Loans and Allowance for Loan Losses | Note 3: Loans and Allowance for Loan Losses Classes of loans at June 30, include: 2017 2016 Real estate loans One- $ 140,647 $ 149,538 Multi-family 87,228 84,200 Commercial 133,841 119,643 Home equity lines of credit 7,520 8,138 Construction 7,421 19,698 Commercial 62,392 57,826 Consumer 7,905 10,086 446,954 449,129 Less Unearned fees and discounts, net (203 ) 30 Allowance for loan losses 6,835 5,351 Loans, net $ 440,322 $ 443,748 The Company had loans held for sale included in one- The Company believes that sound loans are a necessary and desirable means of employing funds available for investment. Recognizing the Company’s obligations to its depositors and to the communities it serves, authorized personnel are expected to seek to develop and make sound, profitable loans that resources permit and that opportunity affords. The Company maintains lending policies and procedures in place designed to focus our lending efforts on the types, locations, and duration of loans most appropriate for our business model and markets. The Company’s lending activity includes the origination of one- Management reviews and approves the Company’s lending policies and procedures on a routine basis. Management routinely (at least quarterly) reviews our allowance for loan losses and reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing The Company’s policies and loan approval limits are established by the Board of Directors. The loan officers generally have authority to approve one- one- one- The Company conducts internal loan reviews that validate the loans against the Company’s loan policy quarterly for mortgage, consumer, and small commercial loans on a sample basis, and all larger commercial loans on an annual basis. The Company also receives independent loan reviews performed by a third party on larger commercial loans to be performed annually. In addition to compliance with our policy, the third party loan review process reviews the risk assessments made by our credit department, lenders and loan committees. Results of these reviews are presented to management, Audit Committee and the Board of Directors. The Company’s lending can be summarized into six primary areas; one- One- The Company offers one- non-conforming one- one- In addition, the Company also offers home equity loans that are secured by a second mortgage on the borrower’s primary or secondary residence. Home equity loans are generally underwritten using the same criteria used to underwrite one- As one- one- Commercial Real Estate and Multi-Family Real Estate Loans Commercial real estate mortgage loans are primarily secured by office buildings, owner-occupied businesses, strip mall centers, churches, and farm loans secured by real estate. In underwriting commercial real estate and multi-family real estate loans, the Company considers a number of factors, which include the projected net cash flow to the loan’s debt service requirement, the age and condition of the collateral, the financial resources and income level of the borrower and the borrower’s experience in owning or managing similar properties. Personal guarantees are typically obtained from commercial real estate and multi-family real estate borrowers. In addition, the borrower’s financial information on such loans is monitored on an ongoing basis by requiring periodic financial statement updates. The repayment of these loans is primarily dependent on the cash flows of the underlying property. However, the commercial real estate loan generally must be supported by an adequate underlying collateral value. The performance and the value of the underlying property may be adversely affected by economic factors or geographical and/or industry specific factors. These loans are subject to other industry guidelines that are closely monitored by the Company. Home Equity Lines of Credit In addition to traditional one- one- Commercial Business Loans The Company originates commercial non-mortgage medium-sized The commercial business loan portfolio consists primarily of secured loans. When making commercial business loans, the Company considers the financial statements, lending history and debt service capabilities of the borrower, the projected cash flows of the business and the value of the collateral, if any. The cash flows of the underlying borrower, however, may not perform consistent with historical or projected information. Further, the collateral securing loans may fluctuate in value due to individual economic or other factors. Loans are typically guaranteed by the principals of the borrower. The Company has established minimum standards and underwriting guidelines for all commercial loan types. Real Estate Construction Loans The Company originates construction loans for one- Consumer Loans Consumer loans consist of installment loans to individuals, primarily automotive loans. These loans are underwritten utilizing the borrower’s financial history, including the Fair Isaac Corporation (“FICO”) credit scoring and information as to the underlying collateral. Repayment is expected from the cash flow of the borrower. Consumer loans may be underwritten with terms up to seven years, fully amortized. Unsecured loans are limited to twelve months. Loan-to-value Loan Concentrations The loan portfolio includes a concentration of loans secured by commercial real estate properties, including commercial real estate construction loans, amounting to $227,359,000 and $222,395,000 as of June 30, 2017 and 2016, respectively. Generally, these loans are collateralized by multi-family and nonresidential properties. The loans are expected to be repaid from cash flows or from proceeds from the sale of the properties of the borrower. Purchased Loans and Loan Participations The Company’s loans receivable included purchased loans of $7,599,000 and $9,772,000 at June 30, 2017 and 2016, respectively. All of these purchased loans are secured by single family homes located out of our primary market area primarily in the Midwest. The Company’s loans receivable also include commercial loan participations of $38,531,000 and $47,731,000 at June 30, 2017 and 2016, respectively, of which $10,322,000 and $19,303,000, at June 30, 2017 and 2016 were outside of our primary market area. These participation loans are secured by real estate and other business assets. The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of June 30, 2017 and 2016: 2017 Real Estate Loans One- to four- family Multi-family Commercial Home Equity Construction Allowance for loan losses: Balance, beginning of year $ 1,198 $ 1,202 $ 1,399 $ 94 $ 227 Provision charged to expense 1,521 134 129 (18 ) (152 ) Losses charged off (232 ) — (8 ) — — Recoveries 32 — — — — Balance, end of period $ 2,519 $ 1,336 $ 1,520 $ 76 $ 75 Ending balance: individually evaluated for impairment $ 1,527 $ — $ 6 $ — $ — Ending balance: collectively evaluated for impairment $ 992 $ 1,336 $ 1,514 $ 76 $ 75 Loans: Ending balance $ 140,647 $ 87,228 $ 133,841 $ 7,520 $ 7,421 Ending balance: individually evaluated for impairment $ 10,034 $ 1,390 $ 25 $ 57 $ — Ending balance: collectively evaluated for impairment $ 130,613 $ 85,838 $ 133,816 $ 7,463 $ 7,421 2017 (Continued) Commercial Consumer Unallocated Total Allowance for loan losses: Balance, beginning of year $ 1,140 $ 91 $ — $ 5,351 Provision charged to expense 102 5 — 1,721 Losses charged off — (35 ) — (275 ) Recoveries — 6 — 38 Balance, end of year $ 1,242 $ 67 $ — $ 6,835 Ending balance: individually evaluated for impairment $ — $ — $ — $ 1,533 Ending balance: collectively evaluated for impairment $ 1,242 $ 67 $ — $ 5,302 Loans: Ending balance $ 62,392 $ 7,905 $ — $ 446,954 Ending balance: individually evaluated for impairment $ 89 $ — $ — $ 11,595 Ending balance: collectively evaluated for impairment $ 62,303 $ 7,905 $ — $ 435,359 2016 Real Estate Loans One- to four- family Multi-family Commercial Home Equity Construction Allowance for loan losses: Balance, beginning of year $ 1,216 $ 827 $ 1,246 $ 85 $ 6 Provision charged to expense 165 375 156 41 221 Losses charged off (188 ) — (3 ) (32 ) — Recoveries 5 — — — — Balance, end of period $ 1,198 $ 1,202 $ 1,399 $ 94 $ 227 Ending balance: individually evaluated for impairment $ 6 $ — $ 14 $ — $ — Ending balance: collectively evaluated for impairment $ 1,192 $ 1,202 $ 1,385 $ 94 $ 227 Loans: Ending balance $ 149,538 $ 84,200 $ 119,643 $ 8,138 $ 19,698 Ending balance: individually evaluated for impairment $ 2,405 $ 1,457 $ 63 $ 327 $ — Ending balance: collectively evaluated for impairment $ 147,133 $ 82,743 $ 119,580 $ 7,811 $ 19,698 2016 (Continued) Commercial Consumer Unallocated Total Allowance for loan losses: Balance, beginning of year $ 744 $ 87 $ — $ 4,211 Provision charged to expense 396 12 — 1,366 Losses charged off — (10 ) — (233 ) Recoveries — 2 — 7 Balance, end of year $ 1,140 $ 91 $ — $ 5,351 Ending balance: individually evaluated for impairment $ — $ — $ — $ 20 Ending balance: collectively evaluated for impairment $ 1,140 $ 91 $ — $ 5,331 Loans: Ending balance $ 57,826 $ 10,086 $ — $ 449,129 Ending balance: individually evaluated for impairment $ 9 $ — $ — $ 4,261 Ending balance: collectively evaluated for impairment $ 57,817 $ 10,086 $ — $ 444,868 Management’s opinion as to the ultimate collectability of loans is subject to estimates regarding future cash flows from operations and the value of property, real and personal, pledged as collateral. These estimates are affected by changing economic conditions and the economic prospects of borrowers. Allowance for Loan Losses The allowance for loan losses represents an estimate of the amount of losses believed inherent in our loan portfolio at the balance sheet date. The allowance calculation involves a high degree of estimation that management attempts to mitigate through the use of objective historical data where available. Loan losses are charged against the allowance for loan losses when management believes that the loan balance is confirmed as uncollectible. Subsequent recoveries, if any, are credited to the allowance. Overall, we believe the reserve to be consistent with prior periods and adequate to cover the estimated losses in our loan portfolio. The Company’s methodology for assessing the appropriateness of the allowance for loan losses consists of two key elements: (1) specific allowances for estimated credit losses on individual loans that are determined to be impaired through the Company’s review for identified problem loans; and (2) a general allowance based on estimated credit losses inherent in the remainder of the loan portfolio. The specific allowance is measured by determining the present value of expected cash flows, the loan’s observable market value, or for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expense. Factors used in identifying a specific problem loan include: (1) the strength of the customer’s personal or business cash flows; (2) the availability of other sources of repayment; (3) the amount due or past due; (4) the type and value of collateral; (5) the strength of the collateral position; (6) the estimated cost to sell the collateral; and (7) the borrower’s effort to cure the delinquency. In addition for loans secured by real estate, the Company also considers the extent of any past due and unpaid property taxes applicable to the property serving as collateral on the mortgage. The Company establishes a general allowance for loans that are not deemed impaired to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, has not been allocated to particular problem assets. The general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages based on the Company’s historical loss experience and management’s evaluation of the collectability of the loan portfolio. The allowance is then adjusted for qualitative factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date. These qualitative factors may include: (1) Management’s assumptions regarding the minimal level of risk for a given loan category; (2) changes in lending policies and procedures, including changes in underwriting standards, and charge-off non-accrual re-evaluated Although the Company’s policy allows for a general valuation allowance on certain smaller-balance, homogenous pools of loans classified as substandard, the Company has historically evaluated every loan classified as substandard, regardless of size, for impairment as part of the review for establishing specific allowances. The Company’s policy also allows for general valuation allowance on certain smaller-balance, homogenous pools of loans which are loans criticized as special mention or watch. A separate general allowance calculation is made on these loans based on historical measured weakness, and which is no less than twice the amount of the general allowance calculated on the non-classified There have been no changes to the Company’s accounting policies or methodology from the prior periods. Credit Quality Indicators 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, historical payment experience, credit documentation, public information and current economic trends, among other factors. All loans are graded at inception of the loan. Subsequently, analyses are performed on an annual basis and grade changes are made as necessary. Interim grade reviews may take place if circumstances of the borrower warrant a more timely review. The Company utilizes an internal asset classification system as a means of reporting problem and potential problem loans. Under the Company’s risk rating system, the Company classifies problem and potential problem loans as “Watch,” “Substandard,” “Doubtful,” and “Loss.” The Company uses the following definitions for risk ratings: Pass – Watch – Substandard – Doubtful – Loss – charged-off. Risk characteristics applicable to each segment of the loan portfolio are described as follows. Residential One- one- one- Commercial and Multi-family Real Estate: Construction Real Estate: Commercial: Consumer: The following tables present the credit risk profile of the Company’s loan portfolio, as of June 30, 2017 and 2016, based on rating category and payment activity: Real Estate Loans June 30, 2017 One- Multi-family Commercial Home Equity Construction Pass $ 129,814 $ 86,900 $ 133,058 $ 7,471 $ 7,421 Watch 1,146 — 485 — — Substandard 9,687 328 298 49 — Doubtful — — — — — Loss — — — — — Total $ 140,647 $ 87,228 $ 133,841 $ 7,520 $ 7,421 June 30, 2017, (Continued) Commercial Consumer Total Pass $ 59,667 $ 7,842 $ 432,173 Watch 2,630 62 4,323 Substandard 95 1 10,458 Doubtful — — — Loss — — — Total $ 62,392 $ 7,905 $ 446,954 Real Estate Loans June 30, 2016 One- Multi-family Commercial Home Equity Construction Pass $ 146,924 $ 82,580 $ 115,787 $ 7,811 $ 19,698 Watch 350 1,271 3,500 — — Substandard 2,264 349 356 327 — Doubtful — — — — — Loss — — — — — Total $ 149,538 $ 84,200 $ 119,643 $ 8,138 $ 19,698 June 30, 2016, (Continued) Commercial Consumer Total Pass $ 55,184 $ 10,073 $ 438,057 Watch 2,633 — 7,754 Substandard 9 13 3,318 Doubtful — — — Loss — — — Total $ 57,826 $ 10,086 $ 449,129 The following tables present the Company’s loan portfolio aging analysis as of June 30, 2017 and 2016: 30-59 Days 60-89 Days Past Due Greater Than Total Past Due Current Total Loans Total Loans > June 30, 2017 Real estate loans: One- $ 1,016 $ 158 $ 540 $ 1,714 $ 138,933 $ 140,647 $ 155 Multi-family — — — — 87,228 87,228 — Commercial 4 84 — 88 133,753 133,841 — Home equity lines of credit 2 — 24 26 7,494 7,520 — Construction — — — — 7,421 7,421 — Commercial — — — — 62,392 62,392 — Consumer 59 6 — 65 7,840 7,905 — Total $ 1,081 $ 248 $ 564 $ 1,893 $ 445,061 $ 446,954 $ 155 June 30, 2016 Real estate loans: One- $ 2,061 $ 148 $ 1,489 $ 3,698 $ 145,840 $ 149,538 $ 4 Multi-family 181 — — 181 84,019 84,200 — Commercial — 97 27 124 119,519 119,643 — Home equity lines of credit 39 — 316 355 7,783 8,138 — Construction — — — — 19,698 19,698 — Commercial 33 100 — 133 57,693 57,826 — Consumer 16 5 8 29 10,057 10,086 8 Total $ 2,330 $ 350 $ 1,840 $ 4,520 $ 444,609 $ 449,129 $ 12 A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), case-by-case Impairment is measured on a loan-by-loan The Company actively seeks to reduce its investment in impaired loans. The primary tools to work through impaired loans are settlement with the borrowers or guarantors, foreclosure of the underlying collateral, or restructuring. Included in certain loan categories in the impaired loans are $3.1 million in troubled debt restructurings that were classified as impaired. The following tables present impaired loans for year ended June 30, 2017 and 2016: June 30, 2017 Recorded Unpaid Specific Average Interest Interest on Loans without a specific allowance: Real estate loans: One- $ 2,220 $ 2,220 $ — $ 2,276 $ 38 $ 51 Multi-family 1,390 1,390 — 1,421 67 90 Commercial 19 19 — 23 — — Home equity lines of credit 57 57 — 61 2 3 Construction — — — — — — Commercial 89 89 — 87 — — Consumer — — — — — — Loans with a specific allowance: Real estate loans: One- $ 7,814 $ 7,814 $ 1,527 $ 3,907 $ 185 $ 185 Multi-family — — — — — — Commercial 6 6 6 7 — — Home equity lines of credit — — — — — — Construction — — — — — — Commercial — — — — — — Consumer — — — — — — Total: Real estate loans: One- $ 10,034 $ 10,034 $ 1,527 $ 6,183 $ 223 $ 236 Multi-family 1,390 1,390 — 1,421 67 90 Commercial 25 25 6 30 — — Home equity lines of credit 57 57 — 61 2 3 Construction — — — — — — Commercial 89 89 — 87 — — Consumer — — — — — — Total $ 11,595 $ 11,595 $ 1,533 $ 7,782 $ 292 $ 329 June 30, 2016 Recorded Unpaid Specific Average Interest Interest on Loans without a specific allowance: Real estate loans: One- $ 2,291 $ 2,291 $ — $ 2,338 $ 32 $ 42 Multi-family 1,457 1,457 — 1,497 67 90 Commercial 28 28 — 29 — — Home equity lines of credit 327 327 — 346 — 2 Construction — — — — — — Commercial 9 9 — 15 — — Consumer — — — 3 — — Loans with a specific allowance: Real estate loans: One- $ 114 $ 114 $ 6 $ 117 $ 1 $ 2 Multi-family — — — — — — Commercial 35 35 14 40 — — Home equity lines of credit — — — — — — Construction — — — — — — Commercial — — — — — — Consumer — — — — — — Total: Real estate loans: One- $ 2,405 $ 2,405 $ 6 $ 2,455 $ 33 $ 44 Multi-family 1,457 1,457 — 1,497 67 90 Commercial 63 63 14 69 — — Home equity lines of credit 327 327 — 346 — 2 Construction — — — — — — Commercial 9 9 — 15 — — Consumer — — — 3 — — Total $ 4,261 $ 4,261 $ 20 $ 4,385 $ 100 $ 136 Interest income recognized on impaired loans includes interest accrued and collected on the outstanding balances of accruing impaired loans as well as interest cash collections on non-accruing The following table presents the Company’s nonaccrual loans at June 30, 2017 and 2016: 2017 2016 Real estate loans One- $ 9,105 $ 1,604 Multi-family 146 185 Commercial 25 63 Home equity lines of credit 24 316 Construction — — Commercial 84 9 Consumer — — Total $ 9,384 $ 2,177 At June 30, 2017 and 2016, the Company had a number of loans that were modified in troubled debt restructurings (TDR’s) and impaired. The modification of terms of such loans included one or a combination of the following: an extension of maturity, a reduction of the stated interest rate or a permanent reduction of the recorded investment in the loan. The following table presents the recorded balance, at original cost, of troubled debt restructurings, as of June 30, 2017 and 2016. With the exception of one one- one-to one- one- June 30, 2017 June 30, 2016 Real estate loans One- $ 1,759 $ 984 Multi-family 1,244 1,272 Commercial 6 9 Home equity lines of credit 33 11 Total real estate loans 3,042 2,276 Construction — — Commercial 84 9 Consumer 5 — Total $ 3,131 $ 2,285 The following table represents loans modified as troubled debt restructurings during the years ending June 30, 2017 and 2016: Year Ended June 30, 2017 Year Ended June 30, 2016 Number of Recorded Number of Recorded Real estate loans: One- 3 $ 830 — $ — Home equity lines of credit 1 24 1 4 Multi-family — — — — Commercial — — — — Total real estate loans 4 854 1 4 Construction — — — — Commercial 1 84 — — Consumer loans 1 5 — — Total 6 $ 943 1 $ 4 2017 Modifications During the year ended June 30, 2017, the Company modified three one- write-off write-off 2016 Modifications During the year ended June 30, 2016, the Company modified one home equity line of credit for $4,000. TDRs with Defaults The Company had one TDR, a one- one- Specific loss allowances are included in the calculation of estimated future loss ratios, which are applied to the various loan portfolios for purposes of estimating future losses. Management considers the level of defaults within the various portfolios, as well as the current adverse economic environment and negative outlook in the real estate and collateral markets when evaluating qualitative adjustments used to determine the adequacy of the allowance for loan losses. We believe the qualitative adjustments more accurately reflect collateral values in light of the sales and economic conditions that we have recently observed. We may obtain physical possession of real estate collateralizing a residential mortgage loan or home equity loan via foreclosure or in-substance |