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 September 30, 2015 and March 31, 2015: September 30, 2015 March 31, 2015 Legacy (1) Acquired Total Loans % of Legacy (1) % of Real estate loans: One-to four-family: Residential $ 48,178,332 $ 23,927,926 $ 72,106,258 32 % $ 49,864,923 31 % Residential construction 5,039,969 1,701,841 6,741,810 3 % 3,955,702 2 % Investor (2) 12,762,883 17,279,438 30,042,321 13 % 12,971,519 8 % Commercial 70,252,890 1,823,440 72,076,330 32 % 59,273,398 37 % Commercial construction 2,916,772 2,175,679 5,092,451 2 % 2,405,849 1 % Total real estate loans 139,150,846 46,908,324 186,059,170 82 % 128,471,391 79 % Commercial business 17,658,133 3,359,988 21,018,121 9 % 18,489,603 12 % Home equity loans 12,154,536 2,283,782 14,438,318 6 % 12,261,292 8 % Consumer 3,591,507 1,250,406 4,841,913 2 % 1,166,155 1 % Total Loans 172,555,022 53,802,500 226,357,522 100 % 160,388,441 100 % Net deferred loan origination fees and costs (133,355 ) — (133,355 ) (103,247 ) Loan premium (discount) 96,421 (989,892 ) (893,471 ) 0 Allowance for loan losses (1,734,246 ) — (1,734,246 ) (1,690,236 ) $ 170,783,842 $ 52,812,608 $ 223,596,450 $ 158,594,958 (1) As a result of the acquisition of Fairmount Bancorp, Inc. (Fairmount Bancorp), the parent company of Fairmount Bank, in September 2015, we have segmented the portfolio into two components, loans originated by Hamilton Bank “Legacy” and loans acquired from Fairmount Bank “Acquired”. (2) “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 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 table details activity in the allowance for loan losses by portfolio segment for both the six months ended September 30, 2015 and 2014 and for the year ended March 31, 2015. 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. Six months ended: September 30, 2015 Allowance Provision for Charge Recoveries Allowance Real estate loans: One-to four-family $ 433,570 $ 178,000 $ 162,331 $ 848 $ 450,087 Commercial 585,817 101,014 — — 686,831 Commercial construction 67,835 39,390 — — 107,225 Commercial business 473,127 (189,728 ) 10,533 108,651 381,517 Home equity loans 98,983 (9,770 ) 6,000 — 83,213 Consumer 727 31,271 7,565 940 25,373 Unallocated 30,177 (30,177 ) — — — $ 1,690,236 $ 120,000 $ 186,429 $ 110,439 $ 1,734,246 Six months ended: September 30, 2014 Allowance Provision for Charge Recoveries Allowance Real estate loans: One-to four-family $ 528,362 $ 109,464 $ 105,498 $ 1,315 $ 533,643 Commercial 575,881 7,706 — — 583,587 Commercial construction 60,361 (60,361 ) — — — Commercial business 590,975 322,057 — 9,314 922,346 Home equity loans 27,181 92,859 69,801 2,505 52,744 Consumer 3,213 (1,725 ) — — 1,488 Unallocated — — — — — $ 1,785,973 $ 470,000 $ 175,299 $ 13,134 $ 2,093,808 Year Ended: March 31, 2015 Allowance Provision for Charge Recoveries Allowance Real estate loans: One-to four-family $ 528,362 $ 38,738 $ 138,821 $ 5,291 $ 433,570 Commercial 575,881 9,936 — — 585,817 Commercial construction 60,361 7,474 — — 67,835 Commercial business 590,975 (82,390 ) 83,879 48,421 473,127 Home equity loans 27,181 169,990 100,693 2,505 98,983 Consumer 3,213 (3,925 ) — 1,439 727 Unallocated — 30,177 — — 30,177 $ 1,785,973 $ 170,000 $ 323,393 $ 57,656 $ 1,690,236 The following table provides additional information on the allowance for loan losses by segment: Legacy Acquired Allowance Loan Balance Allowance Loan Balance Individually Collectively Individually Collectively Individually Collectively Individually Collectively evaluated evaluated evaluated evaluated evaluated evaluated evaluated evaluated Six months ended: for for for for for for for for September 30, 2015 impairment impairment impairment impairment impairment impairment impairment impairment Real estate loans: One-to four-family $ 83,954 $ 366,133 $ 2,062,013 $ 63,919,171 $ — $ — $ 1,364,241 $ 41,544,964 Commercial — 918,733 3,358,408 66,894,482 — — 264,366 1,559,074 Commercial construction — 107,225 1,286,588 1,630,184 — — — 2,175,679 Commercial business — 149,615 2,078,869 15,579,264 — — — 3,359,988 Home equity loans — 83,213 63,598 12,090,938 — — — 2,283,782 Consumer — 25,373 — 3,591,507 — — 58,840 1,191,566 Unallocated — — — — — — — — $ 83,954 $ 1,650,292 $ 8,849,476 $ 163,705,546 $ — $ — $ 1,687,447 $ 52,115,053 Legacy Allowance Loan Balance Individually Collectively Individually Collectively evaluated evaluated evaluated evaluated Six months ended: for for for for September 30, 2014 impairment impairment impairment impairment Real estate loans: One-to four-family $ 157,155 $ 376,488 $ 1,812,115 $ 67,636,289 Commercial — 583,587 3,359,813 43,098,056 Commercial construction — — 1,461,037 — Commercial business 2,473 919,873 2,598,666 16,149,177 Home equity loans — 52,744 49,283 11,724,563 Consumer — 1,488 1,201 1,146,405 Unallocated — — — — $ 159,628 $ 1,934,180 $ 9,282,115 $ 139,754,490 Legacy Allowance Loan Balance Individually Collectively Individually Collectively Evaluated Evaluated Evaluated Evaluated Year Ended: for for for for March 31, 2015 Impairment Impairment Impairment Impairment Real estate loans: One-to four-family $ 97,632 $ 335,938 $ 2,092,580 $ 64,699,564 Commercial — 585,817 3,358,447 55,914,951 Commercial construction — 67,835 1,374,530 1,031,319 Commercial business 730 472,397 2,010,424 16,479,179 Home equity loans — 98,983 15,229 12,246,063 Consumer — 727 — 1,166,155 Unallocated — 30,177 — — $ 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 six months ended September 30, 2015 and as of and for the year ended March 31, 2015, were as follows. September 30, 2015 Loans Loans Loans Total past Current Totals loans Accruing Nonaccrual Nonaccrual Legacy Loans: Real estate loans: One-to four-family $ 326,486 $ 322,327 $ 316,586 $ 965,399 $ 65,015,785 $ 65,981,184 $ — $ 549,751 $ 22,135 Commercial — — — — 70,252,890 70,252,890 — — — Commercial construction — — — — 2,916,772 2,916,772 — 1,286,588 11,497 Commercial business — — 128,861 128,861 17,529,272 17,658,133 — 171,223 105,986 Home equity loans — 8,476 44,581 53,057 12,101,479 12,154,536 — 53,058 1,395 Consumer 12,396 33,371 — 45,767 3,545,740 3,591,507 — — — $ 338,882 $ 364,174 $ 490,028 $ 1,193,084 $ 171,361,938 $ 172,555,022 $ — $ 2,060,620 $ 141,013 September 30, 2015 Loans Loans Loans Total past Current Totals loans Accruing Nonaccrual Nonaccrual Acquired Loans: Real estate loans: One-to four-family $ — $ 28,346 $ 971,164 $ 999,510 $ 41,909,695 $ 42,909,205 $ — $ 871,627 $ 92,019 Commercial — — — — 1,823,440 1,823,440 — — — Commercial construction — — — — 2,175,679 2,175,679 — — — Commercial business — — — — 3,359,988 3,359,988 — — — Home equity loans — — — — 2,283,782 2,283,782 — — — Consumer — — 4,363 4,363 1,246,043 1,250,406 — 4,363 81 $ — $ 28,346 $ 975,527 $ 1,003,873 $ 52,798,627 $ 53,802,500 $ — $ 875,990 $ 92,100 March 31, 2015 Loans Loans Loans Total past Current Totals loans Accruing Nonaccrual Nonaccrual Legacy Loans: 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 business — 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 six months ended September 30, 2015 and as of and for the year ended March 31, 2015, were as follows: September 30, 2015 Unpaid Recorded Recorded Total Related Average Interest Legacy Loans: Real estate loans: One-to four-family $ 2,217,546 $ 637,981 $ 1,424,032 $ 2,062,013 $ 83,954 $ 2,163,495 $ 30,819 Commercial 3,433,629 3,358,408 — 3,358,408 — 3,358,429 83,961 Commercial construction 2,549,027 1,286,588 — 1,286,588 — 1,330,696 — Commercial business 2,724,680 2,078,869 — 2,078,869 — 2,011,302 69,843 Home equity loans 85,866 63,598 — 63,598 — 65,068 758 Consumer — — — — — — — $ 11,010,748 $ 7,425,444 $ 1,424,032 $ 8,849,476 $ 83,954 $ 8,928,990 $ 185,381 September 30, 2015 Unpaid Recorded Recorded Total Related Average Interest Acquired Loans: Real estate loans: One-to four-family $ 2,587,277 $ 1,364,241 $ — $ 1,364,241 $ — $ 1,364,241 $ 47,659 Commercial 264,366 264,366 — 264,366 — 264,366 — Commercial construction — — — — — — — Commercial business — — — — — — — Home equity loans — — — — — — — Consumer 74,460 58,840 — 58,840 — — 4,747 $ 2,926,103 $ 1,687,447 $ — $ 1,687,447 $ — $ 1,628,607 $ 52,406 March 31, 2015 Unpaid Recorded Recorded Total Related Average Interest Legacy Loans: 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 business 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 September 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 September 30, 2015 or March 31, 2015. Legacy Acquired September 30, 2015 Pass Special Substandard Total Pass Special Substandard Total Real estate loans: One-to four-family $ 63,518,142 $ 1,750,268 $ 712,774 $ 65,981,184 $ 41,591,428 $ 138,482 $ 1,179,295 $ 42,909,205 Commercial 64,007,058 2,887,424 3,358,408 70,252,890 1,609,074 214,366 — 1,823,440 Commercial construction 1,630,184 — 1,286,588 2,916,772 2,175,679 — — 2,175,679 Commercial business 13,064,631 3,128,533 1,464,969 17,658,133 3,359,988 — — 3,359,988 Home equity loans 12,090,603 8,476 55,457 12,154,536 2,283,782 — — 2,283,782 Consumer 3,564,024 — 27,483 3,591,507 1,169,786 36,031 44,589 1,250,406 $ 157,874,642 $ 7,774,701 $ 6,905,679 $ 172,555,022 $ 52,189,737 $ 388,879 $ 1,223,884 $ 53,802,500 Percentage of classified loans 91.5 % 4.5 % 4.0 % 100.0 % 97.0 % 0.7 % 2.3 % 100.0 % Legacy 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 business 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 classified 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 September 30, 2015 and March 31, 2015 follows: September 30, 2015 Number of Performing Nonperforming Total Legacy Loans: Real estate loans: One-to four-family 7 $ 1,373,690 $ 71,858 $ 1,445,548 Commercial 2 3,358,408 — 3,358,408 Commercial construction — — — — Commercial business 2 613,900 42,362 656,262 Home equity loans — — — — Consumer — — — — 11 $ 5,345,998 $ 114,220 $ 5,460,218 September 30, 2015 Number of Performing Nonperforming Total Acquired Loans: Real estate loans: One-to four-family — $ — $ — $ — Commercial — — — — Commercial construction — — — — Commercial business — — — — Home equity loans — — — — Consumer — — — — — $ — $ — $ — March 31, 2015 Number of Performing Nonperforming Total Legacy Loans: 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 business 3 614,358 59,883 674,241 Home equity loans — — — — Consumer — — — — 10 $ 5,338,936 $ 133,968 $ 5,472,904 The following table presents the number of contracts and the dollar amount of TDR’s that were added during the six month period ended September 30, 2015. The amount shown reflects the outstanding loan balance at the time of the modification. There were no TDR’s that defaulted within twelve months of their restructuring, during the six month period ended September 30, 2015. Six months ended September 30, 2015 Number of Outstanding recorded Real estate loans: One-to four-family 2 $ 20,905 Commercial — — Commercial construction — — Commercial business — — Home equity loans — — Consumer — — 2 $ 20,905 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 September 30, 2015 and March 31, 2015: September 30, March 31, Unused commercial lines of credit $ 6,512,127 $ 8,074,686 Unused home equity lines of credit 16,823,758 15,885,344 Unused consumer lines of credit 30,133 31,876 Residential mortgage loan commitments 240,000 — Residential construction loan commitments 5,255,083 5,325,095 Commercial construction loan commitments 2,101,374 1,129,681 Home equity loan commitments 235,000 337,000 Commercial loan commitments 6,390,000 269,000 Standby letters of credit 196,396 50,000 |