LOANS RECEIVABLE AND ALLOWANCE FOR LOAN AND LEASE LOSSES

The loans receivable portfolio is segmented into one-to-four family, multifamily, commercial real estate, construction, business (including Small Business Administration loans), and consumer loans.

The allowance for loan and lease losses ("ALLL") reflects management’s judgment in the evaluation of probable loan losses inherent in the portfolio at the balance sheet date. Management uses a disciplined process and methodology to calculate the ALLL each quarter. To determine the total ALLL, management estimates the reserves needed for each segment of the loan portfolio, including loans analyzed individually and loans analyzed on a pooled basis.

From time to time, events or economic factors may affect the loan portfolio, causing management to provide additional amounts or release balances from the ALLL. The ALLL is sensitive to risk ratings assigned to individually evaluated loans and economic assumptions and delinquency trends. Individual loan risk ratings are evaluated based on the specific facts related to that loan. Additions to the ALLL are made by charges to the provision for loan losses. Credit exposures deemed to be uncollectible are charged against the ALLL, while recoveries of previously charged off amounts are credited to the ALLL.

The following is a summary of loans receivable at June 30, 2017 and March 31, 2017:



	June 30, 2017					March 31, 2017
$ in thousands	Amount			Percent		Amount			Percent
Gross loans receivable:
One-to-four family	$	128,936		24.3	%	$	132,679		24.5	%
Multifamily	82,392			15.6	%	87,824			16.2	%
Commercial real estate	241,815			45.7	%	241,794			44.7	%
Construction	—			—	%	4,983			0.9	%
Business ⁽¹⁾	68,015			12.8	%	65,151			12.0	%
Consumer ⁽²⁾	8,530			1.6	%	8,994			1.7	%
Total loans receivable	$	529,688		100.0	%	$	541,425		100.0	%

Unamortized premiums, deferred costs and fees, net	4,004					4,127

Allowance for loan losses	(5,133		)			(5,060		)
Total loans receivable, net	$	528,559				$	540,492

Loans HFS	$	1,020				$	944

⁽¹⁾ Includes business overdrafts

⁽²⁾Includes personal loans and consumer overdrafts

The following is an analysis of the allowance for loan losses based upon the method of evaluating loan impairment for the three month periods ended June 30, 2017 and 2016, and the fiscal year ended March 31, 2017.



Three months ended June 30, 2017
$ in thousands	One-to-four family			Multifamily		Commercial Real Estate		Construction			Business		Consumer		Total
Allowance for loan losses:
Beginning Balance	$	1,663		$	1,213	$	1,496	$	106		$	573	$	9	$	5,060
Charge-offs	81			—		—		—			20		14		115
Recoveries	—			—		5		—			59		4		68
Provision for (Recovery of) Loan Losses	(64		)	14		146		(106		)	112		18		120
Ending Balance	$	1,518		$	1,227	$	1,647	$	—		$	724	$	17	$	5,133

Allowance for Loan Losses Ending Balance: collectively evaluated for impairment	1,368			1,221		1,645		—			647		17		4,898
Allowance for Loan Losses Ending Balance: individually evaluated for impairment	150			6		2		—			77		—		235

Loan Receivables Ending Balance:	$	131,134		$	83,234	$	242,743	$	—		$	67,968	$	8,613	$	533,692
Ending Balance: collectively evaluated for impairment	124,905			81,639		239,733		—			62,984		8,613		517,874
Ending Balance: individually evaluated for impairment	6,229			1,595		3,010		—			4,984		—		15,818



Fiscal year ended March 31, 2017
$ in thousands	One-to-four family		Multifamily		Commercial Real Estate			Construction		Business			Consumer		Total
Allowance for loan losses:
Beginning Balance	$	1,697	$	622	$	1,808		$	62	$	1,022		$	21	$	5,232
Charge-offs	106		338		—			—		—			85		529
Recoveries	—		—		20			—		304			4		328
Provision for (Recovery of) Loan Losses	72		929		(332		)	44		(753		)	69		29
Ending Balance	$	1,663	$	1,213	$	1,496		$	106	$	573		$	9	$	5,060

Allowance for Loan Losses Ending Balance: collectively evaluated for impairment	1,357		1,207		1,490			106		532			7		4,699
Allowance for Loan Losses Ending Balance: individually evaluated for impairment	306		6		6			—		41			2		361

Loan Receivables Ending Balance:	$	134,927	$	88,750	$	242,818		$	4,949	$	65,114		$	8,994	$	545,552
Ending Balance: collectively evaluated for impairment	129,420		87,148		239,323			4,949		61,027			8,992		530,859
Ending Balance: individually evaluated for impairment	5,507		1,602		3,495			—		4,087			2		14,693



Three months ended June 30, 2016
$ in thousands	One-to-four family		Multifamily			Commercial Real Estate		Construction		Business			Consumer			Total
Allowance for loan losses:
Beginning Balance	$	1,697	$	622		$	1,808	$	62	$	1,022		$	21		$	5,232
Charge-offs	3		7			—		—		—			—			10
Recoveries	—		—			5		—		156			4			165
Provision for (Recovery of) Loan Losses (restated)	181		(85		)	45		—		(322		)	(23		)	(204		)
Ending Balance	$	1,875	$	530		$	1,858	$	62	$	856		$	2		$	5,183

The following is a summary of nonaccrual loans at June 30, 2017 and March 31, 2017.



$ in thousands	June 30, 2017		March 31, 2017
Gross loans receivable:
One-to-four family	$	4,703	$	3,899
Multifamily	1,589		1,602
Commercial real estate	1,389		993
Business	1,026		1,922
Consumer	—		2
Total nonaccrual loans	$	8,707	$	8,418

Nonaccrual loans generally consist of loans for which the accrual of interest has been discontinued as a result of such loans becoming 90 days or more delinquent as to principal and/or interest payments. Interest income on nonaccrual loans is recorded when received based upon the collectability of the loan. Troubled debt restructured ("TDR") loans consist of modified loans where borrowers have been granted concessions in regards to the terms of their loans due to financial or other difficulties, which rendered them unable to repay their loans under the original contractual terms. Total TDR loans at June 30, 2017 were $5.6 million, $2.0 million of which were non-performing as they were either not consistently performing in accordance with their modified terms or not performing in accordance with their modified terms for at least six months. At March 31, 2017, total TDR loans were $6.4 million, of which $2.5 million were non-performing.

At June 30, 2017, other non-performing assets totaled $1.8 million which consisted of other real estate owned and held-for-sale loans. At June 30, 2017, other real estate owned valued at $787 thousand comprised of six foreclosed properties which includes $496 thousand of residential properties, compared to $990 thousand comprised of eight properties, which included $718 thousand of residential properties at March 31, 2017. At June 30, 2017, non performing held-for-sale loans totaled $1.0 million, compared to $944 thousand at March 31, 2017.

Although we believe that substantially all risk elements at June 30, 2017 have been disclosed, it is possible that for a variety of reasons, including economic conditions, certain borrowers may be unable to comply with the contractual repayment terms on certain real estate and commercial loans.

The Bank utilizes an internal loan classification system as a means of reporting problem loans within its loan categories. Loans may be classified as "Pass," “Special Mention,” “Substandard,” “Doubtful,” and “Loss.” Loans rated Pass have demonstrated satisfactory asset quality, earning history, liquidity, and other adequate margins of creditor protection. They represent a moderate credit risk and some degree of financial stability. Loans are considered collectible in full, but perhaps require greater than average amount of loan officer attention. Borrowers are capable of absorbing normal setbacks without failure. Loans rated Special Mention have potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank's credit position at some future date. Loans rated Substandard are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, 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 Bank will sustain some loss if the deficiencies are not corrected. Loans rated Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, based on currently existing facts, conditions and values, highly questionable and improbable. Loans classified as Loss are those considered uncollectible with insignificant value and are charged off immediately to the allowance for loan losses.

One-to-four family residential loans and consumer and other loans are rated non-performing if they are delinquent in payments ninety or more days, a troubled debt restructuring with less than six months contractual performance or past maturity. All other one-to-four family residential loans and consumer and other loans are performing loans.

As of June 30, 2017, and based on the most recent analysis performed in the current quarter, the risk category by class of loans is as follows:



$ in thousands	Multifamily		Commercial Real Estate		Construction		Business
Credit Risk Profile by Internally Assigned Grade:
Pass	$	81,639	$	238,971	$	—	$	60,923
Special Mention	—		763		—		1,571
Substandard	1,595		3,009		—		5,474
Doubtful	—		—		—		—
Loss	—		—		—		—
Total	$	83,234	$	242,743	$	—	$	67,968

					One-to-four family		Consumer
Credit Risk Profile Based on Payment Activity:
Performing					$	124,905	$	8,613
Non-Performing					6,229		—
Total					$	131,134	$	8,613

As of March 31, 2017, and based on the most recent analysis performed, the risk category by class of loans is as follows:



$ in thousands	Multifamily		Commercial Real Estate		Construction		Business
Credit Risk Profile by Internally Assigned Grade:
Pass	$	87,148	$	238,552	$	4,949	$	58,555
Special Mention	—		771		—		133
Substandard	1,082		3,495		—		6,426
Doubtful	520		—		—		—
Loss	—		—		—		—
Total	$	88,750	$	242,818	$	4,949	$	65,114

					One-to-four family		Consumer
Credit Risk Profile Based on Payment Activity:
Performing					$	131,028	$	8,992
Non-Performing					3,899		2
Total					$	134,927	$	8,994

The following table presents an aging analysis of the recorded investment of past due financing receivable as of June 30, 2017 and March 31, 2017.



June 30, 2017
$ in thousands	30-59 Days Past Due		60-89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total Financing Receivables
One-to-four family	$	353	$	243	$	4,228	$	4,824	$	126,310	$	131,134
Multifamily	—		—		797		797		82,437		83,234
Commercial real estate	—		—		868		868		241,875		242,743
Business	301		—		1,026		1,327		66,641		67,968
Consumer	1		—		—		1		8,612		8,613
Total	$	655	$	243	$	6,919	$	7,817	$	525,875	$	533,692



March 31, 2017
$ in thousands	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Financing Receivables
One-to-four family	$	2,094	$	247	$	3,022	$	5,363	$	129,564	$	134,927
Multifamily	—		—		803		803		87,947		88,750
Commercial real estate	—		—		—		—		242,818		242,818
Construction	—		—		—		—		4,949		4,949
Business	—		429		1,500		1,929		63,185		65,114
Consumer	1		—		2		3		8,991		8,994
Total	$	2,095	$	676	$	5,327	$	8,098	$	537,454	$	545,552

The following table presents information on impaired loans with the associated allowance amount, if applicable, at June 30, 2017 and March 31, 2017.



	At June 30, 2017						At March 31, 2017
$ in thousands	Recorded Investment		Unpaid Principal Balance		Associated Allowance		Recorded Investment		Unpaid Principal Balance		Associated Allowance
With no specific allowance recorded:
One-to-four family	$	4,672	$	5,658	$	—	$	3,416	$	4,210	$	—
Multifamily	1,589		2,074		—		1,596		2,081		—
Commercial real estate	1,389		1,389		—		993		993		—
Business	1,381		1,388		—		1,923		1,968		—
With an allowance recorded:
One-to-four family	1,557		1,557		150		2,091		2,215		306
Multifamily	6		6		6		6		6		6
Commercial real estate	1,621		1,621		2		2,502		2,502		6
Business	3,603		3,738		77		2,164		2,164		41
Consumer and other	—		—		—		2		2		2
Total	$	15,818	$	17,431	$	235	$	14,693	$	16,141	$	361

The following tables presents information on average balances on impaired loans and the interest income recognized on a cash basis for the three month period ended June 30, 2017 and 2016.



	For the Three Months Ended June 30,
	2017				2016
$ in thousands	Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized
With no specific allowance recorded:
One-to-four family	$	4,723	$	6	$	3,153	$	7
Multifamily	1,592		9		1,755		2
Commercial real estate	1,391		19		1,985		—
Business	1,387		—		4,099		134
With an allowance recorded:
One-to-four family	1,563		—		1,721		1
Commercial real estate	1,624		—		885		—
Business	3,709		—		2,647		—
Consumer and other	—		—		—		—
Total	$	15,996	$	34	$	16,245	$	144

In certain circumstances, the Bank will modify a loan as part of a troubled debt restructure ("TDR") under GAAP. Situations around these modifications may include extension of maturity date, reduction in the stated interest rate, rescheduling of future cash flows, reduction in the face amount of the debt or reduction of past accrued interest. Loans modified in TDRs are placed on nonaccrual status until the Company determines that future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate performance according to the restructured terms for a period of at least six months. There were no TDR modifications made during the three month periods ended June 30, 2017 and 2016.

In an effort to proactively resolve delinquent loans, the Bank has selectively extended to certain borrowers concessions such as extensions, rate reductions or forbearance agreements. For the periods ended June 30, 2017 and 2016, there were no modified loans that defaulted in the last 12 months of modification.

At June 30, 2017, there were 10 loans in the TDR portfolio totaling $3.6 million that were on accrual status as the Company has determined that future collection of the principal and interest is reasonably assured. These have generally performed according to restructured terms for a period of at least six months. At March 31, 2017, there were 11 loans in the performing TDR portfolio totaling $3.9 million.

Transactions With Certain Related Persons

Federal law requires that all loans or extensions of credit to executive officers and directors must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with the general public and must not involve more than the normal risk of repayment or present other unfavorable features. Loans to our current directors, principal officers, nominees for election as directors, security holders known by us to own more than 5% of the outstanding shares of common stock, or associates of such persons (together, “related persons”), are made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to the Company, and do not involve more than the normal risk of collectibility or present other unfavorable features.

The aggregate amount of loans outstanding to related parties was $4.8 million at June 30, 2017 and $4.7 million at March 31, 2017. During the three months ended June 30, 2017, advances totaled $111 thousand and principal repayments totaled $23 thousand. These loans were made in the ordinary course of business, on substantially the same terms, including collateral, as those prevailing at the time for comparable loans with persons not related to the Company, and do not involve more than the normal risk of collectibility or present other unfavorable features.

Furthermore, loans above the greater of $25,000, or 5% of the Company's capital and surplus (up to $500,000), to the Company’s directors and executive officers must be approved in advance by a majority of the disinterested members of the Company's Board of Directors.