Loans Receivable and the Allowance for Loan Losses

3 Months Ended

Mar. 31, 2020

Loans Receivable and the Allowance for Loan Losses

Loans Receivable and the Allowance for Loan Losses

Note 5 – Loans Receivable and the Allowance for Loan Losses -

Loans receivable at March 31, 2020 and December 31, 2019 are summarized as follows:

	March 31,		December 31,
(in thousands)	2020		2019
Mortgage Loans
1-4 Family	$	69,532	$	73,591
Multifamily		3,215		3,567
Commercial real estate		1,095		1,117
Consumer Loans		206		209
		74,048		78,484
Plus (Less):
Unamortized Loan Fees/Costs		1,064		1,151
Allowance for Loan Losses		(850)		(850)
Net Loans Receivable	$	74,262	$	78,785

The performing mortgage loans are pledged, under a blanket lien, as collateral securing advances from the FHLB at March 31, 2020 and December 31, 2019.

Management evaluates the allowance for loan losses to assess the risk of loss in the loan portfolio and to determine the adequacy of the allowance for loan losses. For purposes of this evaluation, loans are aggregated into pools based on various characteristics. Some of those characteristics include payment status, concentrations, and loan to collateral value and the financial status of borrowers. The allowance allocated to each of these pools is based on historical charge-off rates, adjusted for changes in the credit risk characteristics within these pools, as determined from current information and analyses. In determining the appropriate level of the allowance, management also ensures that the overall allowance appropriately reflects current macroeconomic conditions, industry exposure and a margin for the imprecision inherent in most estimates of expected credit losses. In addition to these factors, management also considers the following for each segment of the loan portfolio when determining the allowance:

•  Residential mortgages - This category consists of loans secured by first and junior liens on residential real estate. The performance of these loans may be adversely affected by unemployment rates, local residential real estate market conditions and the interest rate environment.

•  Commercial real estate - This category consists of loans primarily secured by office buildings, and retail shopping facilities. The performance of commercial real estate loans may be adversely affected by conditions specific to the relevant industry, the real estate market for the property type and geographic region where the property or borrower is located.

•  Construction and land - This category consists of loans to finance the ground-up construction and/or improvement of construction of residential and commercial properties and loans secured by land. The performance of construction and land loans is generally dependent upon the successful completion of improvements and/or land development for the end user, the sale of the property to a third party, or a secondary source of cash flow from the owners. The successful completion of planned improvements and development maybe adversely affected by changes in the estimated property value upon completion of construction, projected costs and other conditions leading to project delays.

•  Multi-family residential - This category consists of loans secured by apartment or residential buildings with five or more units used to accommodate households on a temporary or permanent basis. The performance of multi-family loans is generally dependent on the receipt of rental income from the tenants who occupy the subject property. The occupancy rate of the subject property and the ability of the tenants to pay rent may be adversely affected by the location of the subject property and local economic conditions.

•  Consumer - This category consists of loans to individuals for household, family and other personal use. The performance of these loans may be adversely affected by national and local economic conditions, unemployment rates and other factors affecting the borrower's income available to service the debt. All of our consumer loans are secured by our customers’ savings accounts and/or certificates of deposit.

As a result of the uncertainties inherent in the estimation process, management’s estimate of loan losses and the related allowance could change in the near term.

Based on management’s periodic evaluation of the allowance for loan losses, a provision for loan losses is charged to operations if additions to the allowance are required. Actual loan charge-offs are deducted from the allowance and subsequent recoveries of previously charged-off loans are added to the allowance.

The following tables set forth, as of March 31, 2020 and December 31, 2019, the balance of the allowance for loan losses by portfolio segment, disaggregated by impairment methodology, which is then further segregated by amounts evaluated for impairment collectively and individually. The allowance for loan losses allocated to each portfolio segment is not necessarily indicative of future losses in any particular portfolio segment and does not restrict the use of the allowance to absorb losses in other portfolio segments.

Allowance for Loan Losses and Recorded Investment in Loans Receivable
March 31, 2020 (in thousands)

					Mortgage-
	Mortgage-		Mortgage-		Commercial
	1-4 Family		Multifamily		Real Estate		Consumer		Total
Allowance for Loan Losses:
Beginning Balance	$	812	$	27	$	11	$	—	$	850
Charge-Offs		—		—		—		—		—
Recoveries		—		—		—		—		—
Provision		(15)		11		4		—		—
Ending Balance	$	797	$	38	$	15	$	—	$	850
Ending Balance:
Individually Evaluated for Impairment	$	—	$	—	$	—	$	—	$	—
Collectively Evaluated for Impairment	$	797	$	38	$	15	$	—	$	850
Loans Receivable:
Ending Balance	$	69,532	$	3,215	$	1,095	$	206	$	74,048
Ending Balance:
Individually Evaluated for Impairment	$	—	$	—	$	—	$	—	$	—
Collectively Evaluated for Impairment	$	69,532	$	3,215	$	1,095	$	206	$	74,048

The allowance for loan losses for Mortgage 1‑4 Family Loans of $797,000 includes an unallocated portion of $378,000 as of March 31, 2020.

Allowance for Loan Losses and Recorded Investment in Loans Receivable
December 31, 2019 (in thousands)

					Mortgage-
	Mortgage-		Mortgage-		Commercial
	1-4 Family		Multifamily		Real Estate		Consumer		Total
Allowance for Loan Losses:
Beginning Balance	$	807	$	31	$	12	$	—	$	850
Charge-Offs		—		—		—		—		—
Recoveries		9		—		—		—		9
Provision		(4)		(4)		(1)		—		(9)
Ending Balance	$	812	$	27	$	11	$	—	$	850
Ending Balance:
Individually Evaluated for Impairment	$	—	$	—	$	—	$	—	$	—
Collectively Evaluated for Impairment	$	812	$	27	$	11	$	—	$	850
Loans Receivable:
Ending Balance	$	73,591	$	3,567	$	1,117	$	209	$	78,484
Ending Balance:
Individually Evaluated for Impairment	$	—	$	—	$	—	$	—	$	—
Collectively Evaluated for Impairment	$	73,591	$	3,567	$	1,117	$	209	$	78,484

The allowance for loan losses for Mortgage 1‑4 Family Loans of $812,000 includes an unallocated portion of $437,000 as of December 31, 2019.

Management further disaggregates the loan portfolio segments into classes of loans, which are based on the initial measurement of the loan, risk characteristics of the loan and the method for monitoring and assessing the credit risk of the loan.

Loan Grades / Classification

The primary purpose of grading loans is to assess credit quality and assist in identifying potential problem loans.  Every loan in the portfolio is assigned a loan grade based on quality and level of risk.  Loan grades are updated as events occur that bear on the collectability of the loan, such as change in payment flow or status of the obligor or collateral.  Changes in loan grades are reported to the Board Loan Committee.

Each credit reviewed is assigned a loan grade based on the following system:

Loan Grade 1Pass – Good

Loans with no identified problems and do not require more than normal attention.  The repayment source is well defined and the borrower/guarantor exhibits no inability of repaying the loan as agreed. The financial information is acceptable and the loan meets credit and policy requirements and exhibits no unusual elements of risk.  The collateral is acceptable and adequate. 

Loan Grade 2Pass – Fair

These are performing owner-occupied loans that exhibit diminished borrower capacity, such as sufficiently-aged Troubled Debt Restructurings or loans that are frequently delinquent more than 30 days but less than 60 days.  Also included are performing investor loans with a good payment record but lack updated financial information but are judged from alternate sources to have satisfactory cash flows and a sufficiently strong guarantor.

Loan Grade 3Watch

Owner-occupied loans that are well-secured but are occasionally delinquent more than 60 days but less than 90.  Also included are performing investor loans lacking required current financial information or that demonstrate diminished guarantor capacity and an estimated stressed debt service coverage ratio of less than 1.20.

Loan Grade 4Special Mention (For investment loans only.)

Investment loans that have potential or identified weaknesses that deserve management’s close attention.  If left uncorrected, these may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. These loans are not adversely classified and do not expose the institution to sufficient risk to warrant adverse classification. Default is not imminent.

Adverse Classifications

Loan Grade 5Substandard

A loan that is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledge, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard. 

Loan Grade 6Doubtful 

A loan that has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors which may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined.

Credit Quality Indicators - Credit Risk Profile Based on Loan Grades at March 31, 2020 (in thousands)

					Special
	Pass		Watch		Mention		Substandard		Doubtful		Total
Mortgage Loans:
1 to 4 Family	$	68,881	$	87	$	—	$	564	$	—	$	69,532
Multifamily		3,215		—		—		—		—		3,215
Commercial real estate		1,095		—		—		—		—		1,095
Non-Mortgage Loans:
Consumer		206		—		—		—		—		206
Total	$	73,397	$	87	$	—	$	564	$	—	$	74,048

Credit Quality Indicators - Credit Risk Profile Based on Loan Grades at December 31, 2019 (in thousands)

					Special
	Pass		Watch		Mention		Substandard		Doubtful		Total
Mortgage Loans:
1 to 4 Family	$	72,937	$	87	$	—	$	567	$	—	$	73,591
Multifamily		3,567		—		—		—		—		3,567
Commercial real estate		1,117		—		—		—		—		1,117
Non-Mortgage Loans:
Consumer		209		—		—		—		—		209
Total	$	77,830	$	87	$	—	$	567	$	—	$	78,484

At March 31, 2020 and December 31, 2019, loan balances outstanding on non-accrual status amounted to $0 and $0, respectively. The Company considers loans more than 90 days past due and on nonaccrual as nonperforming loans.

At March 31, 2020 and December 31, 2019, the credit quality indicators (performing and nonperforming loans), disaggregated by class of loan, are as follows:

Credit Quality Indicators - Credit Risk Profile Based on Payment Activity at March 31, 2020 (in thousands)

			Non-
	Performing		Performing		Total
Mortgage Loans:
1 to 4 Family	$	69,532	$	—	$	69,532
Multifamily		3,215		—		3,215
Commercial real estate		1,095		—		1,095
Non-Mortgage Loans:
Consumer		206		—		206
Total	$	74,048	$	—	$	74,048

Credit Quality Indicators - Credit Risk Profile Based on Payment Activity at December 31, 2019 (in thousands)

			Non-
	Performing		Performing		Total
Mortgage Loans:
1 to 4 Family	$	73,591	$	—	$	73,591
Multifamily		3,567		—		3,567
Commercial real estate		1,117		—		1,117
Non-Mortgage Loans:
Consumer		209		—		209
Total	$	78,484	$	—	$	78,484

The following tables reflect certain information with respect to the loan portfolio delinquencies by loan class and amount as of March 31, 2020 and December 31, 2019. There were no loans over 90 days past due and still accruing as of March 31, 2020 and December 31, 2019.

Aged Analysis of Past Due Loans Receivable at March 31, 2020 (in thousands)

	30-59		60-89		90 Days or						Total
	Days		Days		Greater		Total				Loans
	Past Due		Past Due		Past Due		Past Due		Current		Receivable
Mortgage Loans:
1 to 4 Family	$	—	$	89	$	—	$	89	$	69,443	$	69,532
Multifamily		—		—		—		—		3,215		3,215
Commercial real estate		—		—		—		—		1,095		1,095
Non-Mortgage Loans:
Consumer		—		—		—		—		206		206
Total	$	—	$	89	$	—	$	89	$	73,959	$	74,048

Aged Analysis of Past Due Loans Receivable at December 31, 2019 (in thousands)

	30-59		60-89		90 Days or						Total
	Days		Days		Greater		Total				Loans
	Past Due		Past Due		Past Due		Past Due		Current		Receivable
Mortgage Loans:
1 to 4 Family	$	—	$	89	$	—	$	89	$	73,502	$	73,591
Multifamily		—		—		—		—		3,567		3,567
Commercial real estate		—		—		—		—		1,117		1,117
Non-Mortgage Loans:
Consumer		—		—		—		—		209		209
Total	$	—	$	89	$	—	$	89	$	78,395	$	78,484

The following is a summary of information pertaining to impaired loans as of March 31, 2020 and December 31, 2019.

Impaired Loans

March 31, 2020

(in thousands)

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
Mortgage Loans	$	—	$	—	$	—	$	—	$	—
Non-Mortgage Loans	$	—	$	—	$	—	$	—	$	—

Impaired Loans

December 31, 2019

(in thousands)

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
Mortgage Loans	$	—	$	—	$	—	$	—	$	—
Non-Mortgage Loans	$	—	$	—	$	—	$	—	$	—

The Company seeks to assist customers that are experiencing financial difficulty by renegotiating loans within lending regulations and guidelines. Once modified in a troubled debt restructuring, a loan is generally considered impaired until its contractual maturity. At the time of the restructuring, the loan is evaluated for an asset-specific allowance for credit losses. The Company continues to specifically reevaluate the loan in subsequent periods, regardless of the borrower’s performance under the modified terms. If a borrower subsequently defaults on the loan after it is restructured, the Company provides an allowance for credit losses for the amount of the loan that exceeds the value of the related collateral.

The Company had no troubled debt restructurings as of March 31, 2020 and December 31, 2019 or any that defaulted subsequent to the restructuring through the date the financial statements were issued.