6. LOANS AND SERVICING

Loans

A summary of loans is as follows:


	At		At
	December 31,		December 31,
	2015		2014
	Amount		Amount
	(In thousands)
Residential loans:
One- to four-family	$	86,472	$	84,199
Home equity loans and lines of credit		18,263		16,499
Total residential mortgage loans		104,735		100,698

Commercial loans:
One- to four-family investment property		15,255		8,345
Multi-family real estate		30,709		15,020
Commercial real estate		67,152		62,227
Commercial business		17,548		17,838
Total commercial loans		130,664		103,430

Construction loans:
One- to four-family		12,967		13,056
Multi-family		1,486		10,842
Non-residential		5,925		4,828
Total construction loans		20,378		28,726

Consumer		237		289

Total loans		256,014		233,143

Other items:
Net deferred loan costs		377		379
Allowance for loan losses		(2,408)		(2,229)

Total loans, net	$	253,983	$	231,293

Information pertaining to the allowance for loan losses at and for the year ended December 31, 2015 is as follows:


	Residential				Commercial								Construction
					One- to four-
			Home equity		family
	One- to four-		loans and lines		investment		Multi-family		Commercial		Commercial		One- to four-				Non-
	family		of credit		property		real estate		real estate		business		family		Multi-family		residential		Consumer		Unallocated		Total
	(In thousands)

Allowance for loan losses

Beginning Balance	$	273	$	249	$	46	$	113	$	943	$	311	$	117	$	97	$	77	$	3	$	—	$	2,229
Charge-offs		—		—		—		—		—		(22)		—		—		—		(4)		—		(26)
Recoveries		—		1		—		—		—		—		—		—		—		4		—		5
(Benefit) provision		(76)		26		44		120		78		16		(4)		(85)		14		(1)		68		200
Ending Balance	$	197	$	276	$	90	$	233	$	1,021	$	305	$	113	$	12	$	91	$	2	$	68	$	2,408

Ending balance:
individually evaluated for impairment	$	7	$	—	$	7	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	14

Ending balance:
collectively evaluated for impairment	$	190	$	276	$	83	$	233	$	1,021	$	305	$	113	$	12	$	91	$	2	$	68	$	2,394

Loans

Ending Balance	$	86,472	$	18,263	$	15,255	$	30,709	$	67,152	$	17,548	$	12,967	$	1,486	$	5,925	$	237	$	—	$	256,014

Ending balance:
individually evaluated for impairment	$	1,567	$	104	$	88	$	—	$	287	$	—	$	—	$	—	$	—	$	—	$	—	$	2,046

Ending balance:
collectively evaluated for impairment	$	84,905	$	18,159	$	15,167	$	30,709	$	66,865	$	17,548	$	12,967	$	1,486	$	5,925	$	237	$	—	$	253,968

Information pertaining to the allowance for loan losses at and for the year ended December 31, 2014 is as follows:


	Residential				Commercial								Construction
					One- to four-
			Home equity		family
	One- to four-		loans and lines		investment		Multi-family		Commercial		Commercial		One- to four-				Non-
	family		of credit		property		real estate		real estate		business		family		Multi-family		residential		Consumer		Unallocated		Total
	(In thousands)
Allowance for loan losses

Beginning Balance	$	284	$	274	$	61	$	108	$	1,056	$	291	$	133	$	66	$	63	$	15	$	45	$	2,396
Charge-offs		—		(14)		—		—		(248)		—		—		—		—		(7)		—		(269)
Recoveries		—		1		—		—		—		—		—		—		—		3		—		4
(Benefit) provision		(11)		(12)		(15)		5		135		20		(16)		31		14		(8)		(45)		98
Ending Balance	$	273	$	249	$	46	$	113	$	943	$	311	$	117	$	97	$	77	$	3	$	—	$	2,229

Ending balance:
individually evaluated for impairment	$	7	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	7

Ending balance:
collectively evaluated for impairment	$	266	$	249	$	46	$	113	$	943	$	311	$	117	$	97	$	77	$	3	$	—	$	2,222

Loans

Ending Balance	$	84,199	$	16,499	$	8,345	$	15,020	$	62,227	$	17,838	$	13,056	$	10,842	$	4,828	$	289	$	—	$	233,143

Ending balance:
individually evaluated for impairment	$	317	$	27	$	—	$	—	$	295	$	—	$	—	$	—	$	—	$	—	$	—	$	639

Ending balance:
collectively evaluated for impairment	$	83,882	$	16,472	$	8,345	$	15,020	$	61,932	$	17,838	$	13,056	$	10,842	$	4,828	$	289	$	—	$	232,504

The following is a summary of past-due and non-accrual loans at December 31, 2015:


	Loans delinquent for:												90 days
					90 days		Total		Total		Total		or more		Non-accrual
	30 - 59 Days		60 - 89 Days		or more		Past Due		Current		Loans		and accruing		Loans
	(In thousands)
Residential loans:
One- to four-family	$	—	$	—	$	649	$	649	$	85,823	$	86,472	$	—	$	776
Home equity loans and lines of credit		273		—		—		273		17,990		18,263		—		—

Commercial loans:
One- to four-family investment property		—		—		—		—		15,255		15,255		—		—
Multi-family real estate		—		—		—		—		30,709		30,709		—		—
Commercial real estate		—		—		—		—		67,152		67,152		—		—
Commercial business		12		—		—		12		17,536		17,548		—		—

Construction loans:
One- to four-family		—		—		—		—		12,967		12,967		—		—
Multi-family		—		—		—		—		1,486		1,486		—		—
Non-residential		—		—		—		—		5,925		5,925		—		—

Consumer		—		4		—		4		233		237		—		—
Total	$	285	$	4	$	649	$	938	$	255,076	$	256,014	$	—	$	776

The following is a summary of past-due and non-accrual loans at December 31, 2014:


	Loans delinquent for:												90 days
					90 days		Total		Total		Total		or more		Non-accrual
	30 - 59 Days		60 - 89 Days		or more		Past Due		Current		Loans		and accruing		Loans
	(In thousands)
Residential loans:
One- to four-family	$	—	$	620	$	641	$	1,261	$	82,938	$	84,199	$	—	$	951
Home equity loans and lines of credit		38		13		—		51		16,448		16,499		—		—

Commercial loans:
One- to four-family investment property		—		—		—		—		8,345		8,345		—		—
Multi-family real estate		—		—		—		—		15,020		15,020		—		—
Commercial real estate		295		—		—		295		61,932		62,227		—		—
Commercial business		—		—		—		—		17,838		17,838		—		—

Construction loans:
One- to four-family		—		—		—		—		13,056		13,056		—		—
Multi-family		—		—		—		—		10,842		10,842		—		—
Non-residential		—		—		—		—		4,828		4,828		—		—

Consumer		—		—		2		2		287		289		—		2
Total	$	333	$	633	$	643	$	1,609	$	231,534	$	233,143	$	—	$	953

The following is an analysis of impaired loans at December 31, 2015:


			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
	(In thousands)
Impaired loans without a valuation allowance

Residential loans:
One- to four-family	$	1,255	$	1,255	$	—	$	236	$	12
Home equity loans and lines of credit		104		104		—		51		2
Commercial loans:
One- to four-family investment property		—		—		—		—		—
Multi-family real estate		—		—		—		—		—
Commercial real estate		287		287		—		292		17
Commercial business		—		—		—		74		9
Construction loans:
One- to four-family		—		—		—		—		—
Multi-family		—		—		—		—		—
Non-residential		—		—		—		—		—
Consumer		—		—		—		—		—

Total impaired with no related allowance	$	1,646	$	1,646	$	—	$	653	$	40

Impaired loans with a valuation allowance

Residential loans:
One- to four-family	$	312	$	312	$	7	$	314	$	16
Home equity loans and lines of credit		—		—		—		—		—
Commercial loans:
One- to four-family investment property		88		88		7		55		4
Multi-family real estate		—		—		—		—		—
Commercial real estate		—		—		—		—		—
Commercial business		—		—		—		—		—
Construction loans:
One- to four-family		—		—		—		—		—
Multi-family		—		—		—		—		—
Non-residential		—		—		—		—		—
Consumer		—		—		—		—		—

Total with an allowance recorded	$	400	$	400	$	14	$	369	$	20

No additional funds are committed to be advanced in connection with impaired loans.

The following is an analysis of impaired loans at December 31, 2014:


			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
	(In thousands)
Impaired loans without a valuation allowance

Residential loans:
One- to four-family	$	—	$	—	$	—	$	—	$	—
Home equity loans and lines of credit		27		27		—		28		1
Commercial loans:
One- to four-family investment property		—		—		—		—		—
Multi-family real estate		—		—		—		—		—
Commercial real estate		295		295		—		298		18
Commercial business		—		—		—		—		—
Construction loans:
One- to four-family		—		—		—		—		—
Multi-family		—		—		—		—		—
Non-residential		—		—		—		—		—
Consumer		—		—		—		—		—

Total impaired with no related allowance	$	322	$	322	$	—	$	326	$	19

Impaired loans with a valuation allowance

Residential loans:
One- to four-family	$	317	$	317	$	7	$	319	$	16
Home equity loans and lines of credit		—		—		—		123		—
Commercial loans:
One- to four-family investment property		—		—		—		—		—
Multi-family real estate		—		—		—		—		—
Commercial real estate		—		—		—		426		8
Commercial business		—		—		—		—		—
Construction loans:
One- to four-family		—		—		—		—		—
Multi-family		—		—		—		—		—
Non-residential		—		—		—		—		—
Consumer		—		—		—		—		—

Total with an allowance recorded	$	317	$	317	$	7	$	868	$	24

The Company had two loan relationships that were classified as troubled debt restructures (“TDR”) totaling $775,000 during the year ended December 31, 2015. The first relationship involved two commercial business loans totaling $235,000 guaranteed by two individuals. During the year ended December 31, 2015, the business was sold and net proceeds of $100,000 were applied to the outstanding balances leaving a combined deficiency or pre-modification balance of $135,000. The $135,000 balance was modified into two loans held individually by the personal guarantors of the original loans on a pro-rated basis based on their respective ownership percentages. The first loan had a $45,000 balance and the borrower made a $22,500 cash payment and the remaining $22,500 balance was charged off to the allowance for loan losses resulting in a post modification balance of zero. The remaining balance was modified into a one- to four-family investment property loan with a post-modification balance of $90,000. The TDR did not result in a material impact to the allowance for loan losses. The second relationship involved a one- to four-family residential loan totaling $606,000 to one individual. During the year ended December 31, 2015, the loan was modified to include a second individual and additional residential collateral was added. The loan, with a post modification balance of $606,000, was restructured into an interest only note with maturity in 24 months. A second loan, an interest only home equity loan with maturity in 24 months, representing the real estate taxes paid by the Company on behalf of the borrower, was established as part of the Forbearance Agreement. The home equity loan had a post modification balance of $79,000. As part of the Forbearance Agreement, the borrower will be working to develop land for potential sale which is collateralizing the TDR loan and the Company will receive 100% of the net proceeds to pay down the outstanding principle balance of the TDR. When the loan matures, any remaining balance due must be paid in full or refinanced at that time. The TDR did not result in a material impact to the allowance for loan losses. There is no commitment to lend additional funds to the borrowers whose loans were modified as a TDR during the year ended December 31, 2015.

There were no loan modifications made that resulted in a TDR during the year ended December 31, 2014.

At December 31, 2015 there were no TDR loans in default of their modified terms.

The following tables present the Company’s loans by risk rating:


	Residential				Commercial								Construction
					One‑ to four‑
			Home equity		family
	One‑ to four‑		loans and lines		investment		Multi‑family		Commercial		Commercial		One‑ to four‑				Non-
	family		of credit		property		real estate		real estate		business		family		Multi‑family		residential		Consumer		Total
	(In thousands)
At December 31, 2015

Classification:
Not formally rated	$	84,778	$	18,183	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	237	$	103,198
Pass		—		—		15,167		30,709		66,420		17,454		12,967		1,486		5,925		—		150,128
Special mention		—		—		—		—		732		94		—		—		—		—		826
Substandard		1,694		80		88		—		—		—		—		—		—		—		1,862
Doubtful		—		—		—		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—		—		—		—
Total loans	$	86,472	$	18,263	$	15,255	$	30,709	$	67,152	$	17,548	$	12,967	$	1,486	$	5,925	$	237	$	256,014

At December 31, 2014

Classification:
Not formally rated	$	82,311	$	16,499	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	287	$	99,097
Pass		—		—		8,345		15,020		62,227		17,838		13,056		10,842		4,828		—		132,156
Special mention		—		—		—		—		—		—		—		—		—		—		—
Substandard		1,888		—		—		—		—		—		—		—		—		2		1,890
Doubtful		—		—		—		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—		—		—		—
Total loans	$	84,199	$	16,499	$	8,345	$	15,020	$	62,227	$	17,838	$	13,056	$	10,842	$	4,828	$	289	$	233,143

Credit Quality Information

The Bank utilizes a nine grade internal loan rating system for all commercial and construction loans as follows:

Loans rated 1 - 5: Loans in these categories are considered “Pass” rated loans with low to average risk and are not formally rated.

Loans rated 6: Loans in this category are considered “Special Mention.” These loans have risk profiles that 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.” These loans have a well defined weakness that jeopardizes the liquidation of the debt and is inadequately protected by the current sound worth and paying capacity of the borrower or pledged collateral. There is a distinct possibility that the Company will sustain some loss if the deficiencies are 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 a “Loss.” The loan has been determined to be uncollectible and the chance of loss is inevitable. Loans in this category will be charged-off.

On an annual basis, or more often if needed, the Bank formally reviews the ratings on all commercial and construction loans.

Loans serviced for others and mortgage servicing rights

Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balance of mortgage loans serviced for others was $100,544,000 and $113,446,000 at December 31, 2015 and 2014, respectively.

The risks inherent in the mortgage servicing assets relate primarily to changes in prepayments that result from shifts in mortgage interest rates. The fair value of mortgage servicing rights was $1,100,000 and $1,335,000 at December 31, 2015 and 2014, respectively, and was determined using the moving average 10-year U.S. Treasury rate plus 5.0%, adjusted to reflect the current credit spreads and conditions in the market, as a discount rate. Prepayment assumptions, which are impacted by loan rates and terms, are calculated using a moving average of prepayment data published by the Securities Industry and Financial Markets Association, an independent third party proprietary analysis of prepayment rates embedded in liquid mortgage securities markets and modeled against the serviced loan portfolio by the independent third party valuation specialist.

The following summarizes mortgage servicing rights capitalized and amortized:


	Years Ended
	December 31,
	2015		2014
	(In thousands)

Mortgage servicing rights:
Balance at beginning of period	$	840	$	1,084
Additions		10		114
Amortization		(327)		(358)
Balance at end of period		523		840

Valuation allowance:
Balance at beginning of period		6		26
Additions		13		4
Reductions		(15)		(24)
Balance at end of period		4		6

Mortgage servicing assets, net	$	519	$	834

Fair value of mortgage servicing assets	$	1,100	$	1,335