Note 4 - Loans and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2014

Receivables [Abstract]

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

Note 4: Loans and Allowance for Loan Losses

Categories of loans at September 30, 2014 and December 31, 2013 include:

	September 30,			December 31,
	2014			2013
Real estate - residential mortgage:
One to four family units	$	97,624,021		$	93,797,650
Multi-family		31,215,812			46,188,434
Real estate - construction		39,354,340			43,266,130
Real estate - commercial		201,823,638			179,079,433
Commercial loans		86,093,439			92,721,783
Consumer and other loans		17,152,679			17,303,392
Total loans		473,263,929			472,356,822
Less:
Allowance for loan losses		(6,537,697	)		(7,801,600	)
Deferred loan fees/costs, net		(195,800	)		(175,368	)
Net loans	$	466,530,432		$	464,379,854

Classes of loans by aging at September 30, 2014 and December 31, 2013 were as follows:

As of September 30, 2014
	30-59 Days Past Due		60-89 Days Past Due		90 Days and more Past Due		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days and Accruing
	(In Thousands)
Real estate - residential mortgage:
One to four family units	$	751	$	239	$	353	$	1,343	$	96,281	$	97,624	$	-
Multi-family		413		-		-		413		30,803		31,216		-
Real estate - construction		-		-		-		-		39,354		39,354		-
Real estate - commercial		-		-		-		-		201,824		201,824		-
Commercial loans		510		-		230		740		85,353		86,093		-
Consumer and other loans		23		15		38		76		17,077		17,153		-
Total	$	1,697	$	254	$	621	$	2,572	$	470,692	$	473,264	$	-

As of December 31, 2013
	30-59 Days Past Due		60-89 Days Past Due		90 Days and more Past Due		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days and Accruing
	(In Thousands)
Real estate - residential mortgage:
One to four family units	$	246	$	337	$	-	$	583	$	93,215	$	93,798	$	-
Multi-family		-		-		-		-		46,188		46,188		-
Real estate - construction		-		-		536		536		42,730		43,266		-
Real estate - commercial		-		-		2,604		2,604		176,476		179,080		-
Commercial loans		-		2		3,628		3,630		89,092		92,722		-
Consumer and other loans		19		-		63		82		17,221		17,303		-
Total	$	265	$	339	$	6,831	$	7,435	$	464,922	$	472,357	$	-

Nonaccruing loans are summarized as follows:

	September 30,		December 31,
	2014		2013
Real estate - residential mortgage:
One to four family units	$	949,961	$	815,746
Multi-family		413,396		-
Real estate - construction		3,380,896		4,529,410
Real estate - commercial		473,218		3,663,166
Commercial loans		348,254		6,776,230
Consumer and other loans		38,127		63,027
Total	$	5,603,852	$	15,847,579

The following tables present the activity in the allowance for loan losses based on portfolio segment for the three and nine months ended September 30, 2014 and 2013:

Three months ended September 30, 2014	Construction			Commercial Real Estate			One to four family			Multi-family			Commercial			Consumer and Other			Unallocated		Total
	(In Thousands)
Allowance for loan losses:
Balance, beginning of period	$	1,879		$	2,284		$	1,014		$	146		$	1,244		$	221		$	-	$	6,788
Provision charged to expense		(244	)		(418	)		(84	)		(30	)		1,135			(4	)		95	$	450
Losses charged off		-			-			(27	)		-			(792	)		(16	)		-	$	(835	)
Recoveries		1			99			3			-			22			10			-	$	135
Balance, end of period	$	1,636		$	1,965		$	906		$	116		$	1,609		$	211		$	95	$	6,538

Nine months ended September 30, 2014	Construction			Commercial Real Estate			One to four family			Multi-family			Commercial			Consumer and Other			Unallocated			Total
	(In Thousands)
Allowance for loan losses:
Balance, beginning of period	$	2,387		$	2,059		$	997		$	209		$	1,519		$	272		$	359		$	7,802
Provision charged to expense		(548	)		(184	)		30			(93	)		2,049			(15	)		(264	)	$	975
Losses charged off		(207	)		(9	)		(127	)		-			(2,014	)		(84	)		-		$	(2,441	)
Recoveries		4			99			6			-			55			38			-		$	202
Balance, end of period	$	1,636		$	1,965		$	906		$	116		$	1,609		$	211		$	95		$	6,538

Three months ended September 30, 2013	Construction			Commercial Real Estate			One to four family			Multi-family			Commercial			Consumer and Other			Unallocated		Total
	(In Thousands)
Allowance for loan losses:
Balance, beginning of period	$	1,999		$	2,026		$	1,229		$	291		$	2,065		$	267		$	500	$	8,377
Provision charged to expense		571			(24	)		(178	)		(71	)		(189	)		(52	)		143	$	200
Losses charged off		(117	)		-			(6	)		-			-			(17	)		-	$	(140	)
Recoveries		5			-			5			-			8			18			-	$	36
Balance, end of period	$	2,458		$	2,002		$	1,050		$	220		$	1,884		$	216		$	643	$	8,473

Nine months ended September 30, 2013	Construction			Commercial Real Estate			One to four family			Multi-family			Commercial			Consumer and Other			Unallocated		Total
	(In Thousands)
Allowance for loan losses:
Balance, beginning of period	$	2,525		$	2,517		$	1,316		$	284		$	1,689		$	255		$	154	$	8,740
Provision charged to expense		445			(329	)		(138	)		(64	)		462			(15	)		489	$	850
Losses charged off		(555	)		(186	)		(140	)		-			(373	)		(70	)		-	$	(1,324	)
Recoveries		43			-			12			-			106			46			-	$	207
Balance, end of period	$	2,458		$	2,002		$	1,050		$	220		$	1,884		$	216		$	643	$	8,473

The following tables present the recorded investment in loans based on portfolio segment and impairment method as of September 30, 2014 and December 31, 2013: 

As of September 30, 2014	Construction		Commercial Real Estate		One to four family		Multi-family		Commercial		Consumer and Other		Unallocated		Total
	(In Thousands)
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	574	$	185	$	48	$	-	$	-	$	26	$	-	$	833
Ending balance: collectively evaluated for impairment	$	1,062	$	1,780	$	858	$	116	$	1,609	$	185	$	95	$	5,705
Loans:
Ending balance: individually evaluated for impairment	$	3,378	$	473	$	888	$	413	$	1,085	$	1,024	$	-	$	7,261
Ending balance: collectively evaluated for impairment	$	35,976	$	201,351	$	96,736	$	30,803	$	85,008	$	16,129	$	-	$	466,003

December 31, 2013	Construction		Commercial Real Estate		One to four family		Multi-family		Commercial		Consumer and Other		Unallocated		Total
	(In Thousands)
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	890	$	-	$	8	$	-	$	601	$	102	$	-	$	1,601
Ending balance: collectively evaluated for impairment	$	1,497	$	2,059	$	989	$	209	$	918	$	170	$	359	$	6,201
Loans:
Ending balance: individually evaluated for impairment	$	4,530	$	3,663	$	886	$	-	$	6,776	$	316	$	-	$	16,171
Ending balance: collectively evaluated for impairment	$	38,736	$	175,417	$	92,912	$	46,188	$	85,946	$	16,987	$	-	$	456,186

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Bank’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans.

The following table summarizes the recorded investment in impaired loans at September 30, 2014 and December 31, 2013:

	September 30, 2014						December 31, 2013
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Recorded Balance		Unpaid Principal Balance		Specific Allowance
	(In Thousands)
Loans without a specific valuation allowance
Real estate - residential mortgage:
One to four family units	$	642	$	642	$	-	$	620	$	620	$	-
Multi-family		413		413		-		-		-		-
Real estate - construction		74		74		-		96		940		-
Real estate - commercial		-		-		-		3,663		3,663		-
Commercial loans		1,085		1,388		-		2,327		2,462		-
Consumer and other loans		-		-		-		-		-		-
Loans with a specific valuation allowance
Real estate - residential mortgage:
One to four family units	$	308	$	308	$	48	$	267	$	267	$	8
Multi-family		-		-		-		-		-		-
Real estate - construction		3,307		4,358		574		4,433		4,433		890
Real estate - commercial		473		473		185		-		-		-
Commercial loans		-		-		-		4,449		5,148		601
Consumer and other loans		115		115		26		316		316		102
Total
Real estate - residential mortgage:
One to four family units	$	950	$	950	$	48	$	887	$	887	$	8
Multi-family		413		413		-		-		-		-
Real estate - construction		3,381		4,432		574		4,529		5,373		890
Real estate - commercial		473		473		185		3,663		3,663		-
Commercial loans		1,085		1,388		-		6,776		7,610		601
Consumer and other loans		115		115		26		316		316		102
Total	$	6,417	$	7,771	$	833	$	16,171	$	17,849	$	1,601

The following table summarizes average impaired loans and related interest recognized on impaired loans for the three and nine months ended September 30, 2014 and 2013:

	For the Nine Months Ended				For the Nine Months Ended
	September 30, 2014				September 30, 2013
	Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized
	(In Thousands)
Loans without a specific valuation allowance
Real estate - residential mortgage:
One to four family units	$	710	$	1	$	2,028	$	4
Multi-family		46		-		-		-
Real estate - construction		88		-		4,044		-
Real estate - commercial		272		-		4,458		40
Commercial loans		2,375		196		878		1
Consumer and other loans		-		-		107		-
Loans with a specific valuation allowance
Real estate - residential mortgage:
One to four family units	$	333	$	-	$	296	$	-
Multi-family		-		-		-		-
Real estate - construction		3,691		-		1,849		-
Real estate - commercial		434		-		748		-
Commercial loans		1,414		-		2,741		-
Consumer and other loans		277		-		310		-
Total
Real estate - residential mortgage:
One to four family units	$	1,043	$	1	$	2,324	$	4
Multi-family		46		-		-		-
Real estate - construction		3,779		-		5,893		-
Real estate - commercial		706		-		5,206		40
Commercial loans		3,789		196		3,619		1
Consumer and other loans		277		-		417		-
Total	$	9,640	$	197	$	17,459	$	45

	For the Three Months Ended				For the Three Months Ended
	September 30, 2014				September 30, 2013
	Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized
	(In Thousands)
Loans without a specific valuation allowance
Real estate - residential mortgage:
One to four family units	$	627	$	-	$	1,782	$	1
Multi-family		138		-		-		-
Real estate - construction		74		-		1,703		-
Real estate - commercial		-		-		5,091		4
Commercial loans		949		98		1,343		-
Consumer and other loans		-		-		123		-
Loans with a specific valuation allowance
Real estate - residential mortgage:
One to four family units	$	340	$	-	$	599	$	-
Multi-family		-		-		-		-
Real estate - construction		3,307		-		3,829		-
Real estate - commercial		478		-		-		-
Commercial loans		447		-		2,712		-
Consumer and other loans		79		-		252		-
Total
Real estate - residential mortgage:
One to four family units	$	967	$	-	$	2,381	$	1
Multi-family		138		-		-		-
Real estate - construction		3,381		-		5,532		-
Real estate - commercial		478		-		5,091		4
Commercial loans		1,396		98		4,055		-
Consumer and other loans		79		-		375		-
Total	$	6,439	$	98	$	17,434	$	5

At September 30, 2014, the Bank’s impaired loans shown in the table above included loans that were classified as troubled debt restructurings (“TDR”). The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession.

In assessing whether or not a borrower is experiencing financial difficulties, the Bank considers information currently available regarding the financial condition of the borrower. This information includes, but is not limited to, whether (i) the debtor is currently in payment default on any of its debt; (ii) a payment default is probable in the foreseeable future without the modification; (iii) the debtor has declared or is in the process of declaring bankruptcy and (iv) the debtor’s projected cash flow is sufficient to satisfy the contractual payments due under the original terms of the loan without a modification.

The Bank considers all aspects of the modification to loan terms to determine whether or not a concession has been granted to the borrower. Key factors considered by the Bank include the debtor’s ability to access funds at a market rate for debt with similar risk characteristics, the significance of the modification relative to unpaid principal balance or collateral value of the debt, and the significance of a delay in the timing of payments relative to the original contractual terms of the loan. The most common concessions granted by the Bank generally include one or more modifications to the terms of the debt, such as (i) a reduction in the interest rate for the remaining life of the debt, (ii) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (iii) a reduction on the face amount or maturity amount of the debt as stated in the original loan, (iv) a temporary period of interest-only payments, (v) a reduction in accrued interest, and (vi) an extension of amortization.

The Bank did not have any loans that were newly classified as TDRs for the three months ended September 30, 2014.

The following table presents the carrying balance of TDRs as of September 30, 2014 and December 31, 2013:

	September 30,		December 31,
	2014		2013
Real estate - residential mortgage:
One to four family units	$	510,407	$	519,718
Multi-family		-		-
Real estate - construction		3,380,896		4,507,190
Real estate - commercial		473,218		3,026,931
Commercial loans		854,644		3,699,243
Consumer and other loans		-		-
Total	$	5,219,165	$	11,753,082

The Bank has allocated $801,651 and $1,146,359 of specific reserves to customers whose loan terms have been modified in a TDR as of September 30, 2014 and December 31, 2013, respectively. 

There were two commercial TDRs totaling $1,768,081 and one one to four family TDR totaling $282,369 for which there was a payment default within twelve months following the modification during the nine months ending September 30, 2014. There were two one to four family TDRs totaling $330,000 for which there was a payment default within twelve months following the modification during the nine months ending September 30, 2013. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

As part of the on-going monitoring of the credit quality of the Bank’s loan portfolio, management tracks loans by an internal rating system. All loans are assigned an internal credit quality rating based on an analysis of the borrower’s financial condition. The criteria used to assign quality ratings to extensions of credit that exhibit potential problems or well-defined weaknesses are primarily based upon the degree of risk and the likelihood of orderly repayment, and their effect on the Bank’s safety and soundness. The following are the internally assigned ratings:

Pass: This rating represents loans that have strong asset quality and liquidity along with a multi-year track record of profitability.

Special mention: This rating represents loans that are currently protected but are potentially weak. The credit risk may be relatively minor, yet constitute an increased risk in light of the circumstances surrounding a specific loan.

Substandard: This rating represents loans that show signs of continuing negative financial trends and unprofitability and therefore, is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.

Doubtful: This rating represents loans that have all the weaknesses of substandard classified loans with the additional characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

Risk characteristics applicable to each segment of the loan portfolio are described as follows.

Real estate-Residential one to four family: The residential one to four family real estate loans are generally secured by owner-occupied one to four family residences. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers. Credit risk in these loans can be impacted by economic conditions within the Bank’s market areas that might impact either property values or a borrower’s personal income. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Real estate-Construction: Construction and land development real estate loans are usually based upon estimates of costs and estimated value of the completed project and include independent appraisal reviews and a financial analysis of the developers and property owners. Sources of repayment of these loans may include permanent loans, sales of developed property or an interim loan commitment from the Bank until permanent financing is obtained. These loans are considered to be higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Bank’s market areas.

Real estate-Commercial: Commercial real estate loans typically involve larger principal amounts, and repayment of these loans is generally dependent on the successful operations of the property securing the loan or the business conducted on the property securing the loan. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Bank’s market areas.

Commercial: The commercial portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation. Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations.

Consumer: The consumer loan portfolio consists of various term and line of credit loans such as automobile loans and loans for other personal purposes. Repayment for these types of loans will come from a borrower’s income sources that are typically independent of the loan purpose. Credit risk is driven by consumer economic factors (such as unemployment and general economic conditions in the Bank’s market area) and the creditworthiness of a borrower.

The following tables provide information about the credit quality of the loan portfolio using the Bank’s internal rating system as of September 30, 2014 and December 31, 2013:

September 30, 2014	Construction		Commercial Real Estate		One to four family		Multi-family		Commercial		Consumer and Other		Total
	(In Thousands)
Rating:
Pass	$	29,337	$	192,302	$	93,597	$	30,803	$	73,104	$	16,896	$	436,039
Special Mention		6,603		5,537		2,605		-		11,193		-		25,938
Substandard		3,414		3,512		1,422		413		1,796		219		10,776
Doubtful		-		473		-		-		-		38		511
Total	$	39,354	$	201,824	$	97,624	$	31,216	$	86,093	$	17,153	$	473,264

December 31, 2013	Construction		Commercial Real Estate		One to four family		Multi-family		Commercial		Consumer and Other		Total
	(In Thousands)
Rating:
Pass	$	31,433	$	169,135	$	83,341	$	45,768	$	78,622	$	16,743	$	425,042
Special Mention		7,253		4,721		8,954		420		9,161		107		30,616
Substandard		683		5,224		1,503		-		2,738		453		10,601
Doubtful		3,897		-		-		-		2,201		-		6,098
Total	$	43,266	$	179,080	$	93,798	$	46,188	$	92,722	$	17,303	$	472,357

For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees net of certain direct origination costs, are deferred and amortized as a level yield adjustment over the respective term of the loan.

The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the loan is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.