Loans and Allowance for Loan Losses

3 Months Ended

Sep. 30, 2017

Note 3: Loans and Allowance for Loan Losses

Loans at September 30, 2017 and June 30, 2017 include:

	September 30,		June 30,
	2017		2017
	(In thousands)
Real estate loans
One- to four-family residential	$	72,799	$	70,622
Multi-family residential		11,601		10,378
Commercial		35,772		30,882
Construction		16,959		16,436
Commercial loans		3,391		3,304
Consumer and other		684		589

Total loans		141,206		132,211

Less:
Net deferred loan costs		(82)		(72)
Undisbursed loans in process		11,314		9,123
Allowance for loan losses		1,636		1,640

Net loans	$	128,338	$	121,520

The following table presents, by portfolio segment, the activity in the allowance for loan losses for the three months ended September 30, 2017 and the recorded investment in loans and impairment method as of September 30, 2017:

	At or for the three months ended September 30, 2017
	1-4 Family		1-4 Family
	Owner		Non-Owner		Multi-
	Occupied		Occupied		family		Commercial		Construction		Consumer		Total
	(In thousands)
Three Months Ended September 30, 2017
Allowance for loan losses:
Balance, July 1, 2017	$	812	$	326	$	27	$	359	$	116		-	$	1,640
Provision for loan losses		(47)		(1)		4		62		(16)		(2)		-
Charge-offs		(8)		-		-		-		-		-		(8)
Recoveries		2		-		-		-		-		2		4

Balance, September 30, 2017	$	759	$	325	$	31	$	421	$	100	$	-	$	1,636

Allowance for loan losses:

Ending balance, individually evaluated for impairment	$	8	$	14	$	-	$	-	$	-	$	-	$	22

Ending balance, collectively evaluated for impairment	$	751	$	311	$	31	$	421	$	100	$	-	$	1,614

Loans:
Ending balance	$	52,102	$	20,697	$	11,601	$	39,163	$	16,959	$	684	$	141,206

Ending balance; individually evaluated for impairment	$	738	$	225	$	101	$	135	$	-	$	-	$	1,199

Ending balance; collectively evaluated for impairment	$	51,364	$	20,472	$	11,500	$	39,028	$	16,959	$	684	$	140,007

The following table presents, by portfolio segment, the activity in the allowance for loan losses for the three months ended September 30, 2016:

	1-4 Family		1-4 Family
	Owner		Non-Owner		Multi-
	Occupied		Occupied		family		Commercial			Construction		Consumer		Total
	(In thousands)
Three Months Ended September 30, 2016
Allowance for loan losses:
Balance, July 1, 2016	$	1,004	$	282	$	66	$	167		$	116		-	$	1,635
Provision for loan losses		15		(56)		(30)		58			10		3		-
Charge-offs		-		-		-		-			-		(4)		(4)
Recoveries		-		-		-		-			-		1		1

Balance, September 30, 2016	$	1,019	$	226	$	36	$	225	#	$	126	$	-	$	1,632

The following table presents the recorded investment in loans and impairment method as of June 30, 2017:

	1-4 Family		1-4 Family
	Owner		Non-Owner		Multi-
	Occupied		Occupied		family		Commercial		Construction		Consumer		Total
	(In thousands)
June 30, 2017
Allowance for loan losses:
Ending balance, individually evaluated for impairment	$	20	$	13	$	-	$	-	$	-	$	-	$	33

Ending balance, collectively evaluated for impairment	$	792	$	313	$	27	$	359	$	116	$	-	$	1,607

Loans:
Ending balance	$	51,629	$	18,993	$	10,378	$	34,186	$	16,436	$	589	$	132,211

Ending balance; individually evaluated for impairment	$	977	$	331	$	103	$	137	$	-	$	-	$	1,548

Ending balance; collectively evaluated for impairment	$	50,652	$	18,662	$	10,275	$	34,049	$	16,436	$	589	$	130,663

Internal Risk Categories

The Company has adopted a standard loan grading system for all loans. Loans are selected for a grading review based on certain characteristics, including credit concentrations, subprime criteria and delinquency of 90 days or more. Definitions are as follows:

Pass: These are higher quality loans that do not fit any of the other categories described below.

Special Mention: The loans identified as special mention have an obvious flaw or a potential weakness that deserves special management attention, but which has not yet impacted collectibility. These flaws or weaknesses, if left uncorrected, may result in the deterioration of the prospects of repayment or of the Company’s credit position.

Substandard: These are loans with a well-defined weakness, which gives the Company a serious concern about the borrower’s ability to make full repayment if the weakness is not corrected. The loan may contain a flaw, which could impact the borrower’s ability to repay, or the borrower’s continuance as a “going concern.” When collateral values are not sufficient to secure the loan and other weaknesses are present, the loan may be rated substandard. A loan will also be rated substandard when full repayment is expected, but it must come from the liquidation of collateral.

Doubtful: These are loans with major defined weaknesses, where future charge-off of a part of the credit is highly likely. The primary repayment source is no longer viable and the viability of the secondary source of repayment is in doubt. The amount of loss is uncertain due to circumstances within the credit that are not yet fully developed and the loan is rated “Doubtful” until the loss can be accurately estimated.

Loss: These are near term charge-offs. Loans classified as loss are considered uncollectible and of such little value that it is not desirable to continue carrying them as assets on the Company’s financial statements, even though partial recovery may be possible at some future time.

The following tables present the credit risk profile of the Company’s loan portfolio based on internal rating category and payment activity as of September 30, 2017 and June 30, 2017:

	September 30, 2017
	1-4 Family		1-4 Family
	Owner		Non-Owner		Multi-
	Occupied		Occupied		family		Commercial		Construction		Consumer		Total
	(In thousands)
Pass	$	51,512	$	20,439	$	11,500	$	39,068	$	16,959	$	684	$	140,162
Special mention		-		-		-		-		-		-		-
Substandard		590		258		101		95		-		-		1,044
Doubtful		-		-		-		-		-		-		-

Total	$	52,102	$	20,697	$	11,601	$	39,163	$	16,959	$	684	$	141,206

	June 30, 2017
	1-4 Family		1-4 Family
	Owner		Non-Owner		Multi-
	Occupied		Occupied		family		Commercial		Construction		Consumer		Total
	(In thousands)
Pass	$	51,016	$	18,629	$	10,275	$	34,090	$	16,436	$	589	$	131,035
Special mention		-		-		-		-		-		-		-
Substandard		613		364		103		96		-		-		1,176
Doubtful		-		-		-		-		-		-		-

Total	$	51,629	$	18,993	$	10,378	$	34,186	$	16,436	$	589	$	132,211

The Company has a portfolio of loans designated as subprime, defined as those loans made to borrowers with a credit score below 660. These loans are primarily secured by 1-4 family real estate, including both owner-occupied and non-owner-occupied properties. Subprime loans totaled $7.6 million and $7.3 million at September 30, 2017 and June 30, 2017, respectively.

The Company evaluates the loan risk grading system definitions and allowance for loan losses methodology on an ongoing basis. No significant changes were made to either during the past year.

The following tables present the Company’s loan portfolio aging analysis of the recorded investment in loans as of September 30, 2017 and June 30, 2017:

	September 30, 2017
													Total Loans >
	30-59 Days		60-89 Days		Greater Than		Total				Total Loans		90 Days &
	Past Due		Past Due		90 Days		Past Due		Current		Receivable		Accruing
	(In thousands)

1-4 family owner-occupied	$	415	$	-	$	13	$	428	$	51,674	$	52,102	$	-
1-4 family non-owner occupied		-		35		-		35		20,662		20,697		-
Multi-family residential		100		-		-		100		11,501		11,601		-
Commercial		108		-		-		108		39,055		39,163		-
Construction		-		-		-		-		16,959		16,959		-
Consumer and other		-		-		-		-		684		684		-

Total	$	623	$	35	$	13	$	671	$	140,535	$	141,206	$	-

	June 30, 2017
													Total Loans >
	30-59 Days		60-89 Days		Greater Than		Total				Total Loans		90 Days &
	Past Due		Past Due		90 Days		Past Due		Current		Receivable		Accruing
	(In thousands)

1-4 family owner-occupied	$	219	$	274	$	14	$	507	$	51,122	$	51,629	$	-
1-4 family non-owner occupied		-		-		-		-		18,993		18,993		-
Multi-family residential		-		-		-		-		10,378		10,378		-
Commercial		149		-		-		149		34,037		34,186		-
Construction		-		-		-		-		16,436		16,436		-
Consumer and other		-		-		-		-		589		589		-

Total	$	368	$	274	$	14	$	656	$	131,555	$	132,211	$	-

A loan is considered impaired when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming multi-family and commercial loans, but also include loans modified in troubled debt restructurings.

The following table presents impaired loan information as of September 30, 2017 and for the three months ended September 30, 2017 and 2016:

							For the Three Months Ended				For the Three Months Ended
	As of September 30, 2017						September 30, 2017				September 30, 2016
					Allowance
			Unpaid		for Loan		Average		Interest		Average		Interest
	Recorded		Principal		Losses		Recorded		Income		Recorded		Income
	Investment		Balance		Allocated		Investment		Recognized		Investment		Recognized
	(In thousands)
Loans with no related allowance recorded:
1-4 family owner-occupied	$	602	$	851	$	-	$	620	$	5	$	669	$	12
1-4 family non-owner occupied		195		233		-		201		-		180		-
Multi-family residential		101		108		-		108		-		-		-
Commercial		135		149		-		135		2		144		2
Construction		-		-		-		-		-		-		-
Consumer and other		-		-		-		-		-		-		-

Loans with an allowance recorded:
1-4 family owner-occupied		136		172		8		137		-		360		-
1-4 family non-owner occupied		30		40		14		31		-		345		-
Multi-family residential		-		-		-		-		-		111		-
Commercial		-		-		-		-		-		-		-
Construction		-		-		-		-		-		-		-
Consumer and other		-		-		-		-		-		-		-

Totals	$	1,199	$	1,553	$	22	$	1,232	$	7	$	1,809	$	14

The following table presents impaired loan information as of June 30, 2017:

	As of June 30, 2017
					Allowance
			Unpaid		for Loan
	Recorded		Principal		Losses
	Investment		Balance		Allocated
	(In thousands)
Loans with no related allowance recorded:
1-4 family owner-occupied	$	589	$	805	$	-
1-4 family non-owner occupied		202		243		-
Multi-family residential		103		108		-
Commercial		137		152		-
Construction		-		-		-
Consumer and other		-		-		-

Loans with an allowance recorded:
1-4 family owner-occupied		388		439		20
1-4 family non-owner occupied		129		175		13
Multi-family residential		-		-		-
Commercial		-		-		-
Construction		-		-		-
Consumer and other		-		-		-

Totals	$	1,548	$	1,922	$	33

The recorded investment in loans excludes accrued interest receivable and loan origination fees, net due to immateriality.

The following table presents the Company’s nonaccrual loans at September 30, 2017 and June 30, 2017. The table excludes performing troubled debt restructurings.

	September 30,		June 30,
	2017		2017
	(In thousands)
Real estate
1-4 family owner-occupied	$	385	$	422
1-4 family non-owner occupied		225		331
Multi-family residential		101		103
Commercial		-		-
Construction		-		-
Consumer and other		-		-

Total nonaccrual	$	711	$	856

At September 30, 2017 and June 30, 2017, the Company had certain loans that were modified in troubled debt restructurings. The modification of terms of such loans included one or a combination of the following: an extension of maturity, a reduction of the stated interest rate or a permanent reduction of the recorded investment in the loan. The Company had loans modified in a troubled debt restructuring totaling $817,000 and $961,000 at September 30, 2017 and June 30, 2017, respectively. Troubled debt restructured loans had specific allowances totaling $22,000 and $28,000 at September 30, 2017 and June 30, 2017, respectively. At September 30, 2017, the Company had no commitments to lend additional funds to borrowers with troubled debt restructured loans.

No loans were modified as troubled debt restructurings during either of the three-month periods ended September 30, 2017 or 2016.

The Company had no troubled debt restructurings modified during the twelve months ended September 30, 2017 or 2016 that subsequently defaulted during the three-month periods ended September 30, 2017 or 2016. A troubled debt restructured loan is considered to be in payment default once it is 30 days contractually past due under the loan’s modified terms.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.

- Definition

The entire disclosure for claims held for amounts due a entity, excluding financing receivables. Examples include, but are not limited to, trade accounts receivables, notes receivables, loans receivables. Includes disclosure for allowance for credit losses.

+ References + Details

MW Bancorp, Inc. 10-Q