ALLOWANCE FOR LOAN LOSSES | NOTE 4. ALLOWANCE FOR LOAN LOSSES The following tables present, by portfolio segment, the changes in the allowance for loan losses: Three Months Ended March 31, 2016 One-to four Family Residential Commercial Real Estate Home Equity and Lines of Credit Residential Construction Other Construction and Land Commercial Consumer Total (Dollars in thousands) Beginning balance $ 2,455 $ 3,221 $ 1,097 $ 278 $ 1,400 $ 603 $ 407 $ 9,461 Provision 293 587 (214 ) (135 ) 17 (185 ) (363 ) Charge-offs (46 ) (37 ) (317 ) (10 ) (410 ) Recoveries 23 113 77 118 116 447 Ending balance $ 2,725 $ 3,808 $ 959 $ 143 $ 1,177 $ 536 $ 150 $ 9,498 Three Months Ended March 31, 2015 One-to four Family Residential Commercial Real Estate Home Equity and Lines of Credit Residential Construction Other Construction and Land Commercial Consumer Total (Dollars in thousands) Beginning balance $ 2,983 $ 2,717 $ 1,333 $ 510 $ 2,936 $ 308 $ 285 $ 11,072 Provision (100 ) (416 ) (79 ) (206 ) (1,046 ) 281 66 (1,500 ) Charge-offs (219 ) (30 ) (109 ) (19 ) (13 ) (390 ) Recoveries 109 92 23 119 7 79 429 Ending balance $ 2,773 $ 2,363 $ 1,168 $ 304 $ 1,990 $ 596 $ 417 $ 9,611 The following tables present, by portfolio segment and reserving methodology, the allocation of the allowance for loan losses and the gross investment in loans: March 31, 2016 One-to four Residential Commercial Home Equity Residential Other Commercial Consumer Total (Dollars in thousands) Allowance for loan losses Individually evaluated for impairment $ 366 $ 546 $ 6 $ $ 223 $ 35 $ $ 1,176 Collectively evaluated for impairment 2,359 3,262 953 143 954 501 150 8,322 $ 2,725 $ 3,808 $ 959 $ 143 $ 1,177 $ 536 $ 150 $ 9,498 Loans Receivable Individually evaluated for impairment $ 5,992 $ 8,729 $ 313 $ $ 1,970 $ 315 $ $ 17,319 Collectively evaluated for impairment 245,222 215,766 50,927 7,708 50,731 43,181 4,128 617,663 $ 251,214 $ 224,495 $ 51,240 $ 7,708 $ 52,701 $ 43,496 $ 4,128 $ 634,982 December 31, 2015 One-to four Commercial Home Equity Residential Other Commercial Consumer Total (Dollars in thousands) Allowance for loan losses Individually evaluated for impairment $ 344 $ 61 $ 6 $ $ 61 $ 38 $ $ 510 Collectively evaluated for impairment 2,111 3,160 1,091 278 1,339 565 407 8,951 $ 2,455 $ 3,221 $ 1,097 $ 278 $ 1,400 $ 603 $ 407 $ 9,461 Loans Receivable Individually evaluated for impairment $ 6,315 $ 9,013 $ 313 $ $ 1,509 $ 318 $ $ 17,468 Collectively evaluated for impairment 242,318 205,400 53,133 7,848 55,807 40,728 3,639 608,873 $ 248,633 $ 214,413 $ 53,446 $ 7,848 $ 57,316 $ 41,046 $ 3,639 $ 626,341 Portfolio Quality Indicators The Companys portfolio grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled. The Companys internal credit risk grading system is based on experiences with similarly graded loans, industry best practices, and regulatory guidance. Credit risk grades are refreshed each quarter, at which time management analyzes the resulting information, as well as other external statistics and factors, to track loan performance. The Companys internally assigned grades pursuant to the Board-approved lending policy are as follows: ● Pass (1-5) Acceptable loans with any identifiable weaknesses appropriately mitigated. ● Special Mention (6) Potential weakness or identifiable weakness present without appropriate mitigating factors; however, loan continues to perform satisfactorily with no material delinquency noted. This may include some deterioration in repayment capacity and/or loan-to-value of securing collateral. ● Substandard (7) Significant weakness that remains unmitigated, most likely due to diminished repayment capacity, serious delinquency, and/or marginal performance based upon restructured loan terms. ● Doubtful (8) Significant weakness that remains unmitigated and collection in full is highly questionable or improbable. ● Loss (9) Collectability is unlikely resulting in immediate charge-off. Beginning as of March 31, 2015, we no longer risk grade consumer purposed loans within all categories for which the individual loan balance is less than $417,000. These loan types provide limited credit information subsequent to origination and therefore may not be properly risk graded within our standard risk grading system. All of our consumer purposed loans are now considered ungraded and will be analyzed on a performing versus non-performing basis. The non-performing ungraded loans will be deemed substandard when determining our classified assets. Consumer purposed loans may include residential loans, home equity loans and lines of credit, residential lot loans, and other consumer loans. This change in risk grading methodology did not have any material impact on our allowance for loan losses calculation. Description of segment and class risks Each of our portfolio segments and the classes within those segments are subject to risks that could have an adverse impact on the credit quality of our loan portfolio. Management has identified the most significant risks as described below which are generally similar among our segments and classes. While the list in not exhaustive, it provides a description of the risks that management has determined are the most significant. One-to four family residential We centrally underwrite each of our one-to four family residential loans using credit scoring and analytical tools consistent with the Board-approved lending policy and internal procedures based upon industry best practices and regulatory directives. Loans to be sold to secondary market investors must also adhere to investor guidelines. We also evaluate the value and marketability of that collateral. Common risks to each class of non-commercial loans, including one-to-four family residential, include risks that are not specific to individual transactions such as general economic conditions within our markets, particularly unemployment and potential declines in real estate values. Personal events such as death, disability or change in marital status also add risk to non-commercial loans. Commercial real estate Commercial mortgage loans are primarily dependent on the ability of our customers to achieve business results consistent with those projected at loan origination resulting in cash flow sufficient to service the debt. To the extent that a customers business results are significantly unfavorable versus the original projections, the ability for our loan to be serviced on a basis consistent with the contractual terms may be at risk. While these loans are secured by real property and possibly other business assets such as inventory or accounts receivable, it is possible that the liquidation of the collateral will not fully satisfy the obligation. Other commercial real estate loans consist primarily of loans secured by multifamily housing and agricultural loans. The primary risk associated with multifamily loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to service the debt. High unemployment or generally weak economic conditions may result in our customer having to provide rental rate concessions to achieve adequate occupancy rates. The performance of agricultural loans are highly dependent on favorable weather, reasonable costs for seed and fertilizer, and the ability to successfully market the product at a profitable margin. The demand for these products is also dependent on macroeconomic conditions that are beyond the control of the borrower. Home equity and lines of credit Home equity loans are often secured by first or second liens on residential real estate, thereby making such loans particularly susceptible to declining collateral values. A substantial decline in collateral value could render our second lien position to be effectively unsecured. Additional risks include lien perfection inaccuracies and disputes with first lienholders that may further weaken our collateral position. Further, the open-end structure of these loans creates the risk that customers may draw on the lines in excess of the collateral value if there have been significant declines since origination. Residential construction and other construction and land Residential mortgage construction loans are typically secured by undeveloped or partially developed land with funds to be disbursed as home construction is completed contingent upon receipt and satisfactory review of invoices and inspections. Declines in real estate values can result in residential mortgage loan borrowers having debt levels in excess of the collaterals current market value. Non-commercial construction and land development loans can experience delays in completion and/or cost overruns that exceed the borrowers financial ability to complete the project. Cost overruns can result in foreclosure of partially completed collateral with unrealized value and diminished marketability. Commercial We centrally underwrite each of our commercial loans based primarily upon the customers ability to generate the required cash flow to service the debt in accordance with the contractual terms and conditions of the loan agreement. We strive to gain a complete understanding of our borrowers businesses including the experience and background of the principals. To the extent that the loan is secured by collateral, which is a predominant feature of the majority of our commercial loans, or other assets including accounts receivable and inventory, we gain an understanding of the likely value of the collateral and what level of strength it brings to the loan transaction. To the extent that the principals or other parties are obligated under the note or guaranty agreements, we analyze the relative financial strength and liquidity of each guarantor. Common risks to each class of commercial loans include risks that are not specific to individual transactions such as general economic conditions within our markets, as well as risks that are specific to each transaction including volatility or seasonality of cash flows, changing demand for products and services, personal events such as death, disability or change in marital status, and reductions in the value of our collateral. Consumer The consumer loan portfolio includes loans secured by personal property such as automobiles, marketable securities, other titled recreational vehicles including boats and motorcycles, as well as unsecured consumer debt. The value of underlying collateral within this class is especially volatile due to potential rapid depreciation in values since date of loan origination in excess of principal repayment. The following tables present the recorded investment in gross loans by loan grade: March 31, 2016 Loan Grade One-to Commercial Home Equity Residential Other Commercial Consumer Total (Dollars in thousands) 1 $ $ 64 $ $ $ $ 10,199 $ $ 10,263 2 4,408 1,846 6,254 3 26,879 12,284 1,267 1,039 1,891 43,360 4 47,814 90,448 2,200 3,303 7,542 19,085 170,392 5 27,678 86,925 4,589 942 26,370 9,635 335 156,474 6 2,938 14,011 466 1,141 1,961 273 20,790 7 3,218 14,742 575 463 18,998 $ 108,527 $ 222,882 $ 8,522 $ 5,386 $ 37,487 $ 43,392 $ 335 $ 426,531 Ungraded Loan Exposure: Performing $ 141,207 $ 1,613 $ 42,502 $ 2,322 $ 15,214 $ 104 $ 3,793 $ 206,755 Nonperforming 1,480 216 1,696 Subtotal $ 142,687 $ 1,613 $ 42,718 $ 2,322 $ 15,214 $ 104 $ 3,793 $ 208,451 Total $ 251,214 $ 224,495 $ 51,240 $ 7,708 $ 52,701 $ 43,496 $ 4,128 $ 634,982 December 31, 2015 Loan Grade One-to Commercial Home Equity Residential Other Commercial Consumer Total (Dollars in thousands) 1 $ $ 65 $ $ $ $ 10,336 $ $ 10,401 2 4,446 99 4,545 3 18,518 11,396 1,358 525 1,479 1,734 35,010 4 46,942 74,542 1,961 2,036 13,850 18,586 1 157,918 5 33,886 97,469 6,648 1,347 22,864 9,274 592 172,080 6 2,903 13,171 1,106 1,718 297 19,195 7 3,335 13,106 579 458 17,478 $ 105,584 $ 214,195 $ 9,967 $ 5,014 $ 40,490 $ 40,784 $ 593 $ 416,627 Ungraded Loan Exposure: Performing $ 141,771 $ 218 $ 43,158 $ 2,834 $ 16,707 $ 262 $ 3,046 $ 207,996 Nonperforming 1,278 321 119 1,718 Subtotal $ 143,049 $ 218 $ 43,479 $ 2,834 $ 16,826 $ 262 $ 3,046 $ 209,714 Total $ 248,633 $ 214,413 $ 53,446 $ 7,848 $ 57,316 $ 41,046 $ 3,639 $ 626,341 Delinquency Analysis of Loans by Class The following tables include an aging analysis of the recorded investment of past-due financing receivables by class. The Company does not accrue interest on loans greater than 90 days past due. March 31, 2016 30-59 Days Past 60-89 Days Past 90 Days and Over Total Past Due Current Total Loans (Dollars in thousands) One-to four-family residential $ 3,166 $ 1,272 $ 1,178 $ 5,616 $ 245,598 $ 251,214 Commercial real estate 2,232 1,027 2,300 5,559 218,936 224,495 Home equity and lines of credit 671 134 216 1,021 50,219 51,240 Residential construction 7,708 7,708 Other construction and land 528 25 227 780 51,921 52,701 Commercial 10 10 43,486 43,496 Consumer 15 1 16 4,112 4,128 Total $ 6,612 $ 2,459 $ 3,931 $ 13,002 $ 621,980 $ 634,982 December 31, 2015 30-59 Days Past 60-89 Days Past 90 Days and Over Total Past Due Current Total Loans (Dollars in thousands) One-to four-family residential $ 5,610 $ 1,260 $ 1,205 $ 8,075 $ 240,558 $ 248,633 Commercial real estate 1,585 605 2,190 212,223 214,413 Home equity and lines of credit 369 38 322 729 52,717 53,446 Residential construction 7,848 7,848 Other construction and land 208 397 138 743 56,573 57,316 Commercial 625 625 40,421 41,046 Consumer 12 4 16 3,623 3,639 Total $ 8,409 $ 1,699 $ 2,270 $ 12,378 $ 613,963 $ 626,341 Impaired Loans The following table presents investments in loans considered to be impaired and related information on those impaired loans as of March 31, 2016 and December 31, 2015. March 31, 2016 December 31, 2015 Recorded Balance Unpaid Principal Specific Allowance Recorded Balance Unpaid Principal Specific (Dollars in thousands) Loans without a valuation allowance One-to four-family residential $ 3,818 $ 3,844 $ $ 4,289 $ 4,403 $ Commercial real estate 5,808 7,174 7,226 8,809 Home equity and lines of credit 213 328 213 328 Residential construction Other construction and land 794 876 658 818 Commercial $ 10,633 $ 12,222 $ $ 12,386 $ 14,358 $ Loans with a valuation allowance One-to four-family residential $ 2,174 $ 2,174 $ 366 $ 2,026 $ 2,026 $ 344 Commercial real estate 2,921 3,139 546 1,787 1,787 61 Home equity and lines of credit 100 100 6 100 100 6 Residential construction Other construction and land 1,176 1,254 223 851 851 61 Commercial 315 314 35 318 318 38 $ 6,686 $ 6,981 $ 1,176 $ 5,082 $ 5,082 $ 510 Total One-to four-family residential $ 5,992 $ 6,018 $ 366 $ 6,315 $ 6,429 $ 344 Commercial real estate 8,729 10,313 546 9,013 10,596 61 Home equity and lines of credit 313 428 6 313 428 6 Residential construction Other construction and land 1,970 2,130 223 1,509 1,669 61 Commercial 315 314 35 318 318 38 $ 17,319 $ 19,203 $ 1,176 $ 17,468 $ 19,440 $ 510 The following table presents average impaired loans and interest income recognized on those impaired loans, by class segment, for the periods indicated: Three Months Ended March 31, 2016 2015 Average Interest Income Average Interest Income (Dollars in thousands) Loans without a valuation allowance One-to four-family residential $ 3,832 $ 36 $ 5,672 $ 51 Commercial real estate 5,811 46 12,953 120 Home equity and lines of credit 213 2 714 2 Residential construction Other construction and land 797 8 925 7 Commercial $ 10,653 $ 92 $ 20,264 $ 180 Loans with a valuation allowance One-to four-family residential $ 2,182 $ 24 $ 3,185 $ 27 Commercial real estate 2,927 27 3,640 39 Home equity and lines of credit 100 1 186 1 Residential construction Other construction and land 1,180 10 1,020 10 Commercial 316 5 328 5 $ 6,705 $ 67 $ 8,359 $ 82 Total One-to four-family residential $ 6,014 $ 60 $ 8,857 $ 78 Commercial real estate 8,738 73 16,593 159 Home equity and lines of credit 313 3 900 3 Residential construction Other construction and land 1,977 18 1,945 17 Commercial 316 5 328 5 $ 17,358 $ 159 $ 28,623 $ 262 Nonperforming Loans The following table summarizes the balances of nonperforming loans as of March 31, 2016 and December 31, 2015. Certain loans classified as Troubled Debt Restructurings (TDRs) and impaired loans may be on non-accrual status even though they are not contractually delinquent. March 31, 2016 December 31, 2015 (Dollars in thousands) One-to four-family residential $ 2,983 $ 2,893 Commercial real estate 5,253 3,628 Home equity loans and lines of credit 214 320 Residential construction Other construction and land 470 384 Commercial 62 55 Consumer Non-performing loans $ 8,982 $ 7,280 Troubled Debt Restructurings (TDR) The following tables summarize TDR loans as of the dates indicated: March 31, 2016 Performing Nonperforming Total TDRs TDRs TDRs (Dollars in thousands) One-to-four family residential $ 3,675 $ 211 $ 3,886 Commercial real estate 4,853 2,922 7,775 Home equity and lines of credit 213 213 Residential construction Other construction and land 1,510 250 1,760 Commercial 314 11 325 $ 10,565 $ 3,394 $ 13,959 December 31, 2015 Performing Nonperforming Total TDRs TDRs TDRs (Dollars in thousands) One-to-four family residential $ 4,182 $ 211 $ 4,393 Commercial real estate 5,134 2,922 8,056 Home equity and lines of credit 313 313 Residential construction Other construction and land 1,259 250 1,509 Commercial 318 12 330 $ 11,206 $ 3,395 $ 14,601 Loan modifications that were deemed TDRs at the time of the modification during the period presented are summarized in the tables below: Three Months Ended March 31, 2016 (Dollars in thousands) Number of Loans Pre-modification Outstanding Recorded Investment Post-modification Outstanding Recorded Investment None $ $ $ $ Three Months Ended March 31, 2015 (Dollars in thousands) Number of Pre-modification Post-modification Forgiveness of principal: Commercial real estate 1 1,988 1,693 1 $ 1,988 $ 1,693 There were no TDRs that defaulted during the three month periods ending March 31, 2016 and 2015 and which were modified as TDRs within the previous 12 months. |