LOANS AND ALLOWANCE FOR LOAN LOSSES

12 Months Ended

Sep. 30, 2016

Accounts, Notes, Loans and Financing Receivable, Gross, Allowance, and Net [Abstract]

LOANS AND ALLOWANCE FOR LOAN LOSSES

(4) LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans at September 30, 2016 and 2015 consisted of the following:

(In thousands)	2016		2015
Real estate mortgage:
1-4 family residential	$	178,364	$	181,873
Commercial		217,378		172,995
Multifamily residential		18,431		21,647
Residential construction		24,275		19,723
Commercial construction		33,685		15,548
Land and land development		11,137		11,061
Commercial business		41,967		32,574
Consumer:
Home equity		21,370		19,423
Auto		4,858		5,452
Other consumer		2,102		2,159
Gross loans		553,567		482,455
Undisbursed portion of construction loans		(27,623)		(18,599)
Principal loan balance		525,944		463,856
Deferred loan origination fees and costs, net		(211)		(120)
Allowance for loan losses		(7,122)		(6,624)
Loans, net	$	518,611	$	457,112

Residential mortgage loans serviced for the benefit of others amounted to $32,000 and $74,000 at September 30, 2016 and 2015, respectively.

At September 30, 2016, the recorded investment in residential mortgage loans secured by one-to-four family residential properties with loan-to-value ratios exceeding 90% amounted to $13.7 million, of which some do not have private mortgage insurance or government guaranty.

 

The Bank has entered into loan transactions with certain directors, officers and their affiliates (related parties). In the opinion of management, such indebtedness was incurred in the ordinary course of business on substantially the same terms as those prevailing at the time for comparable transactions with other persons and does not involve more than normal risk of collectability or present other unfavorable features.

The following is a summary of activity for related party loans for the years ended September 30, 2016 and 2015:

(In thousands)	2016		2015
Beginning balance	$	11,076	$	6,306
New loans and advances		1,945		1,950
Repayments		(2,307)		(2,018)
Reclassifications due to officer and director changes		(68)		4,838
Ending balance	$	10,646	$	11,076

The following table provides the components of the recorded investment in loans as of September 30, 2016:

	Residential Real Estate		Commercial Real Estate		Multifamily		Construction		Land & Land Development		Commercial Business		Consumer		Total
	(In thousands)
Recorded Investment in Loans:
Principal loan balance	$	178,364	$	217,378	$	18,431	$	30,337	$	11,137	$	41,967	$	28,330	$	525,944
Accrued interest receivable		505		592		38		95		23		143		55		1,451
Net deferred loan origination fees and costs		158		(254)		(17)		(126)		4		37		(13)		(211)
Recorded investment in loans	$	179,027	$	217,716	$	18,452	$	30,306	$	11,164	$	42,147	$	28,372	$	527,184
Recorded Investment in Loans as Evaluated for Impairment:
Individually evaluated for impairment	$	4,152	$	6,298	$	-	$	-	$	241	$	231	$	249	$	11,171
Collectively evaluated for impairment		174,543		211,418		18,452		30,306		10,923		41,916		28,096		515,654
Acquired with deteriorated credit quality		332		-		-		-		-		-		27		359
Recorded investment in loans	$	179,027	$	217,716	$	18,452	$	30,306	$	11,164	$	42,147	$	28,372	$	527,184

The following table provides the components of the recorded investment in loans as of September 30, 2015:

	Residential Real Estate		Commercial Real Estate		Multifamily		Construction		Land & Land Development		Commercial Business		Consumer		Total
	(In thousands)
Recorded Investment in Loans:
Principal loan balance	$	181,873	$	172,995	$	21,647	$	16,672	$	11,061	$	32,574	$	27,034	$	463,856
Accrued interest receivable		552		454		47		23		30		95		58		1,259
Net deferred loan origination fees and costs		283		(294)		(21)		(63)		8		(28)		(5)		(120)
Recorded investment in loans	$	182,708	$	173,155	$	21,673	$	16,632	$	11,099	$	32,641	$	27,087	$	464,995
Recorded Investment in Loans as Evaluated for Impairment:
Individually evaluated for impairment	$	4,391	$	7,041	$	-	$	-	$	-	$	222	$	290	$	11,944
Collectively evaluated for impairment		177,873		166,114		21,673		16,632		11,099		32,419		26,767		452,577
Acquired with deteriorated credit quality		444		-		-		-		-		-		30		474
Recorded investment in loans	$	182,708	$	173,155	$	21,673	$	16,632	$	11,099	$	32,641	$	27,087	$	464,995

An analysis of the allowance for loan losses as of and for the year ended September 30, 2016 is as follows:

	Residential		Commercial						Land & Land		Commercial
	Real Estate		Real Estate		Multifamily		Construction		Development		Business		Consumer		Total
	(In thousands)
Changes in Allowance for Loan Losses:
Beginning balance	$	444	$	4,327	$	156	$	551	$	369	$	678	$	99	$	6,624
Provisions		(17)		833		(47)		294		(74)		(385)		33		637
Charge-offs		(207)		-		-		-		-		(10)		(108)		(325)
Recoveries		115		-		-		-		-		1		70		186
Ending balance	$	335	$	5,160	$	109	$	845	$	295	$	284	$	94	$	7,122
Ending Allowance Balance Attributable to Loans:
Individually evaluated for impairment	$	43	$	-	$	-	$	-	$	-	$	-	$	5	$	48
Collectively evaluated for impairment		292		5,160		109		845		295		284		89		7,074
Acquired with deteriorated credit quality		-		-		-		-		-		-		-		-
Ending balance	$	335	$	5,160	$	109	$	845	$	295	$	284	$	94	$	7,122

An analysis of the allowance for loan losses as of and for the year ended September 30, 2015 is as follows:

	Residential		Commercial						Land & Land		Commercial
	Real Estate		Real Estate		Multifamily		Construction		Development		Business		Consumer		Total
	(In thousands)
Changes in Allowance for Loan Losses:
Beginning balance	$	577	$	3,808	$	146	$	443	$	302	$	795	$	179	$	6,250
Provisions		109		559		10		108		67		8		(2)		859
Charge-offs		(283)		(40)		-		-		-		(126)		(144)		(593)
Recoveries		41		-		-		-		-		1		66		108
Ending balance	$	444	$	4,327	$	156	$	551	$	369	$	678	$	99	$	6,624
Ending Allowance Balance Attributable to Loans:
Individually evaluated for impairment	$	9	$	-	$	-	$	-	$	-	$	-	$	5	$	14
Collectively evaluated for impairment		435		4,327		156		551		369		678		94		6,610
Acquired with deteriorated credit quality		-		-		-		-		-		-		-		-
Ending balance	$	444	$	4,327	$	156	$	551	$	369	$	678	$	99	$	6,624

The following table presents impaired loans individually evaluated for impairment as of and for the year ended September 30, 2016. The Company did not recognize any interest income on impaired loans using the cash receipts method of accounting for the year ended September 30, 2016.

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
	(In thousands)
Loans with no related allowance recorded:
Residential real estate	$	3,891	$	4,171	$	-	$	5,044	$	144
Commercial real estate		6,298		6,394		-		6,595		197
Multifamily		-		-		-		-		-
Construction		-		-		-		-		-
Land and land development		241		238		-		18		-
Commercial business		231		224		-		281		5
Consumer		175		175		-		198		5
	$	10,836	$	11,202	$	-	$	12,136	$	351
Loans with an allowance recorded:
Residential real estate	$	451	$	450	$	43	$	86	$	-
Commercial real estate		-		-		-		-		-
Multifamily		-		-		-		-		-
Construction		-		-		-		-		-
Land and land development		-		-		-		-		-
Commercial business		-		-		-		-		-
Consumer		74		74		5		79		-
	$	525	$	524	$	48	$	165	$	-
Total:
Residential real estate	$	4,342	$	4,621	$	43	$	5,130	$	144
Commercial real estate		6,298		6,394		-		6,595		197
Multifamily		-		-		-		-		-
Construction		-		-		-		-		-
Land and land development		241		238		-		18		-
Commercial business		231		224		-		281		5
Consumer		249		249		5		277		5
	$	11,361	$	11,726	$	48	$	12,301	$	351

The following table presents impaired loans individually evaluated for impairment as of and for the year ended September 30, 2015. The Company recognized $5,000 of interest income on impaired commercial real estate loans using the cash receipts method of accounting for the year ended September 30, 2015.

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
	(In thousands)
Loans with no related allowance recorded:
Residential real estate	$	4,681	$	5,245	$	-	$	5,590	$	143
Commercial real estate		7,041		7,079		-		6,136		223
Multifamily		-		-		-		-		-
Construction		-		-		-		-		-
Land and land development		-		-		-		-		-
Commercial business		222		282		-		255		1
Consumer		210		214		-		238		6
	$	12,154	$	12,820	$	-	$	12,219	$	373
Loans with an allowance recorded:
Residential real estate	$	9	$	9	$	9	$	115	$	-
Commercial real estate		-		-		-		9		-
Multifamily		-		-		-		-		-
Construction		-		-		-		-		-
Land and land development		-		-		-		-		-
Commercial business		-		-		-		4		-
Consumer		80		80		5		90		-
	$	89	$	89	$	14	$	218	$	-
Total:
Residential real estate	$	4,690	$	5,254	$	9	$	5,705	$	143
Commercial real estate		7,041		7,079		-		6,145		223
Multifamily		-		-		-		-		-
Construction		-		-		-		-		-
Land and land development		-		-		-		-		-
Commercial business		222		282		-		259		1
Consumer		290		294		5		328		6
	$	12,243	$	12,909	$	14	$	12,437	$	373

Nonperforming loans consist of nonaccrual loans and loans over 90 days past due and still accruing interest. The following table presents the recorded investment in nonperforming loans at September 30, 2016 and 2015:

	At September 30, 2016						At September 30, 2015
			Loans 90+						Loans 90+
			Days		Total				Days		Total
	Nonaccrual		Past Due		Nonperforming		Nonaccrual		Past Due		Nonperforming
	Loans		Still Accruing		Loans		Loans		Still Accruing		Loans
	(In thousands)
Residential real estate	$	1,752	$	22	$	1,774	$	1,923	$	155	$	2,078
Commercial real estate		1,606		-		1,606		1,855		-		1,855
Multifamily		-		-		-		-		-		-
Construction		-		-		-		-		-		-
Land and land development		241		-		241		-		-		-
Commercial business		136		-		136		210		94		304
Consumer		140		-		140		165		3		168
Total	$	3,875	$	22	$	3,897	$	4,153	$	252	$	4,405

The following table presents the aging of the recorded investment in past due loans at September 30, 2016:

	30-59 Days		60-89 Days		90+ Days		Total				Total
	Past Due		Past Due		Past Due		Past Due		Current		Loans
	(In thousands)
Residential real estate	$	2,019	$	860	$	1,070	$	3,949	$	175,078	$	179,027
Commercial real estate		367		-		94		461		217,255		217,716
Multifamily		-		-		-		-		18,452		18,452
Construction		-		-		-		-		30,306		30,306
Land and land development		-		-		241		241		10,923		11,164
Commercial business		40		-		42		82		42,065		42,147
Consumer		76		1		40		117		28,255		28,372
Total	$	2,502	$	861	$	1,487	$	4,850	$	522,334	$	527,184

The following table presents the aging of the recorded investment in past due loans at September 30, 2015:

	30-59 Days		60-89 Days		90+ Days		Total				Total
	Past Due		Past Due		Past Due		Past Due		Current		Loans
	(In thousands)
Residential real estate	$	3,635	$	1,419	$	1,530	$	6,584	$	176,124	$	182,708
Commercial real estate		1,098		113		139		1,350		171,805		173,155
Multifamily		504		-		-		504		21,169		21,673
Construction		-		-		-		-		16,632		16,632
Land and land development		253		-		-		253		10,846		11,099
Commercial business		15		-		303		318		32,323		32,641
Consumer		81		14		32		127		26,960		27,087
Total	$	5,586	$	1,546	$	2,004	$	9,136	$	455,859	$	464,995

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, public information, historical payment experience, credit documentation, and current economic trends, among other factors. The Company classifies loans based on credit risk at least quarterly. The Company uses the following regulatory definitions for risk ratings:

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss: Loans classified as loss are considered uncollectible and of such little value that their continuance on the Company’s books as an asset is not warranted.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. The following table presents the recorded investment in loans by risk category as of the date indicated:

	Residential		Commercial						Land and Land		Commercial
	Real Estate		Real Estate		Multifamily		Construction		Development		Business		Consumer		Total
	(In thousands)
September 30, 2016:
Pass	$	173,477	$	211,247	$	18,452	$	30,206	$	10,924	$	41,986	$	28,197	$	514,489
Special Mention		459		-		-		100		-		25		-		584
Substandard		5,002		6,469		-		-		240		136		160		12,007
Doubtful		89		-		-		-		-		-		15		104
Loss		-		-		-		-		-		-		-		-
Total	$	179,027	$	217,716	$	18,452	$	30,306	$	11,164	$	42,147	$	28,372	$	527,184
September 30, 2015:
Pass	$	175,662	$	160,224	$	21,673	$	16,632	$	11,079	$	32,335	$	26,793	$	444,398
Special Mention		799		5,342		-		-		-		96		13		6,250
Substandard		5,871		7,589		-		-		20		173		274		13,927
Doubtful		376		-		-		-		-		37		7		420
Loss		-		-		-		-		-		-		-		-
Total	$	182,708	$	173,155	$	21,673	$	16,632	$	11,099	$	32,641	$	27,087	$	464,995

Troubled Debt Restructurings

The following table summarizes the Company’s TDRs by accrual status at September 30, 2016 and 2015. There was no specific reserve included in the allowance for loan losses related to TDRs at September 30, 2016 and 2015.

	Accruing		Nonaccrual		Total
	(In thousands)
September 30, 2016:
Residential real estate	$	2,590	$	-	$	2,590
Commercial real estate		4,692		1,512		6,204
Commercial business		95		120		215
Consumer		109		-		109
Total	$	7,486	$	1,632	$	9,118
September 30, 2015:
Residential real estate	$	2,767	$	110	$	2,877
Commercial real estate		5,186		1,523		6,709
Commercial business		12		-		12
Consumer		125		-		125
Total	$	8,090	$	1,633	$	9,723

The following table summarizes information in regard to TDRs that were restructured during the years ended September 30, 2016 and 2015.

			Pre-		Post-
			Modification		Modification
	Number of		Principal		Principal
	Loans		Balance		Balance
	(Dollars in thousands)
September 30, 2016:
Residential real estate		5	$	181	$	247
Commercial real estate		1		94		131
Commercial business		3		186		216
Total		9	$	461	$	594
September 30, 2015:
Residential real estate		2	$	165	$	172
Commercial real estate		1		1,523		1,523
Consumer		1		3		3
Total		4	$	1,691	$	1,698

At September 30, 2016, the Company had not committed to lend any additional amounts to customers with outstanding loans classified as TDRs. At September 30, 2015, the Company had a commitment to lend $2,000 in additional funds to a customer with an outstanding loan classified as a TDR.

For the TDRs listed above, the terms of modification included temporary interest-only payment periods, reduction of the stated interest rate, extension of the maturity date, deferral of the contractual principal and interest payments, and the renewal of matured loans where the debtor was unable to access funds elsewhere at a market interest rate for debt with similar risk characteristics.

Principal in the amount of $51,000 was charged-off during the year ended September 30, 2016 as a result of a TDR that was restructured in 2013. There were no principal charge-offs recorded as a result of TDRs during the year ended September 30, 2015. There was no specific allowance for loan losses related to TDRs modified during the years ended September 30, 2016 and 2015. In the event that a TDR subsequently defaults, the Company evaluates the restructuring for possible impairment. As a result, the related allowance for loan losses may be increased or charge-offs may be taken to reduce the carrying amount of the loan.

During the years ended September 30, 2016 and 2015, the Company did not have any TDRs that were modified within the previous twelve months for which there was a payment default (defined as more than 90 days past due or in the process of foreclosure).

Loan Servicing Rights

The Company originates loans to commercial customers under the SBA 7(a) and other programs. During the year ended September 30, 2016, the Company began selling the guaranteed portion of the SBA loans with servicing retained. Loan servicing rights on originated SBA loans that have been sold are initially recorded at fair value. Capitalized servicing rights are then amortized in proportion to and over the period of estimated net servicing income. Impairment of servicing rights is assessed using the present value of estimated future cash flows.

The aggregate fair value of loan servicing rights at September 30, 2016 approximated its carrying value. A valuation model employed by an independent third party calculates the present value of future cash flows and is used to estimate fair value at the date of sale and on a quarterly basis for impairment analysis purposes. Management periodically compares the valuation model inputs and results to published industry data in order to validate the model results and assumptions. Key assumptions used to estimate the fair value of the loan servicing rights include the discount rate, ranging from 8.54% to 14.46% with a weighted average rate of 12.27%, and prepayment speed assumptions, ranging from 4.25% to 8.71% with a weighted average rate of 6.75%. For purposes of impairment, risk characteristics such as interest rate, loan type, term and investor type are used to stratify the loan servicing rights. Impairment is recognized through a valuation allowance to the extent that fair value is less than the carrying amount. Changes in the valuation allowance are reported in net gain on sales of loans in the consolidated statements of income.

The unpaid principal balance of SBA loans serviced for others was $13.6 million at September 30, 2016. Contractually specified late fees and ancillary fees earned on SBA loans of $37,000 for the year ended September 30, 2016, are included in interest income on loans in the consolidated statement of income. Net servicing costs (contractually specified servicing fees offset by direct servicing expenses) related to SBA loans of $59,000 are included in other noninterest income in the consolidated statement of income for the year ended September 30, 2016.

An analysis of loan servicing rights for the year ended September 30, 2016 is as follows:

(In thousands)
Balance, beginning of period	$	-
Servicing rights capitalized		345
Amortization		(35)
Change in valuation allowance		-
Balance, end of period	$	310

Residential mortgage loans originated for sale in the secondary market continue to be sold with servicing released.