Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2016

Receivables [Abstract]

Loans and Allowance for Loan Losses

Note 4: Loans and Allowance for Loan Losses

Categories of loans at December 31, include:

	2016		2015
	(In thousands)
One-to-four family residential	$	193,424	$	179,732
Multi-family residential		11,425		12,474
Construction		2,744		6,177
Nonresidential real estate and land		107,788		86,470
Commercial		23,215		18,031
Consumer and other		2,193		1,904
		340,789		304,788
Less:
Undisbursed portion of loans in process		4,719		8,065
Deferred loan origination fees		747		765
Allowance for loans losses		3,040		2,837
Total loans	$	332,283	$	293,121

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, 2016 and 2015:

December 31, 2016	One-to-four family residential			All other mortgage loans			Commercial business loans		Consumer loans			Total
Allowance for loan losses:	(In thousands)
Beginning balance	$	1,346		$	1,210		$	279	$	2		$	2,837
Provision(credit) charged           to expense		213			(19	)		166		5			365
Losses charged off		(81	)		(83	)		—		(1	)		(165	)
Recoveries		1			—			2		—			3
Ending balance	$	1,479		$	1,108		$	447	$	6		$	3,040
Allowance Balances:
Individually evaluated for           impairment	$	323		$	151		$	184	$	—		$	658
Collectively evaluated for           impairment	$	1,156		$	957		$	263	$	6		$	2,382
Loan Balances:
Ending balance:	$	193,424		$	121,957		$	23,215	$	2,193		$	340,789
Individually evaluated for           impairment	$	1,527		$	1,067		$	547	$	—		$	3,141
Collectively evaluated for           impairment	$	191,897		$	120,890		$	22,668	$	2,193		$	337,648

December 31, 2015	One-to-four family residential			All other mortgage loans		Commercial business loans			Consumer loans			Total
Allowance for loan losses:	(In thousands)
Beginning balance	$	1,533		$	885	$	343		$	8		$	2,769
Provision (credit) charged to           expense		924			325		(65	)		(9	)		1,175
Losses charged off		(1,158	)		—		—			—			(1,158	)
Recoveries		47			—		1			3			51
Ending balance	$	1,346		$	1,210	$	279		$	2		$	2,837
Allowance Balances:
Individually evaluated for           impairment	$	506		$	13	$	33		$	—		$	552
Collectively evaluated for           impairment	$	840		$	1,197	$	246		$	2		$	2,285
Loan Balances:
Ending balance:	$	179,732		$	105,121	$	18,031		$	1,904		$	304,788
Individually evaluated for           impairment	$	2,789		$	1,061	$	33		$	—		$	3,883
Collectively evaluated for           impairment	$	176,943		$	104,060	$	17,998		$	1,904		$	300,905

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, 2016 and 2015:

December 31, 2016	One-to-four family residential		All other mortgage loans		Commercial business loans		Consumer loans
	(In thousands)
Rating *
Pass (Risk 1-4)	$	189,975	$	119,503	$	22,427	$	2,193
Special Mention (Risk 5)		—		—		—		—
Substandard (Risk 6)		3,449		2,454		788		—
Total	$	193,424	$	121,957	$	23,215	$	2,193

December 31, 2015	One-to-four family residential		All other mortgage loans		Commercial business loans		Consumer loans
	(In thousands)
Rating *
Pass (Risk 1-4)	$	172,617	$	100,961	$	17,893	$	1,904
Special Mention (Risk 5)		1,406		1,881		105		—
Substandard (Risk 6)		5,709		2,279		33		—
Total	$	179,732	$	105,121	$	18,031	$	1,904

* 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, 2016 and 2015:

December 31, 2016	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable
	(In thousands)
One-to-four family      residential loans	$	442	$	419	$	959	$	1,820	$	191,604	$	193,424
All other mortgage      loans		—		—		63		63		121,894		121,957
Commercial business loans		16		—		22		38		23,177		23,215
Consumer loans		8		—		—		8		2,185		2,193
Total	$	466	$	419	$	1,044	$	1,929	$	338,860	$	340,789

December 31, 2015	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable
	(In thousands)
One-to-four family      residential loans	$	516	$	329	$	903	$	1,748	$	177,984	$	179,732
All other mortgage      loans		298		—		209		507		104,614		105,121
Commercial business loans		68		—		—		68		17,963		18,031
Consumer loans		—		—		—		—		1,904		1,904
Total	$	882	$	329	$	1,112	$	2,323	$	302,465	$	304,788

There were no loans that were past due 90 days or greater that were still accruing at December 31, 2016, or at December 31, 2015.

Non-accrual loans were comprised of the following at December 31, 2016 and 2015:

Non-accrual loans	2016		2015
	(In thousands)
One-to-four family residential loans	$	1,473	$	1,733
Nonresidential real estate loans		85		208
All other mortgage loans		—		—
Commercial business loans		—		—
Consumer loans		—		—
Total	$	1,558	$	1,941

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, 2016, the Company had $1.5 million of residential mortgages, $1.0 million of nonresidential mortgages and $511,000 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 $776,000 in residential mortgage loans, nonresidential real estate and land loans of $1.0 million and commercial loans of $511,000 at December 31, 2016.

The following tables present impaired loans as of and for the years ended December 31, 2016 and 2015:

December 31, 2016	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	$	1,121	$	1,189	$	—	$	1,019	$	37
All other mortgage loans		226		226		—		838		19
Commercial business      loans		—		—		—		—		—
Loans with a specific      valuation allowance
One-to-four family      residential loans		406		406		323		622		—
All other mortgage loans		841		841		151		335		49
Commercial business      loans		547		547		184		168		1
Total:
One-to-four family      residential loans	$	1,527	$	1,595	$	323	$	1,641	$	37
All other mortgage loans		1,067		1,067		151		1,173		68
Commercial business      loans		547		547		184		168		1
	$	3,141	$	3,209	$	658	$	2,982	$	106

December 31, 2015	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	$	1,224	$	1,238	$	—	$	1,493	$	44
All other mortgage loans		—		—		—		532		—
Commercial business      loans		—		—		—		9		—
Loans with a specific      valuation allowance
One-to-four family      residential loans		1,565		1,875		506		1,347		56
All other mortgage loans		1,061		1,061		13		575		71
Commercial business      loans		33		33		33		82		1
Total:
One-to-four family      residential loans	$	2,789	$	3,113	$	506	$	2,840	$	100
All other mortgage loans		1,061		1,061		13		1,107		71
Commercial business      loans		33		33		33		91		1
	$	3,883	$	4,207	$	552	$	4,038	$	172

The following tables present information regarding newly classified troubled debt restructurings by class for the years ended December 31, 2016 and 2015.

Troubled Debt Restructurings	Number of loans		Pre-modification Unpaid Principal Balance		Post-modification Unpaid Principal Balance
			(dollars in thousands)
December 31, 2016
One-to-four family residential loans		8	$	406	$	406
Commercial business loans		4		508		508
Total		12	$	914	$	914
December 31, 2015
One-to-four family residential loans		1	$	17	$	17

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, 2016 or the year ended December 31, 2015. The Company considers TDRs that become 90 days or more past due under modified terms as subsequently defaulted unless the TDR terms indicate annual repayments.

Foreclosed assets held for sale include those properties that the Bank has obtained legal title to, through a formal foreclosure process, or the borrower conveying all interest in the property to the Bank through the completion of a deed in lieu of foreclosure, or similar legal agreement. The following table presents the balance of mortgage loans collateralized by residential real estate properties held as foreclosed assets at December 31, 2016 and December 31, 2015.

	December 31, 2016		December 31, 2015
	Recorded Investment
	(In thousands)
One-to-four family residential loans	$	2	$	14

Banks foreclose on certain properties in the normal course of business when it is more probable than not that the loan balance will not be recovered through scheduled payments. Foreclosure is usually a last resort and begins after all other collection efforts have been exhausted. The following table presents the balance of those mortgage loans collateralized by residential real estate properties that are in the formal process of foreclosure at December 31, 2016 and December 31, 2015.

	December 31, 2016		December 31, 2015
	Recorded Investment
	(In thousands)
One-to-four family residential loans	$	97	$	171