Loans Receivable and Allowance for Loan Losses | Note 6: Loans Receivable and Allowance for Loan Losses Loans receivable, excluding loans held for sale, consist of the following at June 30, 2015 and March 31, 2015: June 30, 2015 March 31, 2015 Amount % of Total Amount % of Total Real estate loans: One-to four-family: Residential $ 48,331,343 28 % $ 49,864,923 31 % Residential construction 5,335,744 3 % 3,955,702 2 % Investor (1) 12,793,901 8 % 12,971,519 8 % Commercial 66,148,361 39 % 59,273,398 37 % Commercial construction 2,866,664 2 % 2,405,849 1 % Total real estate loans 135,476,013 80 % 128,471,391 79 % Commercial 17,961,324 11 % 18,489,603 12 % Home equity loans 12,308,056 7 % 12,261,292 8 % Consumer 3,872,597 2 % 1,166,155 1 % Total Loans 169,617,990 100 % 160,388,441 100 % Net deferred loan origination fees and costs (105,569 ) (103,247 ) Loan premium 106,558 — Allowance for loan losses (1,673,225 ) (1,690,236 ) 167,945,754 158,594,958 (1) “Investor” loans are residential mortgage loans secured by non-owner occupied one- to four-family properties Residential lending is generally considered to involve less risk than other forms of lending, although payment experience on these loans is dependent on economic and market conditions in the Bank’s lending area. Construction loan repayments are generally dependent on the related properties or the financial condition of its borrower or guarantor. Accordingly, repayment of such loans can be more susceptible to adverse conditions in the real estate market and the regional economy. A substantial portion of the Bank’s loan portfolio is real estate loans secured by residential and commercial real estate properties located in the Baltimore metropolitan area. Loans are extended only after evaluation of a customer’s creditworthiness and other relevant factors on a case-by-case basis. The Bank generally does not lend more than 90% of the appraised value of a property at origination and requires private mortgage insurance on residential mortgages with loan-to-value ratios in excess of 80%. In addition, the Bank generally obtains personal guarantees of repayment from borrowers and/or others for construction loans and disburses the proceeds of those and similar loans only as work progresses on the related projects. The following tables set forth for the three months ended June 30, 2015 and for the year ended March 31, 2015, the balance of the allowance for loan losses by portfolio segment, disaggregated by impairment methodology, which is further segregated by amounts evaluated for impairment collectively and individually. Rather than establishing reserves for loans that are individually evaluated for impairment, the Bank typically charges-off the portion of the loan that is considered uncollectible. The allowance for loan losses allocated to each portfolio segment is not necessarily indicative of future losses in any particular portfolio segment and does not restrict the use of the allowance to absorb losses in other portfolio segments. Allowance Loan Balance Three months ended: June 30, 2015 Allowance Provision for Charge Recoveries Allowance Individually Collectively Individually Collectively Real estate loans: One-to four-family $ 433,570 $ 59,327 $ 60,000 $ 848 $ 433,745 $ 92,054 $ 341,691 $ 2,135,316 $ 64,325,672 Commercial 585,817 76,988 — — 662,805 — 662,805 3,358,431 62,789,930 Commercial Construction 67,835 33,202 — — 101,037 — 101,037 1,330,559 1,536,105 Commercial 473,127 (164,574 ) 10,533 66,239 364,259 — 364,259 1,687,697 16,273,627 Home equity loans 98,983 (8,392 ) 6,000 — 84,591 — 84,591 20,136 12,287,920 Consumer 727 33,626 7,565 — 26,788 — 26,788 — 3,872,597 Unallocated 30,177 (30,177 ) — — — — — — — $ 1,690,236 $ — $ 84,098 $ 67,087 $ 1,673,225 $ 92,054 $ 1,581,171 $ 8,532,139 $ 161,085,851 Allowance Loan Balance Three months ended: June 30, 2014 Allowance Provision for Charge Recoveries Allowance Individually Collectively Individually Collectively Real estate loans: One-to four-family $ 528,362 $ (159 ) $ 1,638 $ 1,105 $ 527,670 $ 167,547 $ 360,123 $ 2,096,687 $ 67,924,493 Commercial 575,881 19,921 — — 595,802 — 595,802 3,359,813 39,935,027 Commercial Construction 60,361 (60,361 ) — — — — — 1,505,008 — Commercial 590,975 287,369 — 4,657 883,001 2,466 880,535 3,507,889 15,271,341 Home equity loans 27,181 54,128 42,850 — 38,459 — 38,459 161,271 11,323,948 Consumer 3,213 (898 ) — — 2,315 — 2,315 — 1,145,726 Unallocated — — — — — — — — — $ 1,785,973 $ 300,000 $ 44,488 $ 5,762 $ 2,047,247 $ 170,013 $ 1,877,234 $ 10,630,668 $ 135,600,535 March 31, 2015 Allowance Provision for Charge Recoveries Allowance Individually Collectively Individually Collectively Real estate loans: One-to four-family $ 528,362 $ 38,738 $ 138,821 $ 5,291 $ 433,570 $ 97,632 $ 335,938 $ 2,092,580 $ 64,699,564 Commercial 575,881 9,936 — — 585,817 — 585,817 3,358,447 55,914,951 Commercial Construction 60,361 7,474 — — 67,835 — 67,835 1,374,530 1,031,319 Commercial 590,975 (82,390 ) 83,879 48,421 473,127 730 472,397 2,010,424 16,479,179 Home equity loans 27,181 169,990 100,693 2,505 98,983 — 98,983 15,229 12,246,063 Consumer 3,213 (3,925 ) — 1,439 727 — 727 — 1,166,155 Unallocated — 30,177 — — 30,177 — 30,177 — — $ 1,785,973 $ 170,000 $ 323,393 $ 57,656 $ 1,690,236 $ 98,362 $ 1,591,874 $ 8,851,210 $ 151,537,231 Past due loans, segregated by age and class of loans, as of and for the three months ended June 30, 2015 and as of and for the year ended March 31, 2015, were as follows. June 30, 2015 Loans 30-59 Loans 60-89 Loans Total past Current Totals loans Accruing Nonaccrual Nonaccrual Real estate loans: One-to four-family $ 197,512 $ 258,229 $ 416,111 $ 871,852 $ 65,589,136 $ 66,460,988 $ — $ 564,444 $ 30,647 Commercial — — — — 66,148,361 66,148,361 — — — Commercial Construction — — — — 2,866,664 2,866,664 — 1,330,559 11,497 Commercial 15,074 — 778,074 793,148 17,168,176 17,961,324 599,630 178,444 66,660 Home equity loans 44,790 — 11,659 56,449 12,251,607 12,308,056 — 20,136 181 Consumer 533 284 — 817 3,871,780 3,872,597 — — — $ 257,909 $ 258,513 $ 1,205,844 $ 1,722,266 $ 167,895,724 $ 169,617,990 $ 599,630 $ 2,093,583 $ 108,985 March 31, 2015 Loans 30-59 Loans 60-89 Loans Total past Current Totals loans Accruing Nonaccrual Nonaccrual Real estate loans: One-to four-family $ 299,259 $ 158,898 $ 487,617 $ 945,774 $ 65,846,370 $ 66,792,144 $ — $ 639,191 $ 28,338 Commercial — — — — 59,273,398 59,273,398 — — — Commercial Construction — — 1,374,530 1,374,530 1,031,319 2,405,849 — 1,374,530 11,975 Commercial — 733,809 225,573 959,382 17,530,221 18,489,603 — 225,573 82,789 Home equity loans — — 6,000 6,000 12,255,292 12,261,292 — 15,229 980 Consumer 187 492 — 679 1,165,476 1,166,155 — — — $ 299,446 $ 893,199 $ 2,093,720 $ 3,286,365 $ 157,102,076 $ 160,388,441 $ — $ 2,254,523 $ 124,082 Impaired Loans as of and for the three months ended June 30, 2015 and as of and for the year ended March 31, 2015, were as follows: June 30, 2015 Unpaid Recorded Recorded Total Related Average Interest Real estate loans: One-to four-family $ 2,327,127 $ 703,183 $ 1,432,133 $ 2,135,316 $ 92,054 $ 2,186,765 $ 15,992 Commercial 3,433,653 3,358,431 — 3,358,431 — 3,358,439 41,985 Commercial Construction 2,549,027 1,330,559 — 1,330,559 — 1,352,544 — Commercial 2,400,189 1,687,697 — 1,687,697 — 1,820,249 40,338 Home equity loans 79,295 20,136 — 20,136 — 20,575 — Consumer — — — — — — — $ 10,789,291 $ 7,100,006 $ 1,432,133 $ 8,532,139 $ 92,054 $ 8,738,572 $ 98,315 March 31, 2015 Unpaid Recorded Recorded Total Related Average Interest Real estate loans: One-to four-family $ 2,221,429 $ 652,411 $ 1,440,169 $ 2,092,580 $ 97,632 $ 2,176,952 $ 72,593 Commercial 3,433,669 3,358,447 — 3,358,447 — 3,359,762 157,242 Commercial Construction 2,549,027 1,374,530 — 1,374,530 — 1,775,778 — Commercial 2,730,393 1,961,074 49,350 2,010,424 730 2,810,816 96,056 Home equity loans 67,924 15,229 — 15,229 — 40,701 112 Consumer — — — — — — — $ 11,002,442 $ 7,361,691 $ 1,489,519 $ 8,851,210 $ 98,362 $ 10,164,009 $ 326,003 Credit quality indicators As part of the ongoing monitoring of the credit quality of the Bank’s loan portfolio, management tracks certain credit quality indicators including trends related to the risk grade of loans, the level of classified loans, net charge offs, nonperforming loans, and the general economic conditions in the Bank’s market. The Bank utilizes a risk grading matrix to assign a risk grade to each of its loans. A description of the general characteristics of loans characterized as watch list or classified is as follows: Pass A pass loan is considered of sufficient quality to preclude a special mention or an adverse rating. Pass assets generally are well protected by the current net worth and paying capacity of the obligor or by the value of the asset or underlying collateral. Special Mention A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Bank’s credit position at some future date. Special mention loans are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Loans that would primarily fall into this notational category could have been previously classified adversely, but the deficiencies have since been corrected. Management should closely monitor recent payment history of the loan and value of the collateral. Borrowers may exhibit poor liquidity and leverage positions resulting from generally negative cash flow or negative trends in earnings. Access to alternative financing may be limited to finance companies for business borrowers and may be unavailable for commercial real estate borrowers. Substandard A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans have a well defined weakness, or weaknesses, that jeopardize the collection or liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. This will be the measurement for determining if a loan is impaired. Borrowers may exhibit recent or unexpected unprofitable operations, an inadequate debt service coverage ratio, or marginal liquidity and capitalization. These loans require more intense supervision by Bank management. Doubtful A doubtful loan has all the weaknesses inherent as a substandard loan 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. A loan classified as doubtful exhibits loss potential. However, there is still sufficient reason to permit the loan to remain on the books. A doubtful classification could reflect the deterioration of the primary source of repayment and serious doubt exists as to the quality of the secondary source of repayment. Doubtful classifications should be used only when a distinct and known possibility of loss exists. When identified, adequate loss should be recorded for the specific assets. The entire asset should not be classified as doubtful if a partial recovery is expected, such as liquidation of the collateral or the probability of a private mortgage insurance payment is likely. Loss Loans classified as loss are considered uncollectable and of such little value that their continuance as loans is unjustified. A loss classification does not mean a loan has absolutely no value; partial recoveries may be received in the future. When loans or portions of a loan are considered a loss, it will be the policy of the Bank to write-off the amount designated as a loss. Recoveries will be treated as additions to the allowance for loan losses. The following tables present the June 30, 2015 and March 31, 2015, balances of classified loans based on the risk grade. Classified loans include Special Mention, Substandard, and Doubtful loans. The Bank had no loans classified as Doubtful or Loss as of June 30, 2015 or March 31, 2015. June 30, 2015 Pass Special Substandard Total Real estate loans: One-to four-family $ 64,275,451 $ 1,511,196 $ 674,341 $ 66,460,988 Commercial 59,878,342 2,911,588 3,358,431 66,148,361 Commercial Construction 1,536,105 — 1,330,559 2,866,664 Commercial 13,734,331 3,153,481 1,073,512 17,961,324 Home equity loans 12,296,397 — 11,659 12,308,056 Consumer 3,872,313 284 — 3,872,597 $ 155,592,939 $ 7,576,549 $ 6,448,502 $ 169,617,990 Percentage of total loans 91.7 % 4.5 % 3.8 % 100 % March 31, 2015 Pass Special Substandard Total Real estate loans: One-to four-family $ 64,467,025 $ 1,678,604 $ 646,515 $ 66,792,144 Commercial 52,979,048 2,935,904 3,358,446 59,273,398 Commercial Construction 1,031,319 — 1,374,530 2,405,849 Commercial 13,966,656 3,126,880 1,396,067 18,489,603 Home equity loans 12,255,292 — 6,000 12,261,292 Consumer 1,165,476 679 — 1,166,155 $ 145,864,816 $ 7,742,067 $ 6,781,558 $ 160,388,441 Percentage of total loans 91.0 % 4.8 % 4.2 % 100 % Impaired loans also include certain loans that have been modified in troubled debt restructurings (TDRs) where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Bank’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Generally, nonaccrual loans that are modified and considered TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months. A summary of TDRs at June 30, 2015 and March 31, 2015 follows: June 30, 2015 Number of Performing Nonperforming Total Real estate loans: One-to four-family 5 $ 1,313,684 $ 118,567 $ 1,432,251 Commercial 2 3,358,431 — 3,358,431 Commercial Construction — — — — Commercial 3 614,185 44,850 659,035 Home equity loans — — — — Consumer — — — — 10 $ 5,286,300 $ 163,417 $ 5,449,717 March 31, 2015 Number of Performing Nonperforming Total Real estate loans: One-to four-family 5 $ 1,366,132 $ 74,085 $ 1,440,217 Commercial 2 3,358,446 — 3,358,446 Commercial Construction — — — — Commercial 3 614,358 59,883 674,241 Home equity loans — — — — Consumer — — — — 10 $ 5,338,936 $ 133,968 $ 5,472,904 The Bank did not add any new TDR’s, nor were there any TDR’s that defaulted within twelve months of their restructuring, during the three month period ended June 30, 2015. In the normal course of business, the Bank has various outstanding commitments and contingent liabilities that are not reflected in the accompanying financial statements. Loan commitments and lines of credit are agreements to lend to a customer as long as there is no violation of any condition to the contract. Mortgage loan commitments generally have fixed interest rates, fixed expiration dates, and may require payment of a fee. Other loan commitments generally have fixed interest rates. Lines of credit generally have variable interest rates. Such lines do not represent future cash requirements because it is unlikely that all customers will draw upon their lines in full at any time. The Bank’s maximum exposure to credit loss in the event of nonperformance by the customer is the contractual amount of the credit commitment. Loan commitments, lines of credit, and letters of credit are made on the same terms, including collateral, as outstanding loans. Management is not aware of any accounting loss to be incurred by funding these loan commitments. The Bank had the following outstanding commitments and unused lines of credit as of June 30, 2015 and March 31, 2015: June 30, 2015 March 31, Unused commercial lines of credit $ 7,517,138 $ 8,074,686 Unused home equity lines of credit 14,950,123 15,885,344 Unused consumer lines of credit 31,591 31,876 Residential mortgage loan commitments 155,000 — Home equity loan commitments 54,000 337,000 Commercial loan commitments 500,000 269,000 Residential construction loan commitments 4,906,501 5,325,095 Commercial construction loan commitments 472,895 1,129,681 Standby letters of credit 100,000 50,000 |