Loans and Allowance for Loan Losses | Loans and Allowance for Loan Losses June 30, September 30, 2017 2016 (In thousands) Real estate mortgage: 1-4 family residential $ 173,620 $ 178,364 Commercial 254,871 217,378 Multifamily residential 18,696 18,431 Residential construction 33,837 24,275 Commercial construction 35,829 33,685 Land and land development 9,303 11,137 Commercial business loans 52,411 41,967 Consumer: Home equity loans 21,811 21,370 Auto loans 6,825 4,858 Other consumer loans 2,120 2,102 Gross loans 609,323 553,567 Undisbursed portion of construction loans (36,718) (27,623) Principal loan balance 572,605 525,944 Deferred loan origination fees and costs, net 161 (211) Allowance for loan losses (7,995) (7,122) Loans, net $ 564,771 $ 518,611 During the nine-month period ended June 30, 2017, there was no significant change in the Company’s lending activities or methodology used to estimate the allowance for loan losses as disclosed in the Company’s Annual Report on Form 10-K for the year ended September 30, 2016. At June 30, 2017 and September 30, 2016, the recorded investment in consumer mortgage loans collateralized by residential real estate properties in the process of foreclosure was $ 1.2 837,000 Residential Commercial Land & Land Commercial Real Estate Real Estate Multifamily Construction Development Business Consumer Total (In thousands) Recorded Investment in Loans: Principal loan balance $ 173,620 $ 254,871 $ 18,696 $ 32,948 $ 9,303 $ 52,411 $ 30,756 $ 572,605 Accrued interest receivable 482 844 33 175 22 213 58 1,827 Net deferred loan origination fees and costs 79 (97) (15) 40 4 170 (20) 161 Recorded investment in loans $ 174,181 $ 255,618 $ 18,714 $ 33,163 $ 9,329 $ 52,794 $ 30,794 $ 574,593 Recorded Investment in Loans as Evaluated for Impairment: Individually evaluated for impairment $ 4,589 $ 5,464 $ - $ - $ 314 $ 198 $ 196 $ 10,761 Collectively evaluated for impairment 169,592 250,154 18,714 33,163 9,015 52,596 30,598 563,832 Ending balance $ 174,181 $ 255,618 $ 18,714 $ 33,163 $ 9,329 $ 52,794 $ 30,794 $ 574,593 The following table provides the components of the recorded investment in loans as of September 30, 2016: Residential Commercial Land & Land Commercial Real Estate Real Estate Multifamily Construction Development Business Consumer Total (In thousands) Recorded Investment in Loans: Principal loan balance $ 178,364 $ 217,378 $ 18,431 $ 30,337 $ 11,137 $ 41,967 $ 28,330 $ 525,944 Accrued interest receivable 505 592 38 95 23 143 55 1,451 Net deferred loan origination fees and costs 158 (254) (17) (126) 4 37 (13) (211) Recorded investment in loans $ 179,027 $ 217,716 $ 18,452 $ 30,306 $ 11,164 $ 42,147 $ 28,372 $ 527,184 Recorded Investment in Loans as Evaluated for Impairment: Individually evaluated for impairment $ 4,342 $ 6,298 $ - $ - $ 241 $ 231 $ 249 $ 11,361 Collectively evaluated for impairment 174,685 211,418 18,452 30,306 10,923 41,916 28,123 515,823 Ending balance $ 179,027 $ 217,716 $ 18,452 $ 30,306 $ 11,164 $ 42,147 $ 28,372 $ 527,184 An analysis of the allowance for loan losses as of June 30, 2017 is as follows: Residential Commercial Land & Land Commercial Real Estate Real Estate Multifamily Construction Development Business Consumer Total (In thousands) Ending Allowance Balance Attributable to Loans: Individually evaluated for impairment $ 189 $ - $ - $ - $ - $ - $ 2 $ 191 Collectively evaluated for impairment 286 5,484 95 820 201 809 109 7,804 Ending balance $ 475 $ 5,484 $ 95 $ 820 $ 201 $ 809 $ 111 $ 7,995 An analysis of the allowance for loan losses as of September 30, 2016 is as follows: Residential Commercial Land & Land Commercial Real Estate Real Estate Multifamily Construction Development Business Consumer Total (In thousands) Ending Allowance Balance Attributable to Loans: Individually evaluated for impairment $ 43 $ - $ - $ - $ - $ - $ 5 $ 48 Collectively evaluated for impairment 292 5,160 109 845 295 284 89 7,074 Ending balance $ 335 $ 5,160 $ 109 $ 845 $ 295 $ 284 $ 94 $ 7,122 An analysis of the changes in the allowance for loan losses for the three months ended June 30, 2017 is as follows: Residential Commercial Land & Land Commercial Real Estate Real Estate Multifamily Construction Development Business Consumer Total (In thousands) Changes in Allowance for Loan Losses: Beginning balance $ 311 $ 5,870 $ 116 $ 703 $ 267 $ 348 $ 103 $ 7,718 Provisions 201 (386) (21) 117 (66) 461 (15) 321 Charge-offs (41) - - - - - (25) (66) Recoveries 4 - - - - - 18 22 Ending balance $ 475 $ 5,484 $ 95 $ 820 $ 201 $ 809 $ 111 $ 7,995 An analysis of the changes in the allowance for loan losses for the nine months ended June 30, 2017 is as follows: Residential Commercial Land & Land Commercial Real Estate Real Estate Multifamily Construction Development Business Consumer Total (In thousands) Changes in Allowance for Loan Losses: Beginning balance $ 335 $ 5,160 $ 109 $ 845 $ 295 $ 284 $ 94 $ 7,122 Provisions 211 324 (14) (25) (94) 536 64 1,002 Charge-offs (80) - - - - (25) (87) (192) Recoveries 9 - - - - 14 40 63 Ending balance $ 475 $ 5,484 $ 95 $ 820 $ 201 $ 809 $ 111 $ 7,995 An analysis of the changes in the allowance for loan losses for the three months ended June 30, 2016 is as follows: Residential Commercial Land & Land Commercial Real Estate Real Estate Multifamily Construction Development Business Consumer Total (In thousands) Changes in Allowance for Loan Losses: Beginning balance $ 286 $ 4,595 $ 157 $ 651 $ 345 $ 625 $ 92 $ 6,751 Provisions 113 526 (46) 92 (32) (358) 8 303 Charge-offs (114) - - - - (10) (20) (144) Recoveries 33 - - - - 1 25 59 Ending balance $ 318 $ 5,121 $ 111 $ 743 $ 313 $ 258 $ 105 $ 6,969 An analysis of the changes in the allowance for loan losses for the nine months ended June 30, 2016 is as follows: Residential Commercial Land & Land Commercial Real Estate Real Estate Multifamily Construction Development Business Consumer Total (In thousands) Changes in Allowance for Loan Losses: Beginning balance $ 444 $ 4,327 $ 156 $ 551 $ 369 $ 678 $ 99 $ 6,624 Provisions (69) 794 (45) 192 (56) (411) 23 428 Charge-offs (170) - - - - (10) (77) (257) Recoveries 113 - - - - 1 60 174 Ending balance $ 318 $ 5,121 $ 111 $ 743 $ 313 $ 258 $ 105 $ 6,969 The following table presents impaired loans individually evaluated for impairment as of June 30, 2017 and for the three and nine months ended June 30, 2017 and 2016. At June 30, 2017 Three Months Ended June 30, Nine Months Ended June 30, 2017 2017 2016 2016 2017 2017 2016 2016 Recorded Unpaid Related Average Interest Average Interest Average Interest Average Interest (In thousands) Loans with no related allowance recorded: Residential real estate $ 4,204 $ 4,478 $ - $ 4,371 $ 36 $ 4,929 $ 36 $ 4,264 $ 106 $ 5,252 $ 109 Commercial real estate 5,464 5,567 - 5,731 50 6,508 48 6,085 149 6,646 148 Multifamily - - - - - - - - - - - Construction - - - - - - - - - - - Land and land development 314 270 - 270 1 - - 254 1 - - Commercial business 198 203 - 206 1 248 2 211 4 299 4 Consumer 117 118 - 120 1 197 1 151 3 202 4 $ 10,297 $ 10,636 $ - $ 10,698 $ 89 $ 11,882 $ 87 $ 10,965 $ 263 $ 12,399 $ 265 Loans with an allowance recorded: Residential real estate $ 385 $ 401 $ 189 $ 406 $ - $ 72 $ - $ 444 $ - $ 30 $ - Commercial real estate - - - - - - - - - - - Multifamily - - - - - - - - - - - Construction - - - - - - - - - - - Land and land development - - - - - - - - - - - Commercial business - - - - - - - - - - - Consumer 79 79 2 88 - 83 - 86 - 78 - $ 464 $ 480 $ 191 $ 494 $ - $ 155 $ - $ 530 $ - $ 108 $ - Total: Residential real estate $ 4,589 $ 4,879 $ 189 $ 4,777 $ 36 $ 5,001 $ 36 $ 4,708 $ 106 $ 5,282 $ 109 Commercial real estate 5,464 5,567 - 5,731 50 6,508 48 6,085 149 6,646 148 Multifamily - - - - - - - - - - - Construction - - - - - - - - - - - Land and land development 314 270 - 270 1 - - 254 1 - - Commercial business 198 203 - 206 1 248 2 211 4 299 4 Consumer 196 197 2 208 1 280 1 237 3 280 4 $ 10,761 $ 11,116 $ 191 $ 11,192 $ 89 $ 12,037 $ 87 $ 11,495 $ 263 $ 12,507 $ 265 The Company did not recognize any interest income using the cash receipts method during the three and nine month periods ended June 30, 2017 and 2016. The following table presents impaired loans individually evaluated for impairment as of September 30, 2016. Recorded Unpaid Related (In thousands) Loans with no related allowance recorded: Residential real estate $ 3,891 $ 4,171 $ - Commercial real estate 6,298 6,394 - Multifamily - - - Construction - - - Land and land development 241 238 - Commercial business 231 224 - Consumer 175 175 - $ 10,836 $ 11,202 $ - Loans with an allowance recorded: Residential real estate $ 451 $ 450 $ 43 Commercial real estate - - - Multifamily - - - Construction - - - Land and land development - - - Commercial business - - - Consumer 74 74 5 $ 525 $ 524 $ 48 Total: Residential real estate $ 4,342 $ 4,621 $ 43 Commercial real estate 6,298 6,394 - Multifamily - - - Construction - - - Land and land development 241 238 - Commercial business 231 224 - Consumer 249 249 5 $ 11,361 $ 11,726 $ 48 Loans 90+ Days Total Nonaccrual Past Due Nonperforming Loans Still Accruing Loans (In thousands) Residential real estate $ 1,953 $ 378 $ 2,331 Commercial real estate 1,423 - 1,423 Multifamily - 216 216 Construction - - - Land and land development 282 - 282 Commercial business 85 - 85 Consumer 97 - 97 Total $ 3,840 $ 594 $ 4,434 The following table presents the recorded investment in nonperforming loans at September 30, 2016: Loans 90+ Days Total Nonaccrual Past Due Nonperforming Loans Still Accruing Loans (In thousands) Residential real estate $ 1,752 $ 22 $ 1,774 Commercial real estate 1,606 - 1,606 Multifamily - - - Construction - - - Land and land development 241 - 241 Commercial business 136 - 136 Consumer 140 - 140 Total $ 3,875 $ 22 $ 3,897 30-59 60-89 90 + Days Days Days Total Total Past Due Past Due Past Due Past Due Current Loans (In thousands) Residential real estate $ 2,140 $ 1,134 $ 1,304 $ 4,578 $ 169,603 $ 174,181 Commercial real estate 144 - 105 249 255,369 255,618 Multifamily - - 216 216 18,498 18,714 Construction - - - - 33,163 33,163 Land and land development - - 282 282 9,047 9,329 Commercial business 10 - - 10 52,784 52,794 Consumer 44 - - 44 30,750 30,794 Total $ 2,338 $ 1,134 $ 1,907 $ 5,379 $ 569,214 $ 574,593 The following table presents the aging of the recorded investment in past due loans at September 30, 2016: 30-59 60-89 90 + Days Days Days Total Total Past Due Past Due Past Due Past Due Current Loans (In thousands) Residential real estate $ 2,019 $ 860 $ 1,070 $ 3,949 $ 175,078 $ 179,027 Commercial real estate 367 - 94 461 217,255 217,716 Multifamily - - - - 18,452 18,452 Construction - - - - 30,306 30,306 Land and land development - - 241 241 10,923 11,164 Commercial business 40 - 42 82 42,065 42,147 Consumer 76 1 40 117 28,255 28,372 Total $ 2,502 $ 861 $ 1,487 $ 4,850 $ 522,334 $ 527,184 The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, public information, historical payment experience, credit documentation, and current economic conditions and trends, among other factors. The Company classifies loans based on credit risk at least quarterly. The Company uses the following regulatory definitions for risk ratings: Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date. Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loss: Loans classified as loss are considered uncollectible and of such little value that their continuance on the Company’s books as an asset is not warranted. Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans. As of June 30, 2017, and based on the most recent analysis performed, the recorded investment in loans by risk category was as follows: Residential Commercial Land and Land Commercial Real Estate Real Estate Multifamily Construction Development Business Consumer Total (In thousands) Pass $ 167,238 $ 249,223 $ 16,180 $ 32,624 $ 9,015 $ 52,700 $ 30,632 $ 557,612 Special Mention 421 3,133 2,534 95 - - 11 6,194 Substandard 6,380 3,262 - 444 314 94 149 10,643 Doubtful 142 - - - - - 2 144 Loss - - - - - - - - Total $ 174,181 $ 255,618 $ 18,714 $ 33,163 $ 9,329 $ 52,794 $ 30,794 $ 574,593 As of September 30, 2016, the recorded investment in loans by risk category was as follows: Residential Commercial Land and Land Commercial Real Estate Real Estate Multifamily Construction Development Business Consumer Total (In thousands) Pass $ 173,477 $ 211,247 $ 18,452 $ 30,206 $ 10,924 $ 41,986 $ 28,197 $ 514,489 Special Mention 459 - - 100 - 25 - 584 Substandard 5,002 6,469 - - 240 136 160 12,007 Doubtful 89 - - - - - 15 104 Loss - - - - - - - - Total $ 179,027 $ 217,716 $ 18,452 $ 30,306 $ 11,164 $ 42,147 $ 28,372 $ 527,184 Troubled Debt Restructurings Modification of a loan is considered to be a troubled debt restructuring (“TDR”) if the debtor is experiencing financial difficulties and the Company grants a concession to the debtor that it would not otherwise consider. By granting the concession, the Company expects to obtain more cash or other value from the debtor, or to increase the probability of receipt, than would be expected by not granting the concession. The concession may include, but is not limited to, reduction of the stated interest rate of the loan, reduction of accrued interest, extension of the maturity date or reduction of the face amount or maturity amount of the debt. A concession will be granted when, as a result of the restructuring, the Company does not expect to collect all amounts due, including interest at the original stated rate. A concession may also be granted if the debtor is not able to access funds elsewhere at a market rate for debt with similar risk characteristics as the restructured debt. The Company’s determination of whether a loan modification is a TDR considers the individual facts and circumstances surrounding each modification. Loans modified in a TDR may be retained on accrual status if the borrower has maintained a period of performance in which the borrower’s lending relationship was not greater than ninety days delinquent at the time of restructuring and the Company determines the future collection of principal and interest is reasonably assured. Loans modified in a TDR that are placed on nonaccrual status at the time of restructuring will continue on nonaccrual status until the Company determines the future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate a period of performance according to the restructured terms of at least six consecutive months. Accruing Nonaccrual Total (In thousands) June 30, 2017: Residential real estate $ 2,636 $ 77 $ 2,713 Commercial real estate 4,041 1,318 5,359 Land and land development 32 - 32 Commercial business 113 85 198 Consumer 99 - 99 Total $ 6,921 $ 1,480 $ 8,401 September 30, 2016: Residential real estate $ 2,590 $ - $ 2,590 Commercial real estate 4,692 1,512 6,204 Commercial business 95 120 215 Consumer 109 - 109 Total $ 7,486 $ 1,632 $ 9,118 The following table summarizes information in regard to TDRs that were restructured during the three and nine month periods ended June 30, 2017 and 2016: Pre- Post- Modification Modification Number of Principal Principal Loans Balance Balance (In thousands) Three Months Ended June 30, 2017: Residential real estate 1 $ 21 $ 21 Commercial business 1 103 103 Total 2 $ 124 $ 124 Nine Months Ended June 30, 2017: Residential real estate 2 $ 472 $ 474 Land and land development 1 31 32 Commercial business 1 103 103 Total 4 $ 606 $ 609 Three Months Ended June 30, 2016: Commercial real estate 1 $ 94 $ 131 Commercial business 1 97 97 Total 2 $ 191 $ 228 Nine Months Ended June 30, 2016: Residential real estate 5 $ 181 $ 247 Commercial real estate 1 94 131 Commercial business 3 186 216 Total 9 $ 461 $ 594 For the TDRs listed above, the terms of modification included deferral of contractual principal and interest payments, reduction of the stated interest rate and extension of the maturity date where the debtor was unable to access funds elsewhere at a market interest rate for debt with similar risk characteristics. At June 30, 2017 and September 30, 2016, the Company had not committed to lend any additional amounts to customers with outstanding loans classified as TDRs. There were no principal charge-offs recorded as a result of TDRs during the three and nine month periods ended June 30, 2017 and 2016. There was no specific allowance for loan losses related to TDRs modified during the three and nine month periods ended June 30, 2017 and 2016. In the event that a TDR subsequently defaults, the Company evaluates the restructuring for possible impairment. As a result, the related allowance for loan losses may be increased or charge-offs may be taken to reduce the carrying amount of the loan. During the three and nine month periods ended June 30, 2017 and 2016, the Company did not have any TDRs that were modified within the previous twelve months and for which there was a payment default. Loan Servicing Rights The Company originates loans to commercial customers under the SBA 7(a) and other programs. During the fiscal year ended September 30, 2016, the Company began selling the guaranteed portion of the SBA loans with servicing retained. Loan servicing rights on originated SBA loans that have been sold are initially recorded at fair value. Capitalized servicing rights are then amortized in proportion to and over the period of estimated net servicing income. Impairment of servicing rights is assessed using the present value of estimated future cash flows. The aggregate fair value of loan servicing rights approximates its carrying value. A valuation model employed by an independent third party calculates the present value of future cash flows and is used to estimate fair value at the date of sale and on a quarterly basis for impairment analysis purposes. Management periodically compares the valuation model inputs and results to published industry data in order to validate the model results and assumptions. Key assumptions used to estimate the fair value of the loan servicing rights include the discount rate and prepayment speed assumptions. For purposes of impairment, risk characteristics such as interest rate, loan type, term and investor type are used to stratify the loan servicing rights. Impairment is recognized through a valuation allowance to the extent that fair value is less than the carrying amount. Changes in the valuation allowance are reported in net gain on sales of loans in the consolidated statements of income. The unpaid principal balance of SBA loans serviced for others was $ 45.1 13.6 10.7 1,000 45,000 35,000 62,000 41,000 110,000 34,000 69,000 Three Months Ended Nine Months Ended June 30, June 30, 2017 2016 2017 2016 (In thousands) Balance, beginning of period $ 783 $ 156 $ 310 $ - Servicing rights resulting from transfers of loans 274 126 781 282 Amortization (31) - (65) - Change in valuation allowance - - - - Balance, end of period $ 1,026 $ 282 $ 1,026 $ 282 Residential mortgage loans originated for sale in the secondary market continue to be sold with servicing released. |