Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2012

Loans And Allowance For Loan Losses

Loans and Allowance for Loan Losses

Note 4: Loans and Allowance for Loan Losses

Categories of loans at December 31 include:

	2012		2011
	(In thousands)
One-to-four family residential	$	160,910	$	153,064
Multi-family residential		9,790		8,589
Construction		2,170		753
Nonresidential real estate and land		65,761		62,864
Commercial		14,245		10,526
Consumer and other		1,517		2,257
		254,393		238,053
Less:
Undisbursed portion of loans in process		2,647		1,691
Deferred loan origination fees		569		409
Allowance for loan losses		3,328		3,854
Total loans	$	247,849	$	232,099

The risk characteristics of each portfolio segment are as follows:

Residential Real Estate Loans

For residential mortgage loans that are secured by one-to-four family residences and are generally owner occupied, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in one-to-four family residences. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

All Other Mortgage Loans

All other mortgage loans consist of residential construction loans, non-residential real estate loans, land loans and multi-family real estate loans.

Residential construction loan proceeds are disbursed in increments as construction progresses and as inspections warrant. Construction loans are typically structured as permanent one-to-four family loans originated by the Company with a 12-month construction phase. Accordingly, upon completion of the construction phase, there is no change in interest rate or term to maturity of the original construction loan, nor is a new permanent loan originated. These loans are generally owner occupied and the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded.

Non-residential real estate loans are negotiated on a case-by-case basis. Loans secured by non-residential real estate generally involve a greater degree of risk than one-to-four family residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income-producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by non-residential real estate is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired.

The Company also originates a limited number of land loans secured by individual improved and unimproved lots for future residential construction. In addition, the Company originated loans to commercial customers with land held as the collateral.

Multi-family real estate loans generally involve a greater degree of credit risk than one-to-four family residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income-producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family real estate is typically dependent upon the successful operation of the related real estate property. If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired.

Commercial Business Loans

Commercial business loans carry a higher degree of risk than one-to-four family residential loans. Such lending typically involves large loan balances concentrated in a single borrower or groups of related borrowers for rental or business properties. In addition, the payment experience on loans secured by income-producing properties is typically dependent on the success of the operation of the related project and thus is typically affected by adverse conditions in the real estate market and in the economy. The Company originates commercial loans generally in the $50,000 to $1,000,000 range with the majority of these loans being under $500,000. Commercial loans are generally underwritten based on the borrower’s ability to pay and assets such as buildings, land and equipment are taken as additional loan collateral. Each loan is evaluated for a level of risk and assigned a rating from “1” (the highest quality rating) to “7” (the lowest quality rating).

Consumer Loans

Consumer loans entail greater credit risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly, such as automobiles, mobile homes, boats, and recreational vehicles. In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In particular, amounts realizable on the sale of repossessed automobiles may be significantly reduced based upon the condition of the automobiles and the lack of demand for used automobiles.

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on the portfolio segment and impairment method as of December 31, 2012 and 2011:

December 31, 2012		One-to-four family residential			All other mortgage loans			Commercial business loans			Consumer loans			Unallocated		Total
	(In thousands)
Allowance for loan losses:
Balance, December 31, 2011		$	1,128		$	2,547		$	169		$	10		$	—	$	3,854
Provision charged to expense			98			577			92			6			—		773
Losses charged off			(146	)		(1,199	)		(1	)		(11	)		—		(1,357	)
Recoveries			42			—			15			1			—		58
Balance, December 31, 2012		$	1,122		$	1,925		$	275		$	6		$	—	$	3,328
Ending balance:  individually evaluated for impairment		$	248		$	1,074		$	100		$	—		$	—	$	1,422
Ending balance:  collectively evaluated for impairment		$	874		$	851		$	175		$	6		$	—	$	1,906
Loans:
Ending balance		$	160,910		$	77,721		$	14,245		$	1,517				$	254,393
Ending balance:  individually evaluated for impairment		$	6,878		$	5,837		$	185		$	—				$	12,900
Ending balance:  collectively evaluated for impairment		$	154,032		$	71,884		$	14,060		$	1,517				$	241,493

December 31, 2011		One-to-four family residential			All other mortgage loans		Commercial business loans		Consumer loans		Unallocated		Total
	(In thousands)
Allowance for loan losses:
Balance, beginning of year		$	1,073		$	1,967	$	158	$	5	$	—	$	3,203
Provision charged to expense			212			580		11		3		—		806
Losses charged off			(157	)		—		—		—				(157	)
Recoveries			—			—		—		2		—		2
Balance, end of year		$	1,128		$	2,547	$	169	$	10	$	—	$	3,854
Ending balance:  individually evaluated for impairment		$	320		$	1,941	$	53	$	—	$	—	$	2,314
Ending balance:  collectively evaluated for impairment		$	808		$	606	$	116	$	10	$	—	$	1,540
Loans:
Ending balance		$	153,064		$	72,206	$	10,526	$	2,257			$	238,053
Ending balance:  individually evaluated for impairment		$	3,744		$	6,955	$	92	$	—			$	10,791
Ending balance:  collectively evaluated for impairment		$	149,320		$	65,251	$	10,434	$	2,257			$	227,262

The following tables present the credit risk profile of the Bank’s loan portfolio based on rating category and payment activity as of December 31, 2012 and 2011:

December 31, 2012	One-to-four family residential		All other mortgage loans		Commercial business loans		Consumer loans
	(In thousands)
Rating *
Pass (Risk 1-4)	$	151,749	$	68,949	$	14,034	$	1,513
Special Mention (Risk 5)		708		2,934		26		—
Substandard (Risk 6)		8,453		5,838		185		4
Total	$	160,910	$	77,721	$	14,245	$	1,517

December  31, 2011	One-to-four family residential		All other mortgage loans		Commercial business loans		Consumer loans
	(In thousands)
Rating *
Pass (Risk 1-4)	$	145,061	$	61,970	$	10,268	$	2,257
Special Mention (Risk 5)		2,979		3,281		166		—
Substandard (Risk 6)		5,024		6,955		92		—
Total	$	153,064	$	72,206	$	10,526	$	2,257

* Ratings are generally assigned to consumer and residential mortgage loans on a “pass” or “fail” basis, where “fail” results in a substandard classification. Commercial loans, both secured by real estate or other assets or unsecured, are analyzed in accordance with an analytical matrix codified in the Bank’s loan policy that produces a risk rating as described below.

Risk 1 is unquestioned credit quality for any credit product. Loans are secured by cash and near cash collateral with immediate access to proceeds.

Risk 2 is very low risk with strong credit and repayment sources. Borrower is well capitalized in a stable industry, financial ratios exceed peers and financial trends are positive.

Risk 3 is very favorable risk with highly adequate credit strength and repayment sources. Borrower has good overall financial condition and adequate capitalization.

Risk 4 is acceptable, average risk with adequate credit strength and repayment sources. Collateral positions must be within Bank policies.

Risk 5 or “Special Mention,” also known as “watch,” has potential weakness that deserves Management’s close attention. This risk includes loans where the borrower has developed financial uncertainties or are resolving them. Bank credits have been secured or negotiations will be ongoing to secure further collateral. In accordance with regulatory guidance, this category is generally regarded as temporary, as successful remedial actions will either successfully move the credit back up to Risk 4 or unsuccessful remedial actions will result in the credit being downgraded to Risk 6.

Risk 6 or “Substandard” loans are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged. This risk category contains loans that exhibit a weakening of the borrower’s credit strength with limited credit access and all non-performing loans.

Risk 7 or “Doubtful” loans are significantly under protected by the current net worth and paying capacity of the borrower or of the collateral pledged. This risk category contains loans that are likely to experience a loss of some magnitude, but where the amount of the expected loss is not known with enough certainty to allow for an accurate calculation of a loss amount for charge off. This category is considered to be temporary until a charge off amount can be reasonably determined.

The following tables present the Bank’s loan portfolio aging analysis as of December 31, 2012 and 2011:

December 31, 2012	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days & Accruing
	(In thousands)
One-to-four family residential loans	$	1,049	$	339	$	1,190	$	2,578	$	158,332	$	160,910	$	—
All other mortgage loans		1,544		—		1,309		2,853		74,868		77,721		—
Commercial business loans		—		—		—		—		14,245		14,245		—
Consumer loans		1		2		2		5		1,512		1,517		—
Total	$	2,594	$	341	$	2,501	$	5,436	$	248,957	$	254,393	$	—

December 31, 2011	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days & Accruing
	(In thousands)
One-to-four family residential loans	$	1,513	$	280	$	844	$	2,637	$	150,427	$	153,064	$	—
All other mortgage loans		903		—		1,905		2,808		69,398		72,206		—
Commercial business loans		17		—		35		52		10,474		10,526		—
Consumer loans		17		9		—		26		2,231		2,257		—
Total	$	2,450	$	289	$	2,784	$	5,523	$	232,530	$	238,053	$	—

Non-accrual loans were comprised of the following at December 31, 2012 and 2011:

	2012		2011
Nonaccrual
	(In thousands)
One-to-four family residential loans	$	2,097	$	2,433
Nonresidential real estate loans		3,123		3,271
All other mortgage loans		—		—
Commercial business loans		32		92
Consumer loans		4		12
Total	$	5,256	$	5,808

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

Included in certain loan categories in the impaired loans are troubled debt restructurings that were classified as impaired. At December 31, 2012, the Company had $3.2 million of residential mortgages, $2.4 million of nonresidential mortgages and land and $32,000 of commercial loans that were modified in troubled debt restructurings. Included in these amounts, the Company had troubled debt restructurings that were performing in accordance with their modified terms of $2.8 million in residential mortgage loans, nonresidential real estate and land loans of $364,000 at December 31, 2012.

The following tables present impaired loans as of and for the years ended December 31, 2012 and 2011:

December 31, 2012	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized
Loans without a specific valuation allowance
One-to-four family residential loans	$	5,587	$	5,587	$	—	$	3,733	$	147
All other mortgage loans		2,781		2,781		—		2,376		102
Commercial business loans		85		85		—		21		1
Loans with a specific valuation allowance
One-to-four family residential loans		1,291		1,291		248		1,252		45
All other mortgage loans		3,056		3,652		1,074		4,453		1
Commercial business loans		100		100		100		59		4
Total:
One-to-four family residential loans	$	6,878	$	6,878	$	248	$	4,985	$	192
All other mortgage loans		5,837		6,433		1,074		6,829		103
Commercial business loans		185		185		100		80		5
	$	12,900	$	13,496	$	1,422	$	11,894	$	300

December 31, 2011	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized
Loans without a specific valuation allowance							(nine months)
One-to-four family residential loans	$	1,613	$	1,613	$	—	$	1,966	$	35
All other mortgage loans		1,771		1,771		—		1,345		52
Loans with a specific valuation allowance
One-to-four family residential loans		250		250		224		557		15
All other mortgage loans		5,184		5,184		1,941		5,142		75
Commercial business loans		92		92		53		76		—
Total:
One-to-four family residential loans	$	1,863	$	1,863	$	224	$	2,523	$	50
All other mortgage loans		6,955		6,955		1,941		6,487		127
Commercial business loans		92		92		53		76		—
	$	8,910	$	8,910	$	2,218	$	9,086	$	177

The interest income recognized in the above tables is not materially different from the cash basis method.

The following tables present information regarding newly classified troubled debt restructurings by class for the years ended December 31, 2012 and 2011.

December 31, 2012	Number of loans	Pre-modification Unpaid Principal Balance		Post-modification Unpaid Principal Balance
Troubled Debt Restructurings
One-to-four family residential loans	2	$	527	$	527
All other mortgage loans	2		1,296		1,296
December 31, 2011 (nine months)
Troubled Debt Restructurings
One-to-four family residential loans	2	$	205	$	205
All other mortgage loans	2		1,366		1,366
Commercial business loans	2		162		162

All the above TDR classifications occurred as concessions were granted to borrowers experiencing financial difficulties. These concessions may include a reduction in the stated rate, an interest rate that is below market interest rates for similar debt, an extension of the maturity date or delaying principal payments through interest only payments. Each TDR has been individually evaluated for impairment with the appropriate specific valuation allowance included in the allowance for loan losses calculation. There were no TDR classifications which defaulted during the twelve month period ended December 31, 2012 or the nine month period ended December 31, 2011. The Company considers TDRs that become 90 days or more past due under modified terms as subsequently defaulted.

As a result of adopting the amendments in Accounting Standards Update No. 2011-02 (the ASU), the Company reassessed all restructurings occurring on or after the beginning of its current fiscal year (April 1, 2011) for identification of TDRs. The Company identified no additional TDRs for which an allowance for credit losses had previously been measured under a general allowance for credit losses methodology.