LOANS, ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS

Major classifications of loans as of September 30, 2014 and 2013, respectively, were as follows:



	September 30, 2014			September 30, 2013
Real estate loans:
Consumer	$	223,025		$	252,958
Commercial	39,061			12,531
Total real estate loans	262,086			265,489
Consumer and other loans:
Automobile	12,810			12,662
Secured personal and other	188,911			158,842
Unsecured personal	3,512			1,835
Total consumer and other loans	205,233			173,339
Gross loans	467,319			438,828
Less:
Deferred loan origination fees, net of costs	3,047			2,035
Allowance for loan losses	(6,506		)	(6,180		)
Loans receivable, net	$	463,860		$	434,683

Certain directors and executive officers of the Company and the Bank are defined as related parties. These related parties, including their immediate families and companies in which they are principal owners, were loan customers of the Bank during 2014 and 2013. A summary of the changes in those loans during the last two fiscal years is as follows:



	September 30,
	2014			2013
Balance—beginning of year	$	131		$	138
New loan originations	17			33
Repayments	(19		)	(40		)
Balance—end of year	$	129		$	131
Available and unused lines of credit	$	18		$	18

Allowance for Loan Losses—The ALL represents management’s estimate of probable and inherent credit losses in the Bank’s loan portfolio. Estimating the amount of the ALL requires the exercise of significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of other qualitative factors such as current economic trends and conditions, all of which may be susceptible to significant change.

There are many factors affecting the ALL; some are quantitative, while others require qualitative judgment. The process for determining the ALL (which management believes adequately considers potential factors which result in probable credit losses), includes subjective elements and, therefore, may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provision for loan losses could be required that could adversely affect the Company’s earnings or financial position in future periods. Allocations of the ALL may be made for specific loans but the entire ALL is available for any loan that, in management’s judgment, should be charged-off or for which an actual loss is realized.

Changes in the ALL by loan type for the periods presented below were as follows:



	Real Estate			Consumer and Other			Total
Year Ended September 30, 2014:
Allowance for Loan Losses:
Beginning balance, October 1, 2013	$	2,541		$	3,639		$	6,180
Charge-offs	(1,238		)	(689		)	(1,927		)
Recoveries	94			249			343
Provision	1,362			548			1,910
Ending balance, September 30, 2014	$	2,759		$	3,747		$	6,506
Allowance for Loan Losses at September 30, 2014:
Amount of allowance for loan losses arising from loans individually evaluated for impairment	$	525		$	207		$	732
Amount of allowance for loan losses arising from loans collectively evaluated for impairment	$	2,234		$	3,540		$	5,774
Loans Receivable as of September 30, 2014:
Ending balance	$	261,315		$	209,051		$	470,366
Ending balance: individually evaluated for impairment	$	2,197		$	732		$	2,929
Ending balance: collectively evaluated for impairment	$	259,118		$	208,319		$	467,437



	Real Estate			Consumer and Other			Total
Year ended September 30, 2013
Allowance for Loan Losses:
Beginning balance, October 1, 2012	$	2,287		$	3,458		$	5,745
Charge-offs	(1,525		)	(1,494		)	(3,019		)
Recoveries	36			275			311
Provision	1,743			1,400			3,143
Ending balance, September 30, 2013	$	2,541		$	3,639		$	6,180
Allowance for Loan Losses at September 30, 2013:
Amount of allowance for loan losses arising from loans individually evaluated for impairment	$	667		$	316		$	983
Amount of allowance for loan losses arising from loans collectively evaluated for impairment	$	1,874		$	3,323		$	5,197
Loans Receivable as of September 30, 2013:
Ending balance	$	264,388		$	176,475		$	440,863
Ending balance: individually evaluated for impairment	$	3,659		$	907		$	4,566
Ending balance: collectively evaluated for impairment	$	260,729		$	175,568		$	436,297

The Bank has originated substantially all loans currently recorded on the Company’s consolidated balance sheet, except as noted below.

During October 2012, the Bank entered into an agreement to purchase short term consumer loans from a third party on an ongoing basis. A Board of Director determinant was established to limit the purchase of these consumer loans under this arrangement, to a maximum of $40,000, which we expect to attain by June 2015. Pursuant to the ongoing loan purchase agreement, a restricted reserve account was established at 3% of the outstanding consumer loan balances purchased up to a maximum of $1,000, with such percentage amount of the loans being deposited into a segregated reserve account. The funds in the reserve account are to be released to compensate the Bank for any purchased loans that are ultimately charged off. As of September 30, 2014, the balance of the consumer loans purchased was $32,812. The balance in the cash reserve account was $996, which is included in Deposits on the accompanying Consolidated Balance Sheet. To date, none of the purchased loans have been charged off.

Loans receivable by loan type as of the end of the periods shown below were as follows:



	Real Estate Loans				Consumer and Other Loans				Total Loans
	September 30, 2014		September 30, 2013		September 30, 2014		September 30, 2013		September 30, 2014		September 30, 2013
Performing loans
Performing TDR loans	$	4,535	$	6,254	$	797	$	1,101	$	5,332	$	7,355
Performing loans other	255,564		255,951		207,885		174,949		463,449		430,900
Total performing loans	260,099		262,205		208,682		176,050		468,781		438,255

Nonperforming loans (1)
Nonperforming TDR loans	202		1,187		47		76		249		1,263
Nonperforming loans other	1,014		996		322		349		1,336		1,345
Total nonperforming loans	$	1,216	$	2,183	$	369	$	425	$	1,585	$	2,608
Total loans	$	261,315	$	264,388	$	209,051	$	176,475	$	470,366	$	440,863


(1)	Nonperforming loans are either 90+ days past due or nonaccrual.

An aging analysis of the Company’s real estate and consumer and other loans as of September 30, 2014 and September 30, 2013, respectively, was as follows:



	1 Month Past Due		2 Months Past Due		Greater Than 3 Months		Total Past Due		Current		Total Loans		Recorded Investment > 3 months and Accruing
September 30, 2014
Real estate loans	$	678	$	80	$	989	$	1,747	$	259,568	$	261,315	$	228
Consumer and other loans	354		73		178		605		175,634		176,239		99
Purchased third party loans	190		136		73		399		32,413		32,812		74
Total	$	1,222	$	289	$	1,240	$	2,751	$	467,615	$	470,366	$	401
September 30, 2013
Real estate loans	$	2,057	$	351	$	1,905	$	4,313	$	260,075	$	264,388	$	371
Consumer and other loans	746		121		214		1,081		155,416		156,497		80
Purchased third party loans	112		66		32		210		19,768		19,978		32
Total	$	2,915	$	538	$	2,151	$	5,604	$	435,259	$	440,863	$	483

At September 30, 2014, the Company has identified $5,581 of TDR loans and $2,228 of substandard loans as impaired, totaling $7,809, which includes $5,332 of performing TDR loans. A loan is identified as impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Performing TDRs consist of loans that have been modified and are performing in accordance with the modified terms for a sufficient length of time, generally six months, or loans that were modified on a proactive basis. A summary of the Company’s impaired loans as of September 30, 2014 and September 30, 2013 was as follows:



	With No Related Allowance Recorded						With An Allowance Recorded						Totals
	Real Estate		Consumer and Other		Total		Real Estate		Consumer and Other		Total		Real Estate		Consumer and Other		Total
Recorded investment at September 30, 2014	$	4,345	$	535	$	4,880	$	2,197	$	732	$	2,929	$	6,542	$	1,267	$	7,809
Unpaid balance at September 30, 2014	4,345		535		4,880		2,197		732		2,929		6,542		1,267		7,809
Recorded investment at September 30, 2013	5,349		771		6,120		3,659		907		4,566		9,008		1,678		10,686
Unpaid balance at September 30, 2013	5,349		771		6,120		3,659		907		4,566		9,008		1,678		10,686
Average recorded investment; twelve months ended September 30, 2014	4,722		614		5,336		3,137		823		3,960		7,859		1,437		9,296
Average recorded investment; twelve months ended September 30, 2013	4,185		609		4,794		4,197		993		5,190		8,382		1,602		9,984
Interest income received; twelve months ended September 30, 2014	149		32		181		68		24		92		217		56		273
Interest income received; twelve months ended September 30, 2013	202		71		273		69		40		109		271		111		382

Troubled Debt Restructuring – A TDR includes a loan modification where a borrower is experiencing financial difficulty and the Bank grants a concession to that borrower that the Bank would not otherwise consider except for the borrower’s financial difficulties. Concessions include an extension of loan terms, renewals of existing balloon loans, reductions in interest rates and consolidating existing Bank loans at modified terms. A TDR may be either on accrual or nonaccrual status based upon the performance of the borrower and management’s assessment of collectability. If a TDR is placed on nonaccrual status, it remains there until a sufficient period of performance under the restructured terms has occurred at which time it is returned to accrual status. There were 4 delinquent TDRs, greater than 60 days past due, with a recorded investment of $191 at September 30, 2014, compared to 11 such loans with a recorded investment of $1,102 at September 30, 2013. A summary of loans by loan type modified in a troubled debt restructuring as of September 30, 2014 and September 30, 2013, and during each of the twelve months then ended, was as follows:



	Real Estate			Consumer and Other			Total
September 30, 2014 and
Twelve Months then Ended:
Accruing / Performing:
Beginning balance	$	6,254		$	1,101		$	7,355
Principal payments	(757		)	(258		)	(1,015		)
Charge-offs	(11		)	(30		)	(41		)
Advances	7			—			7
New restructured (1)	40			24			64
Class transfers (2)	(60		)	—			(60		)
Transfers between accrual/non-accrual	(938		)	(40		)	(978		)
Ending balance	$	4,535		$	797		$	5,332
Non-accrual / Non-performing:
Beginning balance	$	1,187		$	76		$	1,263
Principal payments	(1,515		)	(38		)	(1,553		)
Charge-offs	(426		)	(52		)	(478		)
Advances	3			—			3
New restructured (1)	—			16			16
Class transfers (2)	15			5			20
Transfers between accrual/non-accrual	938			40			978
Ending balance	$	202		$	47		$	249
Totals:
Beginning balance	$	7,441		$	1,177		$	8,618
Principal payments	(2,272		)	(296		)	(2,568		)
Charge-offs	(437		)	(82		)	(519		)
Advances	10			—			10
New restructured (1)	40			40			80
Class transfers (2)	(45		)	5			(40		)
Transfers between accrual/non-accrual	—			—			—
Ending balance	$	4,737		$	844		$	5,581


(1)	“New restructured” represent loans restructured during the current period that met TDR criteria in accordance with the Bank’s policy at the time of the restructuring.


(2)	“Class transfers” represent previously restructured loans that met TDR criteria per the Bank’s policy for the first time during the current period.



	Real Estate			Consumer and Other			Total
September 30, 2013 and
Twelve Months then Ended:
Accruing / Performing:
Beginning balance	$	5,751		$	1,055		$	6,806
Principal payments	(397		)	(388		)	(785		)
Charge-offs	(131		)	(42		)	(173		)
Advances	21			7			28
New restructured (1)	181			191			372
Class transfers (2)	1,294			263			1,557
Transfers between accrual/non-accrual	(465		)	15			(450		)
Ending balance	$	6,254		$	1,101		$	7,355
Non-accrual / Non-performing:
Beginning balance	$	1,259		$	70		$	1,329
Principal payments	(557		)	(86		)	(643		)
Charge-offs	(248		)	(24		)	(272		)
Advances	13			3			16
New restructured (1)	—			1			1
Class transfers (2)	255			127			382
Transfers between accrual/non-accrual	465			(15		)	450
Ending balance	$	1,187		$	76		$	1,263
Totals:
Beginning balance	$	7,010		$	1,125		$	8,135
Principal payments	(954		)	(474		)	(1,428		)
Charge-offs	(379		)	(66		)	(445		)
Advances	34			10			44
New restructured (1)	181			192			373
Class transfers (2)	1,549			390			1,939
Transfers between accrual/non-accrual	—			—			—
Ending balance	$	7,441		$	1,177		$	8,618


(1)	“New restructured” represent loans restructured during the current period that met TDR criteria in accordance with the Bank’s policy at the time of the restructuring.


(2)	“Class transfers” represent previously restructured loans that met TDR criteria per the Bank’s policy for the first time during the current period.



	September 30, 2014			September 30, 2013
	Number of Modifications	Recorded Investment		Number of Modifications	Recorded Investment
Troubled debt restructurings:
Real estate	47	$	4,737	62	$	7,441
Consumer and other	53	844		90	1,177
	100	$	5,581	152	$	8,618

As an integral part of their examination process, various regulatory agencies review the Bank’s ALL. Such agencies may require that changes in the ALL be recognized when such regulators’ credit evaluations differ from those of our management based on information available to the regulators at the time of their examinations.