | $ | — | | | $ | 10 | | | | $5,470 | |
Charge-Offs | | | — | | | | (408 | ) | | | — | | | | (636 | ) | | | — | | | | — | | | | (4 | ) | | | (1,048 | ) |
Recoveries | | | — | | | | — | | | | 8 | | | | — | | | | — | | | | — | | | | 74 | | | | 82 | |
Provisions | | | (74 | ) | | | 719 | | | | 334 | | | | 245 | | | | (44 | ) | | | — | | | | (80 | ) | | | 1,100 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending Balance | | $ | 66 | | | $ | 2,543 | | | $ | 1,819 | | | $ | 1,101 | | | $ | 75 | | | $ | — | | | $ | — | | | | $5,604 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance individually evaluated for impairment | | $ | 1,454 | | | $ | 7,803 | | | $ | 8,499 | | | $ | 2,994 | | | $ | 265 | | | $ | — | | | $ | — | | | | $21,015 | (1) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance collectively evaluated for impairment | | $ | 62,315 | | | $ | 51,469 | | | $ | 144,907 | | | $ | 22,923 | | | $ | 33,178 | | | $ | 132 | | | | 1,496 | | | | 316,420 | (1) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending Allowance balance for loans individually evaluated for impairment | | $ | — | | | $ | 1,441 | | | $ | 118 | | | $ | 634 | | | $ | — | | | $ | — | | | | — | | | | $2,193 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending Allowance balance for loans collectively evaluated for impairment | | $ | 66 | | | $ | 1,102 | | | $ | 1,701 | | | $ | 467 | | | $ | 75 | | | $ | — | | | $ | — | | | | $3,411 | |
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-1 | Balances are not adjusted for individual portions of loans in process, unearned interest, deferred loan origination fees and costs and allowance for loan losses. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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The Allowance for Losses on Loans and Recorded Investment in loans for the twelve months ended September 30, 2012 are as follows: |
Allowance for Losses on Loans |
For the period ended September 30, 2012 |
(Dollars in thousands) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Residential | | | Residential | | | Commercial | | | Construction | | | Home | | | Automobile | | | Other | | | Total | |
Rental | Equity | Consumer |
| | Loans | | | Loans | | | Loans | | | Loans | | | Loans | | | Loans | | | Loans | | | Loans | |
Twelve Months ended September 30, 2012 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for losses on Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning Balance | | $ | 205 | | | $ | 1,595 | | | $ | 1,513 | | | $ | 1,267 | | | $ | 168 | | | $ | — | | | $ | 20 | | | $ | 4,768 | |
Charge-Offs | | | (9 | ) | | | (513 | ) | | | (35 | ) | | | — | | | | — | | | | — | | | | (14 | ) | | | (571 | ) |
Recoveries | | | 1 | | | | 5 | | | | 16 | | | | — | | | | — | | | | — | | | | 51 | | | | 73 | |
Provisions | | | (57 | ) | | | 1,145 | | | | (17 | ) | | | 225 | | | | (49 | ) | | | — | | | | (47 | ) | | | 1,200 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending Balance | | $ | 140 | | | $ | 2,232 | | | $ | 1,477 | | | $ | 1,492 | | | $ | 119 | | | $ | — | | | $ | 10 | | | $ | 5,470 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance individually evaluated for impairment | | $ | 1,163 | | | | 7,135 | | | $ | 5,560 | | | $ | 8,267 | | | $ | 210 | | | $ | — | | | $ | — | | | $ | 22,335 | (1) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance collectively evaluated for impairment | | $ | 75,660 | | | $ | 54,976 | | | $ | 145,907 | | | $ | 13,129 | | | $ | 32,630 | | | $ | 437 | | | $ | 1,714 | | | $ | 324,453 | (1) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending Allowance balance for loans individually evaluated for impairment | | $ | — | | | $ | 840 | | | $ | 111 | | | $ | 1,071 | | | $ | — | | | $ | — | | | | — | | | $ | 2,022 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending Allowance balance for loans collectively evaluated for impairment | | $ | 140 | | | $ | 1,392 | | | $ | 1,366 | | | $ | 421 | | | $ | 119 | | | $ | — | | | $ | 10 | | | $ | 3,448 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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-1 | Balances are not adjusted for individual portions of loans in process, unearned interest, deferred loan origination fees and costs and allowance for loan losses. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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Credit Quality Indicators |
The Company has several credit quality indicators to manage credit risk in an ongoing manner. The Company’s primary credit quality indicators are to use an internal credit risk rating system that categorizes loans and leases into pass, special mention, or classified categories. Credit risk ratings are applied individually to those classes of loans and leases that have significant or unique credit characteristics that benefit from a case-by-case evaluation. These are typically loans and leases to businesses or individuals in the classes which comprise the commercial portfolio segment. Groups of loans and leases that are underwritten and structured using standardized criteria and characteristics, such as statistical models (e.g., credit scoring or payment performance), are typically risk rated and monitored collectively. These are typically loans and leases to individuals in the classes which comprise the consumer portfolio segment. |
The following are the definitions of the Company’s credit quality risk ratings: |
Pass |
Asset is of sufficient quality to not warrant any mention whatsoever. |
Transitional |
Loans and other credit extensions bearing this grade exhibit some or all the characteristics of a loan graded a Pass and one or more of the following traits: higher LTV’s than expected for loans within their loan type, industry or economic issues that might cause future problems, the potential of loan default, declining financial trends that are emerging, reduced liquidity, history of late payments, failure to provide requested financial information, or deteriorating value of collateral. Loans in this category may exhibit signs of weakness as a going concern, e.g. poor management of the company; change in ownership/management; negative economic impact; or an adverse affect in the Bank’s collateral position. While no specific loss amount may be anticipated at this point there is sufficient concern regarding these loans, and closer monitoring is required by the Loan Officer and other management personnel. Loans in this category will be discussed quarterly at the Watch Committee meeting. |
Special Mention |
These credit facilities have potential developing weaknesses that deserve extra attention from management. This classification may be warranted if a developing weakness is evident that is associated with the ability of the borrower to repay. If a developing weakness is not corrected or mitigated, there may be deterioration in the ability of the borrower to repay the bank’s debt in the future. This grade should not be assigned to loans that bear certain peculiar risks normally associated with the type of financing involved, unless circumstances have caused the risk to increase to a level higher than would have been acceptable when the credit was originally approved. |
Substandard |
Loans and other credit extensions bearing this grade are considered to be inadequately protected by the current net worth and debt service capacity of the borrower or of any pledged collateral. These obligations, even if apparently protected by collateral value, have well-defined weaknesses related to adverse financial, managerial, economic, market, or political conditions that have clearly jeopardized repayment of principal and interest as originally intended. Furthermore, there is the possibility that some future loss will be sustained by the bank if such weaknesses are not corrected. Clear loss potential, however, does not have to exist in any individual assets classified as substandard. |
Doubtful |
Loans and other credit extensions classified as doubtful have all the weaknesses inherent in those substandard with the added characteristic that the severity of the weaknesses makes collection or liquidation in full highly questionable or improbable based upon currently existing facts, conditions and values. The probability of some loss is extremely high, but because of certain important and reasonably specific factors, the amount of loss cannot be determined. Such pending factors could include merger or liquidation, additional capital injection, refinancing plans, or perfection of liens on additional collateral. Loans in this classification should be placed in non-accrual status, with collections applied to principal on the bank’s books. |
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Loss |
Loans in this classification are considered uncollectible and cannot be justified as a viable asset of the Bank. This classification does not mean the loan has absolutely no recovery value, but that it is neither practical nor desirable to defer writing off this loan even though partial recovery may be obtained in the future. A portion of a loan may also be assigned this rating since the Bank may determine that the balance of the loan is collectable. |
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The risk ratings of loans as of September 30, 2013 and 2012 are as follows: |
September 30, 2013 |
(Dollars in thousands) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Residential | | | Residential | | | Commercial | | | Construction | | | Home | | | Automobile | | | Other | | | | |
Rental | Equity | Consumer |
| | Loans | | | Loans | | | Loans | | | Loans | | | Loans | | | Loans | | | Loans | | | Total | |
Grade | | | | | | | | | | | | | | | | |
Pass (2) | | $ | 61,533 | | | $ | 50,531 | | | $ | 139,171 | | | $ | 21,523 | | | $ | 32,534 | | | $ | 132 | | | $ | 1,461 | | | $ | 306,885 | |
Special Mention | | | 782 | | | | 991 | | | | 5,736 | | | | 1,400 | | | | 644 | | | | — | | | | 35 | | | | 9,588 | |
Substandard | | | 1,454 | | | | 7,750 | | | | 8,499 | | | | 2,994 | | | | 265 | | | | — | | | | — | | | | 20,962 | |
Doubtful | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total (1) | | $ | 63,769 | | | $ | 59,272 | | | $ | 153,406 | | | $ | 25,917 | | | $ | 33,443 | | | $ | 132 | | | $ | 1,496 | | | $ | 337,435 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2012 |
(Dollars in thousands) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Residential | | | Residential | | | Commercial | | | Construction | | | Home | | | Automobile | | | Other | | | | |
Rental | Equity | Consumer |
| | Loans | | | Loans | | | Loans | | | Loans | | | Loans | | | Loans | | | Loans | | | Total | |
Grade | | | | | | | | | | | | | | | | | | | | | | | | |
Pass (2) | | $ | 76,166 | | | $ | 49,817 | | | $ | 141,413 | | | $ | 13,129 | | | $ | 32,840 | | | $ | 437 | | | $ | 1,714 | | | $ | 315,516 | |
Special Mention | | | 119 | | | | 3,824 | | | | 2,465 | | | | — | | | | — | | | | — | | | | — | | | | 6,408 | |
Substandard | | | 538 | | | | 8,470 | | | | 7,589 | | | | 8,267 | | | | — | | | | — | | | | — | | | | 24,864 | |
Doubtful | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total (1) | | $ | 76,823 | | | $ | 62,111 | | | $ | 151,467 | | | $ | 21,396 | | | $ | 32,840 | | | $ | 437 | | | $ | 1,714 | | | $ | 346,788 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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-1 | Balances are not adjusted for individual portions of loans in process, unearned interest, deferred loans origination fees and costs and allowance for loan losses. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
-2 | Transitional loans are included in the Pass category for classification purposes. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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Single-Family Residential Real Estate Lending. The Bank historically has been and continues to be an originator of single-family, residential real estate loans in its market area. The Bank has never participated in the origination of sub-prime lending and, accordingly, has no direct exposure to this type of lending within its loan portfolio. The Bank originates fixed-rate mortgage loans at competitive interest rates. Due to interest rate risk considerations, the Bank has employed a strategy of selling most fixed-rate single-family residential mortgage loans originated into the secondary market. |
A small portion of the Bank’s single-family mortgage loans carry adjustable rates. After the initial term, the rate adjustments on the Bank’s adjustable-rate loans are indexed to a rate which adjusts per loan terms based upon changes in an index based on the weekly average yield on U.S. Treasury securities adjusted to a constant comparable maturity of one year, as made available by the Federal Reserve Board. The interest rates on most of the Bank’s adjustable-rate mortgage loans are adjusted once a year, and the Bank offers loans that have an initial adjustment period of one, three or five years. The maximum adjustment is 2% per adjustment period with a maximum aggregate adjustment of 6% over the life of the loan. All of the Bank’s adjustable-rate loans require that any payment adjustment resulting from a change in the interest rate be sufficient to result in full amortization of the loan by the end of the loan term and, thus, do not permit any of the increased payment to be added to the principal amount of the loan, known as “negative amortization.” |
The retention of adjustable-rate loans in the Bank’s portfolio helps reduce the Bank’s exposure to increases in prevailing market interest rates. However, there are unquantifiable credit risks resulting from potential increases in costs to borrowers in the event of upward repricing of adjustable-rate loans. It is possible that during periods of rising interest rates, the risk of default on adjustable-rate loans may increase due to increases in interest costs to borrowers. Further, although adjustable-rate loans allow the Bank to increase the sensitivity of its interest-earning assets to changes in interest rates, the extent of this interest sensitivity is limited by the initial fixed-rate period before the first adjustment and the lifetime interest rate adjustment limitations. Accordingly, there can be no assurance that yields on the Bank’s adjustable-rate loans will fully adjust to compensate for increases in the Bank’s cost of funds. Finally, adjustable-rate loans increase the Bank’s exposure to decreases in prevailing market interest rates, although decreases in the Bank’s cost of funds tend to offset this effect. |
Single-Family Rental Property Loans. The Bank also offers single-family residential mortgage loans secured by properties that are not owner-occupied, although management has decided to limit future origination volume for this loan product. Single-family residential mortgage loans secured by nonowner-occupied properties are made on a five year fixed-rate or an adjustable-rate basis and carry interest rates above the rates charged on comparable loans secured by owner-occupied properties. The maximum term on such loans is generally 5 years with amortizations up to 25 years. |
Commercial Real Estate Lending. The Bank’s commercial real estate loan portfolio includes loans to finance the acquisition of office buildings, churches, commercial office condominiums, shopping centers, hospitality, and commercial and industrial buildings. Such loans generally range in size from $100,000 to $5 million. Commercial real estate loans are originated on a fixed-rate or adjustable-rate basis with terms of 5 to 10 years and with amortizations of up to 25 years. |
Commercial real estate lending entails significant additional risks as compared with single-family residential property lending. Commercial real estate loans typically involve larger loan balances to single borrowers or groups of related borrowers. The payment experience on such loans typically is dependent on the successful operation of the real estate project, retail establishment or business. These risks can be significantly impacted by supply and demand conditions in the market for office and retail space and, as such, may be subject to a greater extent to adverse conditions in the economy generally. To minimize these risks, the Bank generally limits itself to its market area or to borrowers with which it has prior experience or who are otherwise known to the Bank. It is the Bank’s policy generally to obtain annual financial statements of the business of the borrower or the project for which commercial real estate loans are made. In addition, in the case of commercial real estate loans made to a legal entity, the Bank seeks, whenever possible, to obtain personal guarantees and annual financial statements of the principals of the legal entity. |
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Construction Lending. A portion of the Bank’s construction loans are originated for the construction of owner-occupied, single-family dwellings in the Bank’s primary market area. Residential construction loans are offered primarily to individuals building their primary or secondary residence. Generally, loans to owner/occupants for the construction of owner-occupied, single-family residential properties are originated in connection with the permanent loan on the property and have a construction term of up to 12 months. Such loans are offered on fixed rate terms. Interest rates on residential construction loans made to the owner/occupant have interest rates during the construction period equal to the same rate on the permanent loan selected by the customer. Interest rates on residential construction loans to builders are set at the prime rate plus a margin of between 0% and 1.5%, typically with interest rate floors. Interest rates on commercial construction loans are based on the prime rate plus a negotiated margin of between 0% and 1.5% and adjust monthly, typically with interest rate floors with construction terms generally not exceeding 18 months. Advances are made on a percentage of completion basis. Prior to making a commitment to fund a loan, the Bank requires both an appraisal of the property by appraisers approved by the Board of Directors and a study of projected construction costs. The Bank also reviews and inspects each project at the commencement of construction and as needed prior to disbursements during the term of the construction loan. |
On occasion, the Bank makes acquisition and development loans to local developers to acquire and develop land for sale to builders who will construct single-family residences. Acquisition and development loans, which are considered by the Bank to be construction loans, are made at a rate that adjusts monthly, based on the prime rate plus a negotiated margin, typically with interest rate floors for terms of up to three years. Interest only is paid during the term of the loan, and the principal balance of the loan is paid down as developed lots are sold to builders. Generally, in connection with acquisition and development loans, the Bank issues a letter of credit to secure the developer’s obligation to local governments to complete certain work. If the developer fails to complete the required work, the Bank would be required to fund the cost of completing the work up to the amount of the letter of credit. Letters of credit generate fee income for the Bank but create additional risk. |
Construction financing generally is considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property’s value at completion of construction or development and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate and the borrower is unable to meet the Bank’s requirements of putting up additional funds to cover extra costs or change orders, then the Bank work with the customer to resolve the financial issue. The Bank has sought to minimize this risk by limiting construction lending to qualified borrowers (i.e., borrowers who satisfy all credit requirements and whose loans satisfy all other underwriting standards which would apply to the Bank’s permanent mortgage loan financing for the subject property) in the Bank’s market area. On loans to builders, the Bank works only with selected builders and carefully monitors the creditworthiness of the builders. |
Commercial Lines of Credit. The Bank provides commercial lines of credit to businesses within the Bank’s market area. These loans are secured by business assets, including real property, equipment, automobiles and consumer leases. Generally, all loans are further personally guaranteed by the owners of the business. The commercial lines have adjustable interest rates tied to the prime rate, typically with interest rate floors and are offered at rates from prime plus 0% to prime plus 3.5%, typically with interest rate floors. |
Consumer Lending. The consumer loans currently in the Bank’s loan portfolio consist of automobile loans, home equity lines of credit and loans secured by savings deposits. |
Automobile loans are secured by both new and used cars and, depending on the creditworthiness of the borrower, may be made for up to 110% of the “invoice price” or clean “black book” value, whichever is lower, or, with respect to used automobiles, the loan values as published by a wholesale value listing utilized by the automobile industry. Automobile loans are made directly to the borrower-owner. New and used cars are financed for a period generally of up to six years, or less, depending on the age of the car. Collision insurance is required for all automobile loans. The Bank also maintains a blanket collision insurance policy that provides insurance for any borrower who allows their insurance to lapse. |
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The Bank originates second mortgage loans and home equity lines of credit. Second mortgage loans are made at fixed rates and for terms of up to 15 years. The Bank’s home equity lines of credit currently have adjustable interest rates tied to the prime rate. The Bank is currently offering a fixed promotional rate of 1.99% for the first 12 months of the loan term, then it converts to prime rate minus 1⁄4% with a floor of 4%. The interest rate may not adjust to a rate higher than 24%. The home equity lines of credit require monthly payments until the loan is paid in full, with a loan term not to exceed 30 years. The minimum monthly payment is the outstanding interest. Home equity lines of credit are secured by subordinate liens against residential real property. The Bank requires that fire and extended coverage casualty insurance (and, if appropriate, flood insurance) be maintained in an amount at least sufficient to cover its loan. |
The Bank makes savings account loans for up to 90% of the depositor’s savings account balance. The interest rate is normally 3.0% above the rate paid on the related savings account, and the account must be pledged as collateral to secure the loan. Interest generally is billed on a quarterly basis. |
Consumer lending usually affords the Bank the opportunity to earn yields higher than those obtainable on single-family residential lending. However, consumer loans entail greater risk than residential mortgage loans, particularly in the case of loans which are unsecured or secured by rapidly depreciable assets. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by events such as job loss, divorce, illness or personal bankruptcy. |
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Impaired loans for the twelve months ended September 30, 2013 are as follows: |
Impaired Loans |
As of September 30, 2013 |
(Dollars in thousands) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Recorded | | | Unpaid Principal | | | Related | | | | | | | | | | | | | | | | | | | | | |
Investment | Balance | Allowance | | | | | | | | | | | | | | | | | | | | |
Loans without specific valuation allowances: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential Loan | | $ | 1,454 | | | $ | 1,454 | | | $ | — | | | | | | | | | | | | | | | | | | | | | |
Residential Rental Loans | | | 1,296 | | | | 1,296 | | | | — | | | | | | | | | | | | | | | | | | | | | |
Commercial Loans | | | 6,897 | | | | 6,897 | | | | — | | | | | | | | | | | | | | | | | | | | | |
Construction Loans | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | |
Home Equity Loans | | | 265 | | | | 265 | | | | — | | | | | | | | | | | | | | | | | | | | | |
Consumer Loans | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | |
Other Loans | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 9,912 | | | $ | 9,912 | | | $ | — | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans with specific allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential Loans | | $ | — | | | $ | — | | | $ | — | | | | | | | | | | | | | | | | | | | | | |
Residential Rental Loans | | | 6,507 | | | | 6,507 | | | | 1,441 | | | | | | | | | | | | | | | | | | | | | |
Commercial Loans | | | 1,602 | | | | 1,602 | | | | 118 | | | | | | | | | | | | | | | | | | | | | |
Construction Loans | | | 2,994 | | | | 2,994 | | | | 634 | | | | | | | | | | | | | | | | | | | | | |
Home Equity Loans | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | |
Consumer Loans | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | |
Other Loans | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 11,103 | | | $ | 11,103 | | | $ | 2,193 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
Impaired loans for the twelve months ended September 30, 2012 are as follows: |
Impaired Loans |
As of September 30, 2012 |
(Dollars in thousands) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Recorded | | | Unpaid Principal | | | Related | | | | | | | | | | | | | | | | | | | | | |
Investment | Balance | Allowance | | | | | | | | | | | | | | | | | | | | |
Loans without specific valuation allowances: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential Loan | | $ | 1,163 | | | $ | 1,163 | | | $ | — | | | | | | | | | | | | | | | | | | | | | |
Residential Rental Loans | | | 2,123 | | | | 2,123 | | | | — | | | | | | | | | | | | | | | | | | | | | |
Commercial Loans | | | 3,925 | | | | 3,925 | | | | — | | | | | | | | | | | | | | | | | | | | | |
Construction Loans | | | 2,775 | | | | 2,775 | | | | — | | | | | | | | | | | | | | | | | | | | | |
Home Equity Loans | | | 210 | | | | 210 | | | | — | | | | | | | | | | | | | | | | | | | | | |
Consumer Loans | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | |
Other Loans | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 10,196 | | | $ | 10,196 | | | $ | — | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans with specific allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential Loans | | $ | — | | | $ | — | | | $ | — | | | | | | | | | | | | | | | | | | | | | |
Residential Rental Loans | | | 5,012 | | | | 5,012 | | | | 840 | | | | | | | | | | | | | | | | | | | | | |
Commercial Loans | | | 1,635 | | | | 1,635 | | | | 111 | | | | | | | | | | | | | | | | | | | | | |
Construction Loans | | | 5,492 | | | | 5,492 | | | | 1,071 | | | | | | | | | | | | | | | | | | | | | |
Home Equity Loans | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | |
Consumer Loans | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | |
Other Loans | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 12,139 | | | $ | 12,139 | | | $ | 2,022 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
The following presents information related to the average recorded investment and interest income recognized on impaired loans for the twelve months ended September 30, 2013 and September 30, 2012: |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Twelve Months Ended | | | Twelve Months Ended | | | | | | | | | | | | | | | | | |
30-Sep-13 | 30-Sep-12 | | | | | | | | | | | | | | | | |
(dollars in thousands) | | Average | | | Interest | | | Average | | | Interest | | | | | | | | | | | | | | | | | |
Recorded | Income | Recorded | Income | | | | | | | | | | | | | | | | |
Investment | Recognized | Investment | Recognized | | | | | | | | | | | | | | | | |
Loans without specific valuation allowances: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential Loans | | $ | 1,484 | | | $ | 73 | | | $ | 1,174 | | | $ | 64 | | | | | | | | | | | | | | | | | |
Residential Rental Loans | | | 1,298 | | | | — | | | | 2,125 | | | | 51 | | | | | | | | | | | | | | | | | |
Commercial Loans | | | 7,037 | | | | 342 | | | | 3,993 | | | | 105 | | | | | | | | | | | | | | | | | |
Construction Loans | | | — | | | | — | | | | 2,988 | | | | 142 | | | | | | | | | | | | | | | | | |
Home Equity Loans | | | 265 | | | | 8 | | | | 212 | | | | 6 | | | | | | | | | | | | | | | | | |
Consumer Loans | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | |
Other Loans | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 10,084 | | | $ | 423 | | | $ | 10,492 | | | $ | 368 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans with specific allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential Loans | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | | | | | | | | | | | | | |
Residential Rental Loans | | | 6,498 | | | | 327 | | | | 5,155 | | | | 288 | | | | | | | | | | | | | | | | | |
Commercial Loans | | | 1,640 | | | | 94 | | | | 1,669 | | | | 96 | | | | | | | | | | | | | | | | | |
Construction Loans | | | 2,994 | | | | 127 | | | | 5,494 | | | | 153 | | | | | | | | | | | | | | | | | |
Home Equity Loans | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | |
Consumer Loans | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | |
Other Loans | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 11,132 | | | $ | 548 | | | $ | 12,318 | | | $ | 537 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
-1 | Balances are not adjusted for individual portions of loans in process, unearned interest, deferred loan origination fees and costs and allowances for loan losses. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
Past due loans as of September 30, 2013 and 2012 are as follows: |
Credit Quality Information |
Age Analysis of Past Due Loans |
As of September 30, 2013 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 30-59 Days | | | 60-89 | | | Non-Accrual | | | Total | | | Current | | | Total Loans | | | Non- | | | Loans | |
past due | Days past | past due | Accrual | Greater than |
| due | and Non-Accrual | Loans that | 90 days and |
| | | are Current | Accruing |
Residential Loans | | $ | 753 | | | | 89 | | | | 718 | | | | 1,560 | | | | 62,209 | | | | 63,769 | | | | 347 | | | $ | — | |
Residential Rental Loans | | | — | | | | — | | | | 3,013 | | | | 3,013 | | | | 56,259 | | | | 59,272 | | | | 792 | | | | — | |
Commercial Loans | | | — | | | | — | | | | 1,573 | | | | 1,573 | | | | 151,833 | | | | 153,406 | | | | 378 | | | | — | |
Construction Loans | | | — | | | | — | | | | 2,994 | | | | 2,994 | | | | 22,923 | | | | 25,917 | | | | 2,994 | | | | — | |
Home Equity Loans | | | 381 | | | | — | | | | 142 | | | | 523 | | | | 32,920 | | | | 33,443 | | | | 82 | | | | — | |
Automobile Loans | | | — | | | | — | | | | — | | | | — | | | | 132 | | | | 132 | | | | — | | | | — | |
Other Loans | | | 2 | | | | 35 | | | | — | | | | 37 | | | | 1,459 | | | | 1,496 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total (1) | | $ | 1,136 | | | | 124 | | | | 8,440 | | | | 9,700 | | | | 327,735 | | | | 337,435 | | | | 4,593 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Credit Quality Information |
Age Analysis of Past Due Loans |
As of September 30, 2012 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 30-59 Days | | | 60-89 | | | Non-Accrual | | | Total | | | Current | | | Total Loans | | | Non- | | | Loans | |
past due | Days past | past due | Accrual | Greater than |
| due | and Non-Accrual | Loans that | 90 days and |
| | | are Current | Accruing |
Residential Loans | | $ | 360 | | | $ | 82 | | | $ | 472 | | | $ | 914 | | | $ | 75,909 | | | $ | 76,823 | | | $ | — | | | $ | — | |
Residential Rental Loans | | | 180 | | | | 340 | | | | 2,128 | | | | 2,648 | | | | 59,463 | | | | 62,111 | | | | 741 | | | | | |
Commercial Loans | | | — | | | | — | | | | 2,994 | | | | 2,994 | | | | 148,473 | | | | 151,467 | | | | 1,311 | | | | — | |
Construction Loans | | | — | | | | — | | | | 7,551 | | | | 7,551 | | | | 13,845 | | | | 21,396 | | | | 294 | | | | — | |
Home Equity Loans | | | 119 | | | | 81 | | | | — | | | | 200 | | | | 32,640 | | | | 32,840 | | | | — | | | | — | |
Automobile Loans | | | — | | | | — | | | | — | | | | — | | | | 437 | | | | 437 | | | | — | | | | — | |
Other Loans | | | 3 | | | | — | | | | — | | | | 3 | | | | 1,711 | | | | 1,714 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total (1) | | $ | 662 | | | $ | 503 | | | $ | 13,145 | | | $ | 14,310 | | | $ | 332,478 | | | $ | 346,788 | | | $ | 2,346 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
-1 | Balances are not adjusted for individual portions of loans in process, unearned interest, deferred loan origination fees and costs and allowances for loan losses. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nonperforming Loans and Other Problem Assets. It is management’s policy to continually monitor its loan portfolio to anticipate and address potential and actual delinquencies. When a borrower fails to make a payment on a loan, the Bank takes immediate steps to have the delinquency cured and the loan restored to current status. Loans which are past due 15 days incur a late fee of 5% of principal and interest due. As a matter of policy, the Bank will send a late notice to the borrower after the loan has been past due 15 days and again after 30 days. If payment is not promptly received, the borrower is contacted again, and efforts are made to formulate an affirmative plan to cure the delinquency. Generally, after any loan is delinquent 90 days or more, formal legal proceedings are commenced to collect amounts owed. In the case of automobile loans, late notices are sent after loans are ten days delinquent, and the collateral is seized after a loan is delinquent 60 days. Repossessed cars subsequently are sold at auction. |
Loans generally are placed on nonaccrual status if the loan becomes past due more than 90 days, except in instances where in management’s judgment there is no doubt as to full collectability of principal and interest, or management concludes that payment in full is not likely. Consumer loans are generally charged-off, or any expected loss is reserved for, after they become more than 120 days past due. All other loans are charged-off, or any expected loss is reserved for, when management concludes that they are uncollectible. |
Real estate acquired by the Bank as a result of foreclosure is classified as foreclosed real estate until such time as it is sold. When such property is acquired, it is initially recorded at the lower of cost or estimated fair value and subsequently at the lower of book value or fair value less estimated costs to sell. Costs relating to holding such real estate are charged against income in the current period, while costs relating to improving such real estate are capitalized until a saleable condition is reached. Any required write-down of the loan to its fair value less estimated selling costs upon foreclosure is charged against the allowance for loan losses. |
Charge-off Policies |
The Company’s loan charge-off policies are as follows: |
When loans demonstrate some form of weakness or become 90 days delinquent the Bank performs an analysis to determine if a loss is expected. Loans are generally reserved down to the fair value of collateral securing the asset, less estimated cost to sell, when management judges the asset to be impaired, repayment is deemed to be protracted beyond reasonable time frames, the asset has been classified by either the internal loan review process or external examiners, or when the borrower has filed bankruptcy and the loss becomes evident based on a lack of assets. Once foreclosure takes place, or when foreclosure is imminent, specific reserves are charged-off and the asset is transferred to Foreclosed Real Estate based upon its estimated fair value less estimated disposal cost. |
|
Loans on Nonaccrual Status |
(Dollars in Thousands) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, | | | September 30, | | | | | | | | | | | | | | | | | | | | | | | | | |
2013 | 2012 | | | | | | | | | | | | | | | | | | | | | | | | |
With no related allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential Loans | | $ | 718 | | | $ | 472 | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential Rental Loans | | | 1,296 | | | | 2,039 | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial Loans | | | 1,573 | | | | 2,994 | | | | | | | | | | | | | | | | | | | | | | | | | |
Constructions Loans | | | — | | | | 4,557 | | | | | | | | | | | | | | | | | | | | | | | | | |
Home Equity Loans | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | |
Automobile Loans | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | |
Other Loans | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 3,587 | | | $ | 10,062 | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
With an allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential Loans | | $ | — | | | $ | — | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential Rental Loans | | | 1,717 | | | | 89 | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial Loans | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | |
Constructions Loans | | | 2,994 | | | | 2,994 | | | | | | | | | | | | | | | | | | | | | | | | | |
Home Equity Loans | | | 142 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | |
Automobile Loans | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | |
Other Loans | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 4,853 | | | $ | 3,083 | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Nonaccrual Loans | | $ | 8,440 | (1) | | $ | 13,145 | (1) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
-1 | Includes Troubled Debt Restructurings (TDR’s) of $1.2 million and $700,000 at September 30, 2013 and 2012, respectively, which were not delinquent. Reporting guidance requires disclosure of these loans as nonaccrual even though they may be current in terms of principal and interest payments. As of September 30, 2013 and 2012, the Company had total TDR’s of $7.2 million and $9.3 million, respectively. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
The following schedule represents new modifications added as TDR’s during the fiscal years ended September 30, 2013 and 2012, respectively: |
Modifications |
During periods ended September 30, 2013 and 2012 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2013 | | | 2012 | | | | | | | | | |
| | Number of | | | Pre- | | | Post- | | | Number of | | | Pre- | | | Post- | | | | | | | | | |
Contracts | Modification | Modification | Contracts | Modification | Modification | | | | | | | | |
| Outstanding | Outstanding | | Outstanding | Outstanding | | | | | | | | |
| Recorded | Recorded | | Recorded | Recorded | | | | | | | | |
| Investments | Investments | | Investments | Investments | | | | | | | | |
Troubled Debt Restructurings | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential-Prime | | | 5 | | | $ | 1,232 | | | $ | 1,232 | | | | 1 | | | $ | 90 | | | $ | 90 | | | | | | | | | |
Commercial | | | — | | | | — | | | | — | | | | 5 | | | | 2,449 | | | | 2,449 | | | | | | | | | |
Construction | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | | |
Consumer-Other | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | | |
Finance leases | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | | |
Troubled Debt Restructurings are considered to be in default after 90 days of non-payment. During the fiscal year ended September 30, 2013 no TDR’s defaulted. During the fiscal year ended September 30, 2012 no TDR’s defaulted. |
Loans identified as Troubled Debt Restructurings are also included as nonperforming assets. TDR’s are represented by borrowers experiencing some form of financial difficulty, resulting in the Bank granting a concession as part of a loan modification. Loans modified as TDR’s were primarily comprised of loans for which payments were either deferred or reduced. Reporting guidance requires disclosure of these loans as nonperforming even though they may be current in terms of principal and interest payments. As of September 30, 2013, $7.2 million in TDR’s were included in non performing loans, $7.1 million of which were not delinquent. |
As previously stated, TDR’s are included as nonperforming assets, although payments may be current in conjunction with modified loan terms. Typical loan modifications include lowering interest rates, deferring payments or extending repayment terms. As of September 30, 2013 specific loan loss reserves on TDR’s totaled $1.1 million. |