Note 4: Loans and Allowance for Loan Losses

Categories of loans at December 31, include:

	2014		2013
	(In thousands)
One-to-four family residential	$	169,676	$	166,728
Multi-family residential		12,203		14,011
Construction		2,922		4,951
Nonresidential real estate and land		71,795		67,133
Commercial		16,275		14,915
Consumer and other		2,311		1,110
		275,182		268,848
Less:
Undisbursed portion of loans in process		6,121		4,217
Deferred loan origination fees		683		682
Allowance for loans losses		2,769		2,819
Total loans	$	265,609	$	261,130

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, nonresidential 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.

Nonresidential real estate loans are negotiated on a case-by-case basis. Loans secured by nonresidential 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 nonresidential 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, 2014 and 2013:

December 31, 2014	One-to-four family residential			All other mortgage loans			Commercial business loans			Consumer loans			Total
Allowance for loan losses:							(In thousands)
Beginning balance	$	1,017		$	1,526		$	271		$	5		$	2,819
Provision charged to expense		546			(397	)		182			2			333
Losses charged off		(38	)		(261	)		(112	)		—			(411	)
Recoveries		8			17			2			1			28
Ending balance	$	1,533		$	885		$	343		$	8		$	2,769
Allowance Balances:
Individually evaluated for impairment	$	653		$	18		$	145		$	—		$	816
Collectively evaluated for impairment	$	880		$	867		$	198		$	8		$	1,953
Loan Balances:
Ending balance:	$	169,676		$	86,920		$	16,275		$	2,311		$	275,182
Individually evaluated for impairment	$	3,279		$	18		$	145		$	—		$	3,442
Collectively evaluated for impairment	$	166,397		$	86,902		$	16,130		$	2,311		$	271,740

December 31, 2013	One-to-four family residential			All other mortgage loans			Commercial business loans			Consumer loans			Total
Allowance for loan losses:	(In thousands)
Beginning balance	$	1,122		$	1,925		$	275		$	6		$	3,328
Provision charged to expense		15			222			(6	)		(11	)		220
Losses charged off		(130	)		(621	)		—			(2	)		(753	)
Recoveries		10			—			2			12			24
Ending balance	$	1,017		$	1,526		$	271		$	5		$	2,819
Allowance Balances:
Individually evaluated for impairment	$	226		$	618		$	65		$	—		$	909
Collectively evaluated for impairment	$	791		$	908		$	206		$	5		$	1,910
Loan Balances:
Ending balance:	$	166,728		$	86,095		$	14,915		$	1,110		$	268,848
Individually evaluated for impairment	$	6,411		$	3,661		$	142		$	—		$	10,214
Collectively evaluated for impairment	$	160,317		$	82,434		$	14,773		$	1,110		$	258,634

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, 2014 and 2013:

December 31, 2014	One-to-four family residential		All other mortgage loans		Commercial business loans		Consumer loans
	(In thousands)
Rating *
Pass (Risk 1-4)	$	160,190	$	84,168	$	15,812	$	2,311
Special Mention (Risk 5)		2,015		851		318		—
Substandard (Risk 6)		7,471		1,901		145		—
Total	$	169,676	$	86,920	$	16,275	$	2,311

December 31, 2013	One-to-four family residential		All other mortgage loans		Commercial business loans		Consumer loans
	(In thousands)
Rating *
Pass (Risk 1-4)	$	158,518	$	81,362	$	14,328	$	1,108
Special Mention (Risk 5)		419		1,587		445		—
Substandard (Risk 6)		7,791		3,146		142		2
Total	$	166,728	$	86,095	$	14,915	$	1,110

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 is 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 nonperforming 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, 2014 and 2013:

December 31, 2014	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 and Accruing
	(In thousands)
One-to-four family residential loans	$	466	$	297	$	1,575	$	2,338	$	167,338	$	169,676	$	—
All other mortgage loans		—		198		152		350		86,570		86,920		—
Commercial business loans		—		—		59		59		16,216		16,275		—
Consumer loans		—		—		—		—		2,311		2,311		—
Total	$	466	$	495	$	1,786	$	2,747	$	272,435	$	275,182	$	—

December 31, 2013	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 and Accruing
	(In thousands)
One-to-four family residential loans	$	679	$	228	$	624	$	1,531	$	165,197	$	166,728	$	—
All other mortgage loans		150		64		811		1,025		85,070		86,095		—
Commercial business loans		—		—		—		—		14,915		14,915		—
Consumer loans		79		—		—		79		1,031		1,110		—
Total	$	908	$	292	$	1,435	$	2,635	$	266,213	$	268,848	$	—

Non-accrual loans were comprised of the following at December 31, 2014 and 2013:

Non-accrual loans	2014		2013
	(In thousands)
One-to-four family residential loans	$	2,740	$	1,851
Nonresidential real estate loans		350		1,045
All other mortgage loans		—		—
Commercial business loans		96		2
Consumer loans		—		—
Total	$	3,186	$	2,898

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, 2014, the Company had $3.7 million of residential mortgages, $123,000 of nonresidential mortgages and land loans and $270,000 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 $3.5 million in residential mortgage loans, nonresidential real estate and land loans of $123,000 and commercial loans of $270,000 at December 31, 2014.

The following tables present impaired loans as of and for the years ended December 31, 2014 and 2013:

December 31, 2014	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized
	(In thousands)
Loans without a specific valuation allowance
One-to-four family residential loans	$	1,108	$	1,108	$	—	$	3,220	$	44
All other mortgage loans		—		—		—		1,097		—
Commercial business loans		—		—		—		19		—

Loans with a specific valuation allowance
One-to-four family residential loans		2,171		2,171		653		1,499		56
All other mortgage loans		18		18		18		477		1
Commercial business loans		145		145		145		166		2

Total:
One-to-four family residential loans	$	3,279	$	3,279	$	653	$	4,719	$	100
All other mortgage loans		18		18		18		1,574		1
Commercial business loans		145		145		145		185		2
	$	3,442	$	3,442	$	816	$	6,478	$	103

December 31, 2013	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized
	(In thousands)
Loans without a specific valuation allowance
One-to-four family residential loans	$	5,569	$	5,569	$	—	$	5,698	$	236
All other mortgage loans		2,051		2,051		—		2,244		104
Commercial business loans		77		77		—		81		3

Loans with a specific valuation allowance
One-to-four family residential loans		842		842		226		1,153		29
All other mortgage loans		1,610		2,076		618		2,368		49
Commercial business loans		65		65		65		74		3

Total:
One-to-four family residential loans	$	6,411	$	6,411	$	226	$	6,851	$	265
All other mortgage loans		3,661		4,127		618		4,612		153
Commercial business loans		142		142		65		155		6
	$	10,214	$	10,680	$	909	$	11,618	$	424

The following tables present information regarding newly classified troubled debt restructurings by class for the years ended December 31, 2014 and 2013.

Troubled Debt Restructurings	Number of loans		Pre-modification Unpaid Principal Balance		Post-modification Unpaid Principal Balance
	(dollars in thousands)
December 31, 2014
All other mortgage loans		2	$	1,057	$	1,090

December 31, 2013
One-to-four family residential loans		6	$	909	$	933
All other mortgage loans		1		576		576

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 year ended December 31, 2014 or the year ended December 31, 2013. 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.