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LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES

6 Months Ended

Dec. 31, 2016

9.	LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES

The following table summarizes the primary segments of the loan portfolio as of December 31, 2016 and June 30, 2016.


		December 31, 2016										June 30, 2016
		Total Loans				Individually evaluated for impairment			Collectively evaluated for impairment			Total Loans				Individually evaluated for impairment			Collectively evaluated for impairment

		(Dollars in Thousands)
First mortgage loans:
1 – 4 family dwellings	$		58,782		$		-	$		58,782	$		49,411		$		-	$		49,411
Construction			5,042				-			5,042			4,783				-			4,783
Land acquisition & development			651				-			651			666				-			666
Multi-family dwellings			3,784				-			3,784			3,961				-			3,961
Commercial			1,666				-			1,666			1,592				-			1,592

Consumer Loans
Home equity			932				-			932			802				-			802
Home equity lines of credit			2,185				-			2,185			1,900				-			1,900
Other			161				-			161			150				-			150

Commercial Loans			942				-			942			1,456				-			1,456

Obligations (other than securities and leases) of states and political subdivisons			-				-			-			-				-			-

	$		74,145		$		-	$		74,145	$		64,721		$		-	$		64,721

Plus: Deferred loan costs			396										312
Allowance for loan losses			(395	)									(360	)

Total	$		74,146								$		64,673

Impaired loans are loans for which it is probable the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. The following loan categories are collectively evaluated for impairment. First mortgage loans: 1 – 4 family dwellings and all consumer loan categories (home equity, home equity lines of credit, and other). The following loan categories are individually evaluated for impairment. First mortgage loans: construction, land acquisition and development, multi-family dwellings, and commercial. The Company evaluates commercial loans not secured by real property individually for impairment.

The definition of “impaired loans” is not the same as the definition of “nonaccrual loans,” although the two categories overlap. The Company may choose to place a loan on nonaccrual status due to payment delinquency or uncertain collectability, while not classifying the loan as impaired if the loan is not a commercial or commercial real estate loan. Factors considered by management in determining impairment include payment status and collateral value. The amount of impairment for these types of impaired loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original interest rate, and its recorded value, or as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loans. When foreclosure is probable, impairment is measured based on the fair value of the collateral.

Loans that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified as impaired. Management determines the significance of payment delays on a case-by-case basis taking into consideration all circumstances surrounding the loan and the borrower, including the length of the delay, the borrower’s prior payment record, and the amount of shortfall in relation to the principal and interest owed.

The following tables are a summary of the loans considered to be impaired as of December 31, 2016 and June 30, 2016, and the related interest income recognized for the three and six months ended December 31, 2016 and December 31, 2015:

December 31,
2016

June 30,
2016

(Dollars in Thousands)

Impaired loans with an allocated allowance:

Home equity lines of credit

Impaired loans without an allocated allowance:

Commercial real estate loans

Total impaired loans

Allocated allowance on impaired loans:

Home equity lines of credit

Commercial real estate loans

Total


		Three Months Ended						Six Months Ended
		December 31, 2016			December 31, 2015			December 31, 2016			December 31, 2015
		(Dollars in Thousands)
Average impaired loans
Construction loans	$		-	$		-	$		-	$		-
Land acquisition & development loans			-			-			-			-
Commercial real estate loans			-			-			24			24
Home equity lines of credit			-			-			-			-

Total	$		-	$		-	$		24		$	24


Income recognized on impaired loans
Construction loans	$		-	$		-	$		-	$		-
Land acquisition & development loans			-			-			-			-
Commercial real estate loans			-			-			1			1
Home equity lines of credit			-			-			-			-

Total	$		-	$		-	$		1	$		1

Total nonaccrual loans as of December 31, 2016 and June 30, 2016 and the related interest income recognized for the three and six months ended December 31, 2016 and December 31, 2015 are as follows:


		December 31, 2016			June 30, 2016
		(Dollars in Thousands)
Principal outstanding
1 – 4 family dwellings	$		250	$		254
Construction			-			-
Land acquisition & development			-			-
Commercial real estate			-			-
Home equity lines of credit			-			-

Total	$		250	$		254


		Three Months Ended						Six Months Ended
		December 31, 2016			December 31, 2015			December 31, 2016			December 31, 2015
		(Dollars in Thousands)
Average nonaccrual loans
1 – 4 family dwellings	$		251	$		258	$		252	$		259
Construction			-			-			-			-
Land acquisition & development			-			-			-			-
Commercial real estate			-			-			-			24
Home equity lines of credit			-			-			-			-

Total	$		251	$		258	$		252	$		283


Income that would have been recognized	$		5	$		4	$		8	$		9

Interest income recognized	$		5	$		5	$		9	$		11

Interest income foregone	$		-	$		-	$		-	$		-

The Company’s loan portfolio also includes troubled debt restructurings (TDRs), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.

During the three and six months ended December 31, 2016, and December 31, 2015, there were no TDRs, and no TDRs that subsequently defaulted.

When the Company modifies a loan, management evaluates any possible impairment based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling costs, instead of discounted cash flows. If management determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized by segment or class of loan, as applicable, through an allowance estimate or a charge-off to the allowance. Segment and class status is determined by the loan’s classification at origination.

The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance account. Subsequent recoveries, if any, are credited to the allowance. The allowance is maintained at a level believed adequate by management to absorb estimated potential loan losses. Management’s determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio considering past experience, current economic conditions, composition of the loan portfolio and other relevant factors. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant change.

Effective December 13, 2006, the FDIC, in conjunction with the other federal banking agencies adopted a Revised Interagency Policy Statement on the Allowance for Loan and Lease Losses (“ALLL”). The revised policy statement revised and replaced the banking agencies’ 1993 policy statement on the ALLL. The revised policy statement provides that an institution must maintain an ALLL at a level that is appropriate to cover estimated credit losses on individually evaluated loans determined to be impaired, as well as estimated credit losses inherent in the remainder of the loan and lease portfolio. The banking agencies also revised the policy to ensure consistency with generally accepted accounting principles (“GAAP”). The revised policy statement updates the previous guidance that describes the responsibilities of the board of directors, management, and bank examiners regarding the ALLL, factors to be considered in the estimation of the ALLL, and the objectives and elements of an effective loan review system.

Federal regulations require that each insured savings institution classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, federal examiners have authority to identify problem assets and, if appropriate, classify them. There are three classifications for problem assets: “substandard”, “doubtful” and “loss”. Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of 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 questionable, and there is a high possibility of loss. An asset classified as loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. Another category designated “asset watch” is also utilized by the Bank for assets which do not currently expose an insured institution to a sufficient degree of risk to warrant classification as substandard, doubtful or loss. Assets classified as substandard or doubtful require the institution to establish general allowances for loan losses. If an asset or portion thereof is classified as loss, the insured institution must either establish specific allowances for loan losses in the amount of 100% of the portion of the asset classified loss, or charge-off such amount. General loss allowances established to cover possible losses related to assets classified substandard or doubtful may be included in determining an institution’s regulatory capital, while specific valuation allowances for loan losses do not qualify as regulatory capital.

The Company’s general policy is to internally classify its assets on a regular basis and establish prudent general valuation allowances that are adequate to absorb losses that have not been identified but that are inherent in the loan portfolio. The Company maintains general valuation allowances that it believes are adequate to absorb losses in its loan portfolio that are not clearly attributable to specific loans. The Company’s general valuation allowances are within the following general ranges: (1) 0% to 5% of assets subject to special mention; (2) 1.00% to 100% of assets classified substandard; and (3) 50% to 100% of assets classified doubtful. Any loan classified as loss is charged-off. To further monitor and assess the risk characteristics of the loan portfolio, loan delinquencies are reviewed to consider any developing problem loans. Based upon the procedures in place, considering the Company’s past charge-offs and recoveries and assessing the current risk elements in the portfolio, management believes the allowance for loan losses at December 31, 2016, is adequate.

The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of December 31, 2016 and June 30, 2016:


		Current			30 –59 Days Past Due			60 –89 Days Past Due			90 Days + Past Due Accruing			90 Days + Past Due Non-accrual			Total Past Due			Total Loans

		(Dollars in Thousands)
December 31, 2016
First mortgage loans:
1 – 4 family dwellings	$		58,532	$		-	$		-	$		-	$		250	$		250	$		58,782
Construction			5,042			-			-			-			-			-			5,042
Land acquisition & development			651			-			-			-			-			-			651
Multi-family dwellings			3,784			-			-			-			-			-			3,784
Commercial			1,666			-			-			-			-			-			1,666

Consumer Loans:
Home equity			932			-			-			-			-			-			932
Home equity lines of credit			2,185			-			-			-			-			-			2,185
Other			161			-			-			-			-			-			161

Commercial Loans			942			-			-			-			-			-			942

	$		73,895	$		-	$		-	$		-	$		250	$		250			74,145

Plus: Deferred loan fees																					396
Allowance for loan losses																					(395	)

Net Loans Receivable																			$		74,146


		Current			30 – 59 Days Past Due			60 – 89 Days Past Due			90 Days + Past Due Accruing			90 Days + Past Due Non-accrual			Total Past Due			Total Loans

		(Dollars in Thousands)
June 30, 2016
First mortgage loans:
1 – 4 family dwellings	$		49,157	$		-	$		-	$		-	$		254	$		254	$		49,411
Construction			4,783			-			-			-			-			-			4,783
Land acquisition & development			666			-			-			-			-			-			666
Multi-family dwellings			3,961			-			-			-			-			-			3,961
Commercial			1,592			-			-			-			-			-			1,592

Consumer Loans:
Home equity			802			-			-			-			-			-			802
Home equity lines of credit			1,900			-			-			-			-			-			1,900
Other			150			-			-			-			-			-			150

Commercial Loans			1,456			-			-			-			-			-			1,456

	$		64,467	$		-	$		-	$		-	$		254	$		254			64,721

Plus: Deferred loan fees																					312
Allowance for loan losses																					(360	)

Net Loans Receivable																			$		64,673

Credit quality information

The following tables represent credit exposure by internally assigned grades for the period ended December 31, 2016. The grading system analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or not at all. The Company’s internal credit risk grading system is based on experiences with similarly graded loans.

The Company’s internally assigned grades are as follows:

Pass – loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral.

Special Mention – loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected.

Substandard – loans that have a well-defined weakness based on objective evidence and can be characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful – loans classified as doubtful have all the weaknesses inherent in a substandard loan. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.

Loss – loans classified as loss are considered uncollectible, or of such value that continuance as a loan is not warranted.

The primary credit quality indicator used by management in the 1 – 4 family and consumer loan portfolios is the performance status of the loans. Payment activity is reviewed by Management on a monthly basis to determine how loans are performing. Loans are considered to be non-performing when they become 90 days delinquent, have a history of delinquency, or have other inherent characteristics which Management deems to be weaknesses.

The following tables present the Company’s internally classified construction, land acquisition and development, multi-family residential, commercial real estate and commercial (not secured by real estate) loans at December 31, 2016 and June 30, 2016.


		December 31, 2016
		Construction			Land Acquisition & Development Loans			Multi-family Residential			Commercial Real Estate			Commercial

		(Dollars in Thousands)
Pass	$		5,042	$		651	$		3,784	$		1,666	$		942
Special Mention			-			-			-			-			-
Substandard			-			-			-			-			-
Doubtful			-			-			-			-			-

Ending Balance	$		5,042	$		651	$		3,784	$		1,666	$		942


		June 30, 2016
		Construction			Land Acquisition & Development Loans			Multi-family Residential			Commercial Real Estate			Commercial

		(Dollars in Thousands)

Pass	$		4,783	$		666	$		3,961	$		1,592	$		1,456
Special Mention			-			-			-			-			-
Substandard			-			-			-			-			-
Doubtful			-			-			-			-			-

Ending Balance	$		4,783	$		666	$		3,961	$		1,592	$		1,456

The following table presents performing and non-performing 1 – 4 family residential and consumer loans based on payment activity for the periods ended December 31, 2016 and June 30, 2016.


		December 31, 2016

		1 – 4 Family			Consumer

		(Dollars in Thousands)

Performing	$		58,532	$		3,278
Non-performing			250			-

Total	$		58,782	$		3,278


		June 30, 2016

		1 – 4 Family			Consumer

		(Dollars in Thousands)

Performing	$		49,157	$		2,852
Non-performing			254			-

Total	$		49,411	$		2,852

The Company determines its allowance for loan losses in accordance with generally accepted accounting principles. The Company uses a systematic methodology as required by Financial Reporting Release No. 28 and the various Federal Financial Institutions Examination Council guidelines. The Company also endeavors to adhere to SEC Staff Accounting Bulletin No. 102 in connection with loan loss allowance methodology and documentation issues.

Our methodology used to determine the allocated portion of the allowance is as follows. For groups of homogenous loans, we apply a loss rate to the groups’ aggregate balance. Our group loss rate reflects our historical loss experience. We may adjust these group rates to compensate for changes in environmental factors; but our adjustments have not been frequent due to a relatively stable charge-off experience. The Company also monitors industry loss experience on similar loan portfolio segments. We then identify loans for individual evaluation under ASC Topic 310. If the individually identified loans are performing, we apply a segment specific loss rate adjusted for relevant environmental factors, if necessary, for those loans reviewed individually and considered individually impaired, we use one of the three methods for measuring impairment mandated by ASC Topic 310. Generally the fair value of collateral is used since our impaired loans are generally real estate based. In connection with the fair value of collateral measurement, the Company generally uses an independent appraisal and determines costs to sell. The Company’s appraisals for commercial income based loans, such as multi-family and commercial real estate loans, assess value based upon the operating cash flows of the business as opposed to merely “as built” values. The Company then validates the reasonableness of our calculated allowances by: (1) reviewing trends in loan volume, delinquencies, restructurings and concentrations; (2) reviewing prior period (historical) charge-offs and

recoveries; and (3) presenting the results of this process, quarterly, to the Asset Classification Committee and the Savings Bank’s Board of Directors. We then tabulate, format and summarize the current loan loss allowance balance for financial and regulatory reporting purposes.

The Company had no unallocated loss allowance balance at December 31, 2016.

The allowance for loan losses represents the amount which management estimates is adequate to provide for probable losses inherent in its loan portfolio. The allowance method is used in providing for loan losses. Accordingly, all loan losses are charged to the allowance, and all recoveries are credited to it. The allowance for loan losses is established through a provision for loan losses charged to operations. The provision for loan losses is based on management’s periodic evaluation of individual loans, economic factors, past loan loss experience, changes in the composition and volume of the portfolio, and other relevant factors. The estimates used in determining the adequacy of the allowance for loan losses, including the amounts and timing of future cash flows expected on impaired loans, are particularly susceptible to changes in the near term.

The following tables summarize the primary segments of the allowance for loan losses (“ALLL”), segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of December 31, 2016 and 2015. Activity in the allowance is presented for the three and six months ended December 31, 2016 and 2015.


		As of December 31, 2016
		First Mortgage Loans
		1 – 4 Family			Construction				Land Acquisition & Development			Multi- family				Commercial			Consumer Loans			Commercial Loans				Total

		(Dollars in Thousands)
Beginning ALLL Balance at September 30, 2016	$		256	$		46		$		7	$		21			$	17	$		24	$		5		$		376
Charge-offs			-			-				-			-				-			-			-				-
Recoveries			-			-				-			-				-			-			-				-
Provisions			5			5				-			-				-			9			-				19

Ending ALLL Balance at December 31, 2016	$		261	$		51		$		7	$		21			$	17	$		33	$		5		$		395

Individually evaluated for impairment	$		-	$		-		$		-	$		-			$	-	$		-	$		-		$		-
Collectively evaluated for impairment			261			51				7			21				17			33			5				395

	$		261	$		51		$		7	$		21			$	17	$		33	$		5		$		395


		As of December 31, 2016
		First Mortgage Loans
		1 – 4 Family			Construction				Land Acquisition & Development			Multi- family				Commercial			Consumer Loans			Commercial Loans				Total

		(Dollars in Thousands)
Beginning ALLL Balance at June 30, 2016	$		222	$		57		$		7	$		22		$		16	$		29	$		7		$		360
Charge-offs			-			-				-			-				-			-			-				-
Recoveries			-			-				-			-				-			-			-				-
Provisions			39			(6	)			-			(1	)			1			4			(2	)			35

Ending ALLL Balance at December 31, 2016	$		261	$		51		$		7	$		21		$		17	$		33	$		5		$		395

Individually evaluated for impairment	$		-	$		-		$		-	$		-		$		-	$		-	$		-		$		-
Collectively evaluated for impairment			261			51				7			21				17			33			5				395

	$		261	$		51		$		7	$		21		$		17	$		33	$		5		$		395


		As of December 31, 2015
		First Mortgage Loans
		1 – 4 Family				Construction			Land Acquisition & Development				Multi- family				Commercial				Consumer Loans				Commercial Loans			Total

		(Dollars in Thousands)
Beginning ALLL Balance at September 30, 2015	$		143		$		72	$		9		$		30		$		31		$		32		$		6	$		323
Charge-offs			-				-			-				-				-				-				-			-
Recoveries			-				-			-				-				-				-				-			-
Provisions			19				12			(1	)			(1	)			(2	)			-				1			28

Ending ALLL Balance at December 31, 2015	$		162		$		84	$		8		$		29		$		29		$		32		$		7	$		351

Individually evaluated for impairment	$		-		$		-	$		-		$		-		$		-		$		-		$		-	$		-
Collectively evaluated for impairment			162				84			8				29				29				32				7			351

	$		162		$		84	$		8		$		29		$		29		$		32		$		7	$		351


		As of December 31, 2015
		First Mortgage Loans
		1 – 4 Family				Construction			Land Acquisition & Development				Multi- family				Commercial				Consumer Loans				Commercial Loans			Total

		(Dollars in Thousands)
Beginning ALLL Balance at June 30, 2015	$		125		$		63	$		9		$		30		$		34		$		37		$		6	$		304
Charge-offs			-				-			-				-				-				-				-			-
Recoveries			-				-			-				-				-				-				-			-
Provisions			(37	)			21			(1	)			(1	)			(5	)			(5	)			1			47

Ending ALLL Balance at December 31, 2015	$		162		$		84	$		8		$		29		$		29		$		32		$		7	$		351

Individually evaluated for impairment	$		-		$		-	$		-		$		-		$		-		$		-		$		-	$		-
Collectively evaluated for impairment			162				84			8				29				29				32				7			351

	$		162		$		84	$		8		$		29		$		29		$		32		$		7	$		351

During the three and six months ending December 31, 2016, the ALLL increased $0.019 million and $0.035 million respectively. The primary reason for the changes in the ALLL balance, both in total, and within the identified segments, is changes in applicable loan balances.

During the fiscal year ended June 30, 2016, the Company also increased its ALLL reserve factors, due to increases in associated loan balances and qualitative factors throughout fiscal 2016, for the following loan segments:


Loan Segment	12/31/2016 Factor	12/31/2015 Factor
1 – 4 family	0.40%	0.35%
Construction:
1 – 4 family	0.75%	0.75%
5+ family	1.00%	1.00%

During the three months ended December 31, 2015, the ALLL associated with multi-family residential real estate loans, 1 – 4 family real estate loans, and construction loans increased $9 thousand, $8 thousand, and $5 thousand, respectively. The primary reason for the increases in the ALLL associated with these segments, were the increases in associated loan balances.

During the six months ended December 31, 2015, the ALLL associated with the 1-4 family and construction loan portfolios increased by $37 thousand, and $21 thousand, respectively. The primary reason for the increases in the ALLL associated with these segments were the increases in associated loan balances. The ALLL associated with the commercial real estate loans and consumer loans decreased $5 thousand and $5 thousand, respectively. The decrease in the ALLL associated with commercial real estate loans was primarily due to the payoff of one non-performing loan in this segment, while the decrease in the ALLL associated with consumer loans was primarily due to lower loan balances within this segment.