Note 4: Loans and Allowance for Loan Losses

Categories of loans at September 30, 2016 and December 31, 2015 include:

	September 30,			December 31,
	2016			2015
Real estate - residential mortgage:
One to four family units	$	109,391,522		$	98,257,417
Multi-family		38,192,064			41,603,670
Real estate - construction		41,305,779			45,462,895
Real estate - commercial		238,722,021			208,824,573
Commercial loans		81,739,377			81,006,897
Consumer and other loans		23,261,945			21,991,881
Total loans		532,612,708			497,147,333
Less:
Allowance for loan losses		(6,396,580	)		(5,811,940	)
Deferred loan fees/costs, net		(353,184	)		(333,486	)
Net loans	$	525,862,944		$	491,001,907

Classes of loans by aging at September 30, 2016 and December 31, 2015 were as follows:

As of September 30, 2016
	30-59 Days Past Due		60-89 Days Past Due		90 Days and more Past Due		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days and Accruing
	(In Thousands)
Real estate - residential mortgage:
One to four family units	$	244	$	295	$	164	$	703	$	108,689	$	109,392	$	-
Multi-family		-		-		-		-		38,192		38,192		-
Real estate - construction		-		-		-		-		41,306		41,306		-
Real estate - commercial		-		-		835		835		237,887		238,722		-
Commercial loans		-		-		612		612		81,127		81,739		-
Consumer and other loans		70		-		16		86		23,176		23,262		-
Total	$	314	$	295	$	1,627	$	2,236	$	530,377	$	532,613	$	-

As of December 31, 2015
	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)
Real estate - residential mortgage:
One to four family units	$	-	$	168	$	105	$	273	$	97,984	$	98,257	$	-
Multi-family		-		-		-		-		41,604		41,604		-
Real estate - construction		-		-		-		-		45,463		45,463		-
Real estate - commercial		-		-		1,079		1,079		207,745		208,824		-
Commercial loans		88		-		1,239		1,327		79,680		81,007		-
Consumer and other loans		2		8		-		10		21,982		21,992		-
Total	$	90	$	176	$	2,423	$	2,689	$	494,458	$	497,147	$	-

Nonaccruing loans are summarized as follows:

	September 30,		December 31,
	2016		2015
Real estate - residential mortgage:
One to four family units	$	2,137,884	$	2,272,535
Multi-family		-		-
Real estate - construction		7,536,662		8,079,807
Real estate - commercial		1,077,642		1,240,909
Commercial loans		943,259		2,149,333
Consumer and other loans		37,526		12,891
Total	$	11,732,973	$	13,755,475

The following tables present the activity in the allowance for loan losses based on portfolio segment for the three and nine months ended September 30, 2016 and 2015:

Three months ended September 30, 2016	Construction		Commercial Real Estate		One to four family		Multi-family		Commercial			Consumer and Other			Unallocated			Total
Allowance for loan losses:	(In Thousands)
Balance, beginning of period	$	1,668	$	1,613	$	862	$	157	$	1,366		$	288		$	227		$	6,181
Provision charged to expense		282		86		6		6		(40	)		33			(173	)	$	200
Losses charged off		-		-		-		-		(11	)		(58	)		-		$	(69	)
Recoveries		46		-		17		-		8			14			-		$	85
Balance, end of period	$	1,996	$	1,699	$	885	$	163	$	1,323		$	277		$	54		$	6,397

Nine months ended September 30, 2016	Construction			Commercial Real Estate		One to four family			Multi-family			Commercial			Consumer and Other			Unallocated			Total
Allowance for loan losses:	(In Thousands)
Balance, beginning of period	$	1,246		$	1,526	$	821		$	177		$	1,382		$	223		$	437		$	5,812
Provision charged to expense		922			141		80			(14	)		102			102			(383	)	$	950
Losses charged off		(252	)		-		(47	)		-			(170	)		(132	)		-		$	(601	)
Recoveries		80			32		31			-			9			84			-		$	236
Balance, end of period	$	1,996		$	1,699	$	885		$	163		$	1,323		$	277		$	54		$	6,397

Three months ended September 30, 2015	Construction		Commercial Real Estate			One to four family			Multi-family		Commercial			Consumer and Other			Unallocated		Total
Allowance for loan losses:	(In Thousands)
Balance, beginning of period	$	1,346	$	1,945		$	805		$	151	$	1,893		$	232		$	279	$	6,651
Provision charged to expense		921		(363	)		(25	)		10		(410	)		(4	)		71	$	200
Losses charged off		-		-			(1	)		-		-			(46	)		-	$	(47	)
Recoveries		1		-			4			-		1			11			-	$	17
Balance, end of period	$	2,268	$	1,582		$	783		$	161	$	1,484		$	193		$	350	$	6,822

Nine months ended September 30, 2015	Construction		Commercial Real Estate			One to four family			Multi-family		Commercial			Consumer and Other			Unallocated		Total
Allowance for loan losses:	(In Thousands)
Balance, beginning of period	$	1,330	$	1,992		$	900		$	127	$	1,954		$	185		$	101	$	6,589
Provision charged to expense		929		(410	)		(32	)		34		(474	)		54			249	$	350
Losses charged off		-		-			(99	)		-		-			(80	)		-	$	(179	)
Recoveries		9		-			14			-		4			34			-	$	61
Balance, end of period	$	2,268	$	1,582		$	783		$	161	$	1,484		$	193		$	350	$	6,822

The following tables present the recorded investment in loans based on portfolio segment and impairment method as of September 30, 2016 and December 31, 2015:

As of September 30, 2016	Construction		Commercial Real Estate		One to four family		Multi-family		Commercial		Consumer and Other		Unallocated		Total
Allowance for loan losses:	(In Thousands)
Ending balance: individually evaluated for impairment	$	971	$	69	$	3	$	-	$	293	$	16	$	-	$	1,352
Ending balance: collectively evaluated for impairment	$	1,025	$	1,630	$	882	$	163	$	1,030	$	261	$	54	$	5,045
Loans:
Ending balance: individually evaluated for impairment	$	7,537	$	1,077	$	2,138	$	-	$	943	$	150	$	-	$	11,845
Ending balance: collectively evaluated for impairment	$	33,769	$	237,645	$	107,254	$	38,192	$	80,796	$	23,112	$	-	$	520,768

December 31, 2015	Construction		Commercial Real Estate		One to four family		Multi-family		Commercial		Consumer and Other		Unallocated		Total
Allowance for loan losses:	(In Thousands)
Ending balance: individually evaluated for impairment	$	540	$	-	$	-	$	-	$	312	$	13	$	-	$	865
Ending balance: collectively evaluated for impairment	$	706	$	1,526	$	821	$	177	$	1,070	$	210	$	437	$	4,947
Loans:
Ending balance: individually evaluated for impairment	$	8,080	$	1,241	$	2,272	$	-	$	2,149	$	988	$	-	$	14,730
Ending balance: collectively evaluated for impairment	$	37,383	$	207,583	$	95,985	$	41,604	$	78,858	$	21,004	$	-	$	482,417

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows or collateral value of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Bank’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans.

The following table summarizes the recorded investment in impaired loans at September 30, 2016 and December 31, 2015:

	September 30, 2016						December 31, 2015
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Recorded Balance		Unpaid Principal Balance		Specific Allowance
	(In Thousands)
Loans without a specific valuation allowance
Real estate - residential mortgage:
One to four family units	$	2,110	$	2,110	$	-	$	2,272	$	2,272	$	-
Multi-family		-		-		-		-		-		-
Real estate - construction		5,581		5,581		-		5,730		5,730		-
Real estate - commercial		242		242		-		1,241		1,241		-
Commercial loans		596		596		-		1,538		1,538		-
Consumer and other loans		37		38		-		904		904		-
Loans with a specific valuation allowance
Real estate - residential mortgage:
One to four family units	$	28	$	28	$	3	$	-	$	-	$	-
Multi-family		-		-		-		-		-		-
Real estate - construction		1,956		4,696		971		2,350		4,838		540
Real estate - commercial		835		835		69		-		-		-
Commercial loans		347		800		293		611		914		312
Consumer and other loans		113		113		16		84		84		13
Total
Real estate - residential mortgage:
One to four family units	$	2,138	$	2,138	$	3	$	2,272	$	2,272	$	-
Multi-family		-		-		-		-		-		-
Real estate - construction		7,537		10,277		971		8,080		10,568		540
Real estate - commercial		1,077		1,077		69		1,241		1,241		-
Commercial loans		943		1,396		293		2,149		2,452		312
Consumer and other loans		150		151		16		988		988		13
Total	$	11,845	$	15,039	$	1,352	$	14,730	$	17,521	$	865

The following tables summarize average impaired loans and related interest recognized on impaired loans for the three and nine months ended September 30, 2016 and 2015:

	For the Three Months Ended				For the Three Months Ended
	September 30, 2016				September 30, 2015
	Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized
	(In Thousands)
Loans without a specific valuation allowance
Real estate - residential mortgage:
One to four family units	$	2,153	$	-	$	1,340	$	1
Multi-family		-		-		-		-
Real estate - construction		5,597		-		1,528		-
Real estate - commercial		244		-		54		-
Commercial loans		657		-		640		-
Consumer and other loans		185		-		1,179		1
Loans with a specific valuation allowance
Real estate - residential mortgage:
One to four family units	$	28	$	-	$	-	$	-
Multi-family		-		-		-		-
Real estate - construction		2,051		-		3,452		-
Real estate - commercial		278		-		-		-
Commercial loans		375		-		612		-
Consumer and other loans		110		-		-		-
Total
Real estate - residential mortgage:
One to four family units	$	2,181	$	-	$	1,340	$	1
Multi-family		-		-		-		-
Real estate - construction		7,648		-		4,980		-
Real estate - commercial		522		-		54		-
Commercial loans		1,032		-		1,252		-
Consumer and other loans		295		-		1,179		1
Total	$	11,678	$	-	$	8,805	$	2

	For the Nine Months Ended				For the Nine Months Ended
	September 30, 2016				September 30, 2015
	Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized
	(In Thousands)
Loans without a specific valuation allowance
Real estate - residential mortgage:
One to four family units	$	2,200	$	-	$	932	$	2
Multi-family		-		-		-		-
Real estate - construction		5,661		-		559		-
Real estate - commercial		657		-		18		-
Commercial loans		960		-		434		-
Consumer and other loans		114		1		402		1
Loans with a specific valuation allowance
Real estate - residential mortgage:
One to four family units	$	23	$	-	$	304	$	-
Multi-family		-		-		-		-
Real estate - construction		2,222		-		2,937		-
Real estate - commercial		93		-		-		-
Commercial loans		489		-		618		-
Consumer and other loans		105		-		92		-
Total
Real estate - residential mortgage:
One to four family units	$	2,223	$	-	$	1,236	$	2
Multi-family		-		-		-		-
Real estate - construction		7,883		-		3,496		-
Real estate - commercial		750		-		18		-
Commercial loans		1,449		-		1,052		-
Consumer and other loans		219		1		494		1
Total	$	12,524	$	1	$	6,296	$	3

At September 30, 2016, the Bank’s impaired loans shown in the table above included loans that were classified as troubled debt restructurings (“TDR”). The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession.

In assessing whether or not a borrower is experiencing financial difficulties, the Bank considers information currently available regarding the financial condition of the borrower. This information includes, but is not limited to, whether (i) the debtor is currently in payment default on any of its debt; (ii) a payment default is probable in the foreseeable future without the modification; (iii) the debtor has declared or is in the process of declaring bankruptcy and (iv) the debtor’s projected cash flow is sufficient to satisfy the contractual payments due under the original terms of the loan without a modification.

The Bank considers all aspects of the modification to loan terms to determine whether or not a concession has been granted to the borrower. Key factors considered by the Bank include the debtor’s ability to access funds at a market rate for debt with similar risk characteristics, the significance of the modification relative to unpaid principal balance or collateral value of the debt, and the significance of a delay in the timing of payments relative to the original contractual terms of the loan. The most common concessions granted by the Bank generally include one or more modifications to the terms of the debt, such as (i) a reduction in the interest rate for the remaining life of the debt, (ii) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (iii) a reduction on the face amount or maturity amount of the debt as stated in the original loan, (iv) a temporary period of interest-only payments, (v) a reduction in accrued interest, and (vi) an extension of amortization.

The following table presents the carrying balance of TDRs as of September 30, 2016 and December 31, 2015:

	September 30, 2016		December 31, 2015
Real estate - residential mortgage:
One to four family units	$	1,569,183	$	1,556,964
Multi-family		-		-
Real estate - construction		7,536,662		8,079,807
Real estate - commercial		161,491		161,491
Commercial loans		416,980		1,442,476
Consumer and other loans		-		-
Total	$	9,684,316	$	11,240,738

The bank did not have any new TDRs for the nine months ending September 30, 2016. The Bank has allocated $1,047,836 and $841,284 of specific reserves to customers whose loan terms have been modified in TDR as of September 30, 2016 and December 31, 2015, respectively.

There were no TDRs for which there was a payment default within twelve months following the modification during the nine months ending September 30, 2016 and 2015. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

As part of the on-going monitoring of the credit quality of the Bank’s loan portfolio, management tracks loans by an internal rating system. All loans are assigned an internal credit quality rating based on an analysis of the borrower’s financial condition. The criteria used to assign quality ratings to extensions of credit that exhibit potential problems or well-defined weaknesses are primarily based upon the degree of risk and the likelihood of orderly repayment, and their effect on the Bank’s safety and soundness. The following are the internally assigned ratings:

Pass: This rating represents loans that have strong asset quality and liquidity along with a multi-year track record of profitability.

Special mention: This rating represents loans that are currently protected but are potentially weak. The credit risk may be relatively minor, yet constitute an increased risk in light of the circumstances surrounding a specific loan.

Substandard: This rating represents loans that show signs of continuing negative financial trends and unprofitability and therefore, is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.

Doubtful: This rating represents loans that have all the weaknesses of substandard classified loans with the additional characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

Risk characteristics applicable to each segment of the loan portfolio are described as follows.

Real estate-Residential 1-4 family: The residential 1-4 family real estate loans are generally secured by owner-occupied 1-4 family residences. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers. Credit risk in these loans can be impacted by economic conditions within the Bank’s market areas that might impact either property values or a borrower’s personal income. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Real estate-Construction: Construction and land development real estate loans are usually based upon estimates of costs and estimated value of the completed project and include independent appraisal reviews and a financial analysis of the developers and property owners. Sources of repayment of these loans may include permanent loans, sales of developed property or an interim loan commitment from the Bank until permanent financing is obtained. These loans are considered to be higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Bank’s market areas.

Real estate-Commercial: Commercial real estate loans typically involve larger principal amounts, and repayment of these loans is generally dependent on the successful operations of the property securing the loan or the business conducted on the property securing the loan. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Bank’s market areas.

Commercial: The commercial portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation. Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations.

Consumer: The consumer loan portfolio consists of various term and line of credit loans such as automobile loans and loans for other personal purposes. Repayment for these types of loans will come from a borrower’s income sources that are typically independent of the loan purpose. Credit risk is driven by consumer economic factors (such as unemployment and general economic conditions in the Bank’s market area) and the creditworthiness of a borrower.

The following tables provide information about the credit quality of the loan portfolio using the Bank’s internal rating system as of September 30, 2016 and December 31, 2015:

September 30, 2016	Construction		Commercial Real Estate		One to four family		Multi-family		Commercial		Consumer and Other		Total
	(In Thousands)
Rating:
Pass	$	33,769	$	230,410	$	103,048	$	38,192	$	75,379	$	22,991	$	503,789
Special Mention		-		5,924		2,802		-		4,544		-		13,270
Substandard		7,537		2,388		3,542		-		1,213		271		14,951
Doubtful		-		-		-		-		603		-		603
Total	$	41,306	$	238,722	$	109,392	$	38,192	$	81,739	$	23,262	$	532,613

December 31, 2015	Construction		Commercial Real Estate		One to four family		Multi-family		Commercial		Consumer and Other		Total
	(In Thousands)
Rating:
Pass	$	37,383	$	198,230	$	91,267	$	41,604	$	73,407	$	21,775	$	463,666
Special Mention		-		3,657		3,319		-		2,267		-		9,243
Substandard		8,080		6,937		3,671		-		4,730		217		23,635
Doubtful		-		-		-		-		603		-		603
Total	$	45,463	$	208,824	$	98,257	$	41,604	$	81,007	$	21,992	$	497,147

For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees net of certain direct origination costs, are deferred and amortized as a level yield adjustment over the respective term of the loan.

The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the loan is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.