Loans

The following table sets forth the composition of the Company’s loan portfolio in dollar amounts and as a percentage of the total loan portfolio at the dates indicated.



	September 30, 2014					June 30, 2014
	Amount			Percent		Amount			Percent		Change			% Change
	(Dollars In Thousands)
Mortgage loans on real estate:
One- to four-family⁽¹⁾	$	107,497		21.11	%	$	107,498		21.05	%	$	(1	)	—	%
Commercial	202,178			39.70	%	200,750			39.31	%	1,428			0.7	%
Home equity:
First lien	35,451			6.96	%	36,299			7.11	%	(848		)	(2.3	)%
Second lien	41,813			8.21	%	39,845			7.80	%	1,968			4.9	%
Construction:
Residential	3,790			0.74	%	3,807			0.75	%	(17		)	(0.4	)%
Commercial	34,405			6.76	%	36,189			7.09	%	(1,784		)	(4.9	)%
Total mortgage loans on real estate	425,134			83.48	%	424,388			83.11	%	746			0.2	%
Other loans:
Commercial	52,399			10.29	%	54,756			10.72	%	(2,357		)	(4.3	)%
Consumer:
Manufactured homes	22,157			4.35	%	21,766			4.26	%	391			1.8	%
Automobile and other secured loans	6,680			1.31	%	7,172			1.40	%	(492		)	(6.9	)%
Other	2,910			0.57	%	2,566			0.50	%	344			13.4	%
Total other loans	84,146			16.52	%	86,260			16.89	%	(2,114		)	(2.5	)%
Total loans	509,280			100.00	%	510,648			100.00	%

Net deferred loan costs	2,634					2,638
Allowance for loan losses	(5,769		)			(5,651		)
Total loans, net	$	506,145				$	507,635

⁽¹⁾Excludes loans held for sale of $1.4 million and $330,000 at September 30, 2014 and June 30, 2014, respectively.

Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. The analysis of the allowance for loan losses has two components: specific and general allocations, which are further described below.

Specific Allocation

Specific allocations are made for loans determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or fair value of collateral for collateral dependent loans. The Company charges off any collateral shortfall on collaterally dependent impaired loans.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Impaired loans are generally placed on non-accrual status either when there is reasonable doubt as to the full collection of payments or when the loans become 90 days past due unless an evaluation clearly indicates that the loan is well secured and in the process of collection. Impairment is measured on a loan by loan basis for commercial loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral, adjusted for market conditions and selling expenses, if the loan is collateral dependent.

The Company may periodically agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructure (“TDR”). All TDRs are initially classified as impaired and may be evaluated for removal from impaired status after one year of current payments for a modified loan with a market rate for that borrower at the time of restructuring.

General Allocation

The general allocation is determined by segregating the remaining loans by type of loan and payment history. Consideration is given to historical loss experience and qualitative factors such as delinquency trends, changes in underwriting standards or lending policies, procedures and practices, experience and depth of management and lending staff, and general economic conditions. This analysis establishes loss factors that are applied to the loan groups to determine the amount of the general allocations. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions. Actual loan losses may be significantly more than the allowance for loan losses that have been established which could have a material negative effect on financial results. There were no changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses during the three months ended September 30, 2014.

On a quarterly basis, management’s Loan Review Committee reviews the current status of various loan assets in order to evaluate the adequacy of the allowance for loan losses. In this evaluation process specific loans with risk ratings of six (special mention) or higher are analyzed to determine their potential risk of loss. This process concentrates on watch list, non-accrual and classified loans. Any loan determined to be impaired is evaluated for potential loss exposure. Any shortfall results in a charge-off if the likelihood of loss is evaluated as probable. The Company’s policy for charging off uncollectible loans is based on an analysis of the financial condition of the borrower and/or the collateral value. To determine the adequacy of collateral on a particular loan, an estimate of the fair market value of the collateral is based on the most current appraised value, discounted cash flow valuation or other available information.

The qualitative factors are assessed based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:

Residential real estate - The Company generally does not originate loans with a loan-to-value ratio greater than 80% unless there is private mortgage insurance. All loans in this segment are collateralized by one- to four-family residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.

Commercial real estate - Loans in these segments are primarily income-producing properties throughout Massachusetts and Connecticut. The underlying cash flows generated by the properties can be adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management requires annual borrower financial statements, obtains rent rolls annually and continually monitors the cash flows of these loans.

Home equity loans - Loans in this segment are secured by first or second mortgages on one- to four-family owner occupied properties, and are generally underwritten in amounts such that the combined first and second mortgage balances generally do not exceed 85% of the value of the property serving as collateral at time of origination. The lines-of-credit are available to be drawn upon for 10 to 20 years, at the end of which time they become term loans amortized over 5 to 10 years. Interest rates on home equity lines normally adjust based on the month-end prime rate published in the Wall Street Journal.

Residential construction loans - Loans in this segment primarily include construction to permanent non-speculative real estate loans. All loans in this segment are collateralized by one- to four-family residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.

Commercial construction loans - Loans in this segment primarily include construction to permanent non-speculative real estate loans. The underlying cash flows generated by the properties may be adversely impacted by a downturn in the economy, which in turn, will have an effect on the credit quality in this segment.

Commercial loans - Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy may have an effect on the credit quality in this segment.

Automobile and other secured loans - Loans in this segment include consumer non-real estate secured loans that the Company originates as well as automobile loans that the Company purchases from a third party. The Company has the ability to select the automobile loans it purchases based on its own underwriting standards.

Manufactured home loans - Loans in this segment are secured by first liens on properties located primarily in the Northeast. Repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates, will have an effect on the credit quality in this segment. The Company has the ability to select the manufactured home loans it purchases based on its own underwriting standards.

Other consumer loans - Loans in this segment are generally unsecured and repayment is dependent on the credit quality of the individual borrower.

Credit Quality Information

The Company utilizes a nine grade internal loan rating system for all loans as follows:

Loans rated 1 – 5: Loans in these categories are considered “pass” rated loans with low to average risk.

Loans rated 6: Loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.

Loans rated 7: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

Loans rated 8: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

Loans rated 9: Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted. These loans are generally charged off at each quarter end.

On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, commercial construction and commercial loans. The Company engages an independent third-party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process. All credits rated 6 or worse are reviewed on a quarterly basis by management. At origination, management assigns risk ratings to one- to four-family residential loans, home equity loans, residential construction loans, manufactured home loans, and other consumer loans. The Company updates these risk ratings as needed based primarily on delinquency, bankruptcy, or tax delinquency.

The following tables present the Company’s loans by risk rating at September 30, 2014 and June 30, 2014:



September 30, 2014
	One- to Four-Family		Commercial Real Estate		Home Equity First Lien		Home Equity Second Lien		Residential Construction		Commercial Construction
	(In Thousands)
Loans rated 1-5	$	104,020	$	186,333	$	35,425	$	41,633	$	3,790	$	34,130
Loans rated 6	543		12,892		—		10		—		275
Loans rated 7	2,788		2,953		26		170		—		—
Loans rated 8	146		—		—		—		—		—
Loans rated 9	—		—		—		—		—		—
	$	107,497	$	202,178	$	35,451	$	41,813	$	3,790	$	34,405
	Commercial		Manufactured Homes		Automobile and Other Secured Loans		Other Consumer		Total
	(In Thousands)
Loans rated 1-5	$	47,899	$	21,916	$	6,680	$	2,905	$	484,731
Loans rated 6	430		99		—		—		14,249
Loans rated 7	4,070		51		—		5		10,063
Loans rated 8	—		91		—		—		237
Loans rated 9	—		—		—		—		—
	$	52,399	$	22,157	$	6,680	$	2,910	$	509,280



June 30, 2014
	One- to Four-Family		Commercial Real Estate		Home Equity First Lien		Home Equity Second Lien		Residential Construction		Commercial Construction
	(In Thousands)
Loans rated 1-5	$	104,221	$	184,317	$	36,299	$	39,688	$	3,807	$	36,189
Loans rated 6	523		12,447		—		7		—		—
Loans rated 7	2,608		3,986		—		150		—		—
Loans rated 8	146		—		—		—		—		—
Loans rated 9	—		—		—		—		—		—
	$	107,498	$	200,750	$	36,299	$	39,845	$	3,807	$	36,189
	Commercial		Manufactured Homes		Automobile and Other Secured Loans		Other Consumer		Total
	(In Thousands)
Loans rated 1-5	$	49,874	$	21,342	$	7,172	$	2,564	$	485,473
Loans rated 6	533		160		—		1		13,671
Loans rated 7	4,349		59		—		1		11,153
Loans rated 8	—		205		—		—		351
Loans rated 9	—		—		—		—		—
	$	54,756	$	21,766	$	7,172	$	2,566	$	510,648

The results of the Company’s quarterly loan review process are summarized by, and appropriate recommendations and loan loss allowances are approved by, the Loan Review Committee (the “Committee”). All supporting documentation with regard to the evaluation process, loan loss experience, allowance levels and the schedules of classified loans is maintained by the Company. The Committee is chaired by the Company’s Chief Financial Officer. The allowance for loan losses calculation is presented to the Board of Directors on a quarterly basis with recommendations on its adequacy.

The following are summaries of past due and non-accrual loans as of September 30, 2014 and June 30, 2014:



	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Loans on Non-accrual
September 30, 2014	(In Thousands)
Mortgage loans on real estate:
One- to four-family	$	946	$	82	$	2,681	$	3,709	$	2,977
Commercial	43		404		583		1,030		988
Home equity:
First lien	—		27		—		27		—
Second lien	144		27		24		195		143
Commercial	—		35		2,318		2,353		2,318
Consumer:
Manufactured homes	401		27		116		544		149
Automobile and other secured loans	—		—		—		—		—
Other	105		—		5		110		5
Total	$	1,639	$	602	$	5,727	$	7,968	$	6,580

June 30, 2014
Mortgage loans on real estate:
One- to four-family	$	607	$	236	$	2,437	$	3,280	$	2,755
Commercial	583		—		—		583		534
Home equity:
First lien	—		—		—		—		—
Second lien	159		—		111		270		150
Commercial	—		—		1,500		1,500		1,500
Consumer:
Manufactured homes	304		27		240		571		240
Automobile and other secured loans	—		—		—		—		—
Other	12		1		—		13		—
Total	$	1,665	$	264	$	4,288	$	6,217	$	5,179

At September 30, 2014 and June 30, 2014, there were no loans past due 90 days or more and still accruing.

The following are summaries of impaired loans:



	September 30, 2014						June 30, 2014
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
	(In Thousands)
Impaired loans without a valuation allowance:
Mortgage loans on real estate:
One- to four-family	$	2,977	$	3,196	$	—	$	2,755	$	2,814	$	—
Commercial	3,429		3,429		—		3,147		3,147		—
Commercial construction	275		275		—		—		—		—
Home equity:
Second lien	144		163		—		150		170		—
Other loans:
Commercial	3,031		3,031		—		2,952		2,952		—
Manufactured homes	149		159		—		239		275		—
Consumer other	5		5		—		—		—		—
Total	10,010		10,258		—		9,243		9,358		—
Impaired loans with a valuation allowance:
Mortgage loans on real estate:
Commercial	534		534		10		537		537		11
Total	534		534		10		537		537		11
Total impaired loans	$	10,544	$	10,792	$	10	$	9,780	$	9,895	$	11

Information pertaining to impaired loans for the three months ended September 30, 2014 and 2013 are as follows:



	Three Months Ended September 30, 2014						Three Months Ended September 30, 2013
	Average		Interest Income				Average		Interest Income
	Recorded Investment on Impaired Loans		Recognized		Recognized on a Cash Basis		Recorded Investment on Impaired Loans		Recognized		Recognized on a Cash Basis
	(In Thousands)
Mortgage loans on real estate:
One- to four-family	$	2,986	$	14	$	14	$	1,239	$	21	$	15
Commercial	3,971		31		2		7,818		106		106
Home equity:
Second lien	147		4		4		350		5		1
Construction:
Commercial	278		5		—		—		—		—
Commercial	3,052		28		16		4,799		68		36
Consumer:
Manufactured homes	150		4		4		79		1		—
Other	5		—		—		—		—		—
Total loans	$	10,589	$	86	$	40	$	14,285	$	201	$	158

At September 30, 2014, the Company had one impaired loan that had $129,000 committed to be advanced. The $10.5 million of impaired loans as of September 30, 2014 includes $6.6 million of non-accrual loans and $3.7 million of accruing TDR loans. The remaining $241,000 of impaired loans, all of which are current with payments, are loans that the Company believes, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal, or interest when due according to the contractual terms of the loan agreement. Of the $10.5 million of impaired loans, $4.0 million, or 38%, are current with all payment terms. As of June 30, 2014, the $9.8 million of impaired loans included $5.2 million of non-accrual loans and $4.6 million of accruing TDRs. Of the $9.8 million of impaired loans, $4.6 million, or 47%, were current with all payment terms as of June 30, 2014.

The Company had no new TDRs during the three months ended September 30, 2014 and 2013. As of September 30, 2014 and 2013, there were no TDRs that were restructured within the previous twelve months that had any payment defaults.

Information pertaining to activity in the allowance for loan losses for the three months ended September 30, 2014 and 2013, is as follows:



	One- to Four-Family			Commercial Real Estate			Home Equity First Lien		Home Equity Second Lien			Residential Construction		Commercial Construction		Commercial			Manufactured Homes			Automobile and Other Secured Loans			Other Consumer			Total
	(In Thousands)
Balance at June 30, 2014	$	697		$	2,288		$	204	$	268		$	30	$	472	$	1,216		$	417		$	30		$	29		$	5,651
Charge-offs	(26		)	—			—		(7		)	—		—		—			(14		)	—			(2		)	(49		)
Recoveries	—			—			—		1			—		—		12			—			4			—			17
Provision (credit)	160			128			34		69			2		—		(360		)	115			(4		)	6			150
Balance at September 30, 2014	$	831		$	2,416		$	238	$	331		$	32	$	472	$	868		$	518		$	30		$	33		$	5,769

Balance at June 30, 2013	$	762		$	2,215		$	233	$	302		$	33	$	315	$	1,065		$	432		$	34		$	23		$	5,414
Charge-offs	—			(4		)	—		—			—		—		—			(46		)	—			—			(50		)
Recoveries	—			—			1		—			—		—		1			—			—			11			13
Provision (credit)	—			90			—		—			—		—		—			10			—			—			100
Balance at September 30, 2013	$	762		$	2,301		$	234	$	302		$	33	$	315	$	1,066		$	396		$	34		$	34		$	5,477

Information pertaining to the allowance for loan losses and recorded investment in loans at September 30, 2014, and June 30, 2014 are as follows:



	At September 30, 2014
	One- to Four-Family		Commercial Real Estate		Home Equity First Lien		Home Equity Second Lien		Residential Construction		Commercial Construction		Commercial		Manufactured Homes		Automobile and Other Secured Loans		Other Consumer		Total
Allowance:	(In Thousands)
Impaired loans	$	—	$	10	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	10
Non-impaired loans	831		2,406		238		331		32		472		868		518		30		33		5,759
Total allowance for loan losses	$	831	$	2,416	$	238	$	331	$	32	$	472	$	868	$	518	$	30	$	33	$	5,769
Loans:
Impaired loans	$	2,977	$	3,963	$	—	$	144	$	—	$	275	$	3,031	$	149	$	—	$	5	$	10,544
Non-impaired loans	104,520		198,215		35,451		41,669		3,790		34,130		49,368		22,008		6,680		2,905		498,736
Total loans	$	107,497	$	202,178	$	35,451	$	41,813	$	3,790	$	34,405	$	52,399	$	22,157	$	6,680	$	2,910	$	509,280



	At June 30, 2014
	One- to Four-Family		Commercial Real Estate		Home Equity First Lien		Home Equity Second Lien		Residential Construction		Commercial Construction		Commercial		Manufactured Homes		Automobile and Other Secured Loans		Other Consumer		Total
Allowance:	(In Thousands)
Impaired loans	$	—	$	11	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	11
Non-impaired loans	697		2,277		204		268		30		472		1,216		417		30		29		5,640
Total allowance for loan losses	$	697	$	2,288	$	204	$	268	$	30	$	472	$	1,216	$	417	$	30	$	29	$	5,651
Loans:
Impaired loans	$	2,755	$	3,684	$	—	$	150	$	—	$	—	$	2,952	$	239	$	—	$	—	$	9,780
Non-impaired loans	104,743		197,066		36,299		39,695		3,807		36,189		51,804		21,527		7,172		2,566		500,868
Total loans	$	107,498	$	200,750	$	36,299	$	39,845	$	3,807	$	36,189	$	54,756	$	21,766	$	7,172	$	2,566	$	510,648

The Company has transferred a portion of its originated commercial real estate and commercial loans to participating lenders. The amounts transferred have been accounted for as sales and are therefore not included in the Company’s accompanying consolidated balance sheets. The Company and participating lenders share in any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. The Company continues to service the loans on behalf of the participating lenders and, as such, collects cash payments from the borrowers, remits payments (net of servicing fees) to participating lenders and disburses required escrow funds to relevant parties. At September 30, 2014 and June 30, 2014, the Company was servicing loans for participants aggregating $36.6 million and $34.4 million, respectively.