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EX-32 - EXHIBIT 32 - Westbury Bancorp, Inc.wbb-2017930x10kexx32.htm
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EX-10.9 - EXHIBIT 10.9 - Westbury Bancorp, Inc.wbb-2017930x10kexx109.htm
EX-10.8 - EXHIBIT 10.8 - Westbury Bancorp, Inc.wbb-2017930x10kexx108.htm
EX-10.7 - EXHIBIT 10.7 - Westbury Bancorp, Inc.wbb-2017930x10kexx107.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

x
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2017.
OR
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________.

Commission file number: 001-35871

WESTBURY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Maryland
 
46-1834307
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
200 South Main Street, West Bend, Wisconsin
 
53095
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code: (262) 334-5563

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share    

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). YES x NO ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller




reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
 
Accelerated filer
¨

 
 
 
 
 
Non-accelerated filer
¨
 
Smaller reporting company
x
 
Emerging growth company
x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ¨ NO x

As of December 4, 2017, there were 3,850,057 issued and outstanding shares of the Registrant’s Common Stock. The aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant, computed by reference to the closing price of the common stock on the NASDAQ Capital Market on March 31, 2017 (the last day of the Registrant's most recently completed fiscal second quarter) was $70.5 million. Shares of common stock held by any executive officer or director of the Registrant have been excluded from this computation because such persons may be deemed affiliates. This determination of affiliate status is not a conclusive determination for other purposes.






TABLE OF CONTENTS

 
 
Page Number




PART I
ITEM 1.
Business
Forward Looking Statements
This annual report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “believe,” “contemplate,” “continue,” “intend,” “target” and words of similar meaning. These forward-looking statements include, but are not limited to:
statements of our goals, intentions and expectations;
statements regarding our business plans, prospects, growth and operating strategies;
statements regarding the asset quality of our loan and investment portfolios; and
estimates of our risks and future costs and benefits.
These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this annual report.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in our forward-looking statements:
our ability to manage our operations under current economic conditions nationally and in our market area;
adverse changes in the financial industry, securities, credit and national and local real estate markets (including real estate values);
significant increases in our loan losses and changes in management’s assumptions in determining the adequacy of the allowance for loan losses;
credit risks of lending activities, including changes in the level and trend of loan delinquencies and charge-offs and in our allowance for loan losses and in our provision for loan losses;
competition among depository and other financial institutions;
our success in increasing our commercial business, commercial real estate and multifamily lending while maintaining our asset quality;
we have in recent periods identified multi-family, commercial real estate and construction loans as areas for lending emphasis. We have had, in particular, higher levels of commercial real estate lending (including non-owner occupied commercial real estate loans) in recent periods. Although we believe we have employed the appropriate management, sales, and administrative personnel (including personnel tasked with managing and monitoring loan concentrations in these areas), as well as installed the appropriate systems and procedures, to support this lending emphasis and higher levels of loans in these categories, these types of loans have historically carried greater risk, to varying degrees, of payment default than loans to retail borrowers. As the volume of commercial lending in these loan categories increases, our credit risk may increase. Construction loans have the additional risk of potential non-completion of the project. In the event of increased defaults from commercial borrowers or non-

1



completion of construction projects, our provision for loan losses would further increase and loans may be written off and, therefore, earnings would be reduced. In addition, costs associated with the administration of problem loans increase and, therefore, earnings would be further reduced. Further, as the portion of the Company's loans secured by real estate increases (including those related to construction projects), the Company becomes increasingly exposed to fluctuations in real estate values and the real estate markets, as well as being exposed to potential environmental liabilities and related compliance burdens.  If we fail to adequately monitor and evaluate trends in the real estate markets and to assess potential environmental risks, the value of the collateral we hold may be less than expected;
our success in introducing new financial products;
our ability to attract and maintain deposits;
changes in interest rates generally, including changes in the relative differences between short term and long term interest rates and in deposit interest rates, that may affect our net interest margin and funding sources;
fluctuations in the demand for loans, which may be affected by the number of unsold homes, land and other properties in our market areas and by declines in the value of real estate in our market area;
changes in consumer spending, borrowing and savings habits;
risks related to a high concentration of loans secured by real estate located in our market area;
the results of examinations by our regulators, including the possibility that our regulators may, among other things, require us to increase our allowance for loan losses, write down assets, change our regulatory capital position, limit our ability to borrow funds or maintain or increase deposits;
other actions, resolutions or agreements imposed by our regulators (including the Federal Reserve Bank or the Office of the Comptroller of the Currency) as a result of changes in our financial condition, including related to paying dividends, issuing debt, borrowing funds, repurchasing shares of our common stock and other similar actions.
changes in the level of government support of housing finance;
our ability to enter new markets successfully and capitalize on growth opportunities;
changes in consumer spending, borrowing and savings habits;
changes in laws or government regulations or policies affecting financial institutions, including the Dodd-Frank Act and the JOBS Act, which could result in, among other things, increased deposit insurance premiums and assessments, capital requirements (particularly the new capital regulations), and regulatory fees and compliance costs;
changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;
changes in our compensation and benefit plans;
our ability to retain key members of our senior management team and to address staffing needs to respond to demand or to implement our strategic plans;
loan delinquencies and changes in the underlying cash flows of our borrowers;
our ability to control costs and expenses, particularly those associated with operating as a publicly traded company;

2



changes in the financial condition or future prospects of issuers of securities that we own;
the ability of third-party service providers to perform their obligations to us;
the availability, effectiveness and security of our information technology systems and our ability to secure confidential information through the use of our computer and other technology systems and networks;
the impact of reputational risk created by any of the foregoing developments on such matters such as business generation and retention, funding and liquidity; and
other economic, competitive, governmental, regulatory and operational factors affecting our operations, pricing, products and services described elsewhere in this annual report.
Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.
Westbury Bancorp, Inc.
Westbury Bancorp, Inc. (the “Company”) was incorporated in the State of Maryland on August 10, 2012 and became the savings and loan holding company for Westbury Bank (the “Bank”) following the consummation of the mutual-to-stock conversion of WBSB Bancorp, MHC, the Bank’s former mutual holding company, which was completed on April 9, 2013. The sole business of the Company is its ownership of the Bank. At September 30, 2017, we had total consolidated assets of $790.3 million, net loans of $602.0 million, total deposits of $675.8 million and stockholders' equity of $81.1 million.
Westbury Bank
Westbury Bank is a federally-chartered savings bank headquartered in West Bend, Wisconsin. Our principal business consists of attracting retail deposits from the general public in our market area and investing those deposits, together with funds generated from operations, and borrowings, in commercial and multifamily real estate loans, one- to four-family residential real estate loans, commercial business loans, and, to a lesser extent, construction loans and consumer loans, including home equity lines of credit and automobile loans. A significant majority of our deposits are transaction accounts, which we believe are less susceptible to large-scale withdrawals as a result of changes in interest rates than certificates of deposit, and which we believe have a lower cost of funds over various interest rate cycles. We also purchase investment securities consisting primarily of securities issued by the United States government and its agencies and government-sponsored enterprises, mortgage-backed securities and collateralized mortgage obligations issued by government-sponsored enterprises, municipal securities and corporate securities.
Market Area
We conduct business through our main office located in West Bend, Wisconsin, seven branch offices in West Bend, Brookfield, Germantown, Hartford, Jackson, Kewaskum and Slinger, Wisconsin, and loan production offices in Madison and Appleton, Wisconsin. We also operate one free-standing ATM in West Bend, Wisconsin at a location other than at one of our branches. Our main office, six of our branches and our one free-standing ATM are located in Washington County, our Brookfield branch is located in Waukesha County, our Madison loan production office is located in Dane County, Wisconsin and our Appleton loan production office is located in Outagamie County, Wisconsin. West Bend, Wisconsin is located in southeastern Wisconsin on the Highway 45 corridor, approximately 40 miles northwest of downtown Milwaukee, Wisconsin, and approximately 75 miles northeast of Madison, Wisconsin.
Our primary market area consists of Washington and Waukesha Counties, Wisconsin. Although our current operations are not focused in Milwaukee County, we are affected by conditions in Milwaukee County because our loan portfolio includes loans that are secured by real estate or that have borrowers located in Milwaukee County. In

3



addition, a number of our customers who reside in Washington or Waukesha Counties are employed in Milwaukee County, and the operations of our commercial customers depend in part on sales of products and services to individuals or other businesses located in Milwaukee County and the surrounding area. Our primary market area includes the west and northwest suburbs of Milwaukee, as well as small towns and rural communities.
Lending Activities
Our principal lending activity is originating commercial real estate loans, one- to four-family residential real estate loans, multifamily loans, commercial business loans, and, to a lesser extent, construction loans and consumer loans, including home equity lines of credit and automobile loans. We also have a small portfolio of education loans, although we no longer originate education loans. In recent years, we have increased and, subject to market conditions and our asset-liability management analysis, expect to continue to increase our focus on commercial real estate, multifamily and commercial business lending, in an effort to maintain diversity in our overall loan portfolio and increase the overall yield earned on our loans. We also sell, in the secondary market, a significant portion of the longer-term (20 to 30 year) fixed-rate residential mortgage loans that we originate, on both a servicing-retained and servicing-released, non-recourse basis, while retaining shorter-term (10 to 15 year) fixed-rate residential mortgage loans and adjustable rate residential mortgage loans, in order to manage the maturity and time to repricing of our loan portfolio. We also originate FHA and VA loans for sale on a servicing-released basis.
We have in recent periods identified multi-family, commercial real estate, construction, and commercial business loans as areas for lending emphasis. We have had, in particular, higher levels of commercial real estate lending (including non-owner occupied commercial real estate loans) in recent periods. Although we believe we have employed the appropriate management, sales, and administrative personnel (including personnel tasked with managing and monitoring loan concentrations in these areas), as well as installed the appropriate systems and procedures, to support this lending emphasis and higher levels of loans in these categories, these types of loans have historically carried greater risk of payment default than loans to retail borrowers. As the volume of commercial lending in these loan categories increases, our credit risk may increase. Construction loans have the additional risk of potential non-completion of the project. In the event of increased defaults from commercial borrowers or non-completion of construction projects, our provision for loan losses would further increase and loans may be written off and, therefore, earnings would be reduced. In addition, costs associated with the administration of problem loans increase and, therefore, earnings would be further reduced. Further, as the portion of the Company's loans secured by real estate increases (including those related to construction projects), the Company becomes increasingly exposed to fluctuations in real estate values and the real estate markets, as well as being exposed to potential environmental liabilities and related compliance burdens.  If we fail to adequately monitor and evaluate trends in the real estate markets and to assess potential environmental risks, the value of the collateral we hold may be less than expected.


4



Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated.
 
At September 30,
 
2017
 
2016
 
2015
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
(Dollars in thousands)
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Single family(1)   
$
163,780

 
26.95
%
 
$
158,541

 
29.41
%
 
$
153,141

 
30.73
%
Multifamily
134,094

 
22.06

 
123,623

 
22.93

 
105,750
 
21.22

Commercial real estate - non-owner occupied
151,686

 
24.96

 
117,971

 
21.88

 
110,833
 
22.24

Commercial real estate - owner occupied
68,839

 
11.33

 
63,108

 
11.71

 
52,124
 
10.46

Construction and land
18,860

 
3.10

 
16,230

 
3.01

 
18,831
 
3.78

Total real estate
537,259

 
88.39

 
479,473

 
88.94

 
440,679
 
88.43

Commercial business loans
53,149

 
8.74

 
40,836

 
7.57

 
38,200
 
7.66

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
Home equity lines of credit
14,034

 
2.31

 
14,969

 
2.78

 
14,881
 
2.99

Education
2,865

 
0.47

 
3,401

 
0.63

 
4,106
 
0.82

Automobile
348

 
0.06

 
241

 
0.04

 
207
 
0.04

Other consumer loans
153

 
0.03

 
221

 
0.04

 
316
 
0.06

Total consumer loans
17,400

 
2.86

 
18,832

 
3.49

 
19,510
 
3.91

Total loans
$
607,808

 
100.00
%
 
$
539,141

 
100.00
%
 
$
498,389

 
100.00
%
Net deferred loan costs
60

 
 
 
138

 
 
 
366

 
 
Allowance for loan losses
5,760

 
 
 
5,244

 
 
 
4,598

 
 
Total loans, net
$
601,988

 
 
 
$
533,759

 
 
 
$
493,425

 
 
 
September 30,
 
2014
 
2013
 
Amount
 
Percent
 
Amount
 
Percent
 
(Dollars in thousands)
Real estate loans:
 
 
 
 
 
 
 
Single family(1)   
$
135,337

 
32.13
%
 
$
132,496

 
38.15
%
Multifamily
76,396
 
18.14

 
47,178
 
13.59

Commercial real estate - non-owner occupied
93,141
 
22.11

 
80,522
 
23.20

Commercial real estate - owner occupied
41,980
 
9.98

 
31,715
 
9.13

Construction and land
16,362
 
3.88

 
10,629
 
3.06

Total real estate
363,216
 
86.24

 
302,540
 
87.13

Commercial business loans
37,675
 
8.95

 
25,003
 
7.20

Consumer loans:
 
 
 
 
 
 
 
Home equity lines of credit
14,275
 
3.40

 
13,652
 
3.93

Education
4,694
 
1.11

 
5,189
 
1.49

Automobile
327
 
0.08

 
405
 
0.12

Other consumer loans
994
 
0.24

 
393
 
0.11

Total consumer
20,290
 
4.82

 
19,639
 
5.66

Total loans
$
421,181

 
100.00
%
 
$
347,182

 
100.00
%
Net deferred loan costs
235

 
 
 
136

 
 
Allowance for loan losses
4,072

 
 
 
4,266

 
 
Total loans, net
$
416,874

 
 
 
$
342,780

 
 
                    
(1)
Excludes single family mortgage loans held for sale of $827,000, $1.9 million, $431,000, $326,000 and $1.0 million, respectively, at September 30, 2017, 2016, 2015, 2014, and 2013.

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Loan Portfolio Maturities. The following table sets forth the contractual maturities of our total loan portfolio at September 30, 2017. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. The table presents contractual maturities and does not reflect repricing or the effect of prepayments. Actual maturities may differ.
 
Single Family
Multifamily
Commercial
Real Estate - Non-owner Occupied
Commercial
Real Estate - Owner Occupied
Construction and Land
Commercial
 
(Dollars in thousands)
Due During the Year Ending September 30
 
 
 
 
 
 
 
 
 
 
 
2018
$
1,037

 
$
9,187

 
$
24,100

 
$
2,868

 
$
2,234

 
$
16,804

2019
1,570

 
29,744

 
19,765

 
6,979

 
4,342

 
14,203

2020
2,135

 
37,205

 
35,005

 
20,599

 
3,807

 
2,838

2021 to 2022
4,809

 
35,525

 
38,576

 
21,749

 
388

 
13,836

2023 to 2027
33,481

 
20,800

 
33,171

 
16,235

 
1,505

 
5,468

2028 to 2032
45,905

 
163

 
693

 
190

 
424

 

2033 and beyond
74,843

 
1,470

 
376

 
219

 
6,160

 

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
163,780

 
$
134,094

 
$
151,686

 
$
68,839

 
$
18,860

 
$
53,149



 
Home Equity Lines of Credit
Education
Automobile
Other Consumer
Total
 
(Dollars in thousands)
Due During the Year Ending September 30
 
 
 
 
 
 
 
 
 
2018
$
5,182

 
$
301

 
$
21

 
$
60

 
$
61,794

2019
2,253

 
310

 
83

 
18

 
79,267

2020
321

 
294

 
111

 
9

 
102,324

2021 to 2022
9

 
540

 
133

 

 
115,565

2023 to 2027
33

 
940

 

 
66

 
111,699

2028 to 2032
49

 
320

 

 

 
47,744

2033 and beyond
6,187

 
160

 

 

 
89,415

 
 
 
 
 
 
 
 
 
 
Total
$
14,034

 
$
2,865

 
$
348

 
$
153

 
$
607,808



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The following table sets forth our fixed- and adjustable-rate loans at September 30, 2017 that are due after September 30, 2018.

 
Due After September 30, 2018
 
Fixed
 
Adjustable
 
Total
 
(Dollars in thousands)
Real estate loans:
 
 
 
 
 
Single family
$
84,893

 
$
77,850

 
$
162,743

Multifamily
112,057

 
12,850

 
124,907

Commercial real estate - non-owner occupied
122,537

 
5,049

 
127,586

Commercial real estate - owner occupied
64,203

 
1,768

 
65,971

Construction and land
4,590

 
12,036

 
16,626

Total real estate loans
388,280

 
109,553

 
497,833

Commercial business loans
25,777

 
10,568

 
36,345

Consumer loans:
 
 
 
 
 
Home equity lines of credit
91

 
8,761

 
8,852

Education
2,564

 

 
2,564

Automobile
327

 

 
327

Other consumer loans
93

 

 
93

Total consumer loans
3,075

 
8,761

 
11,836

Total loans
$
417,132

 
$
128,882

 
$
546,014

Loan Approval Procedures and Authority. Pursuant to applicable law, the aggregate amount of loans that we are permitted to make to any one borrower or a group of related borrowers is generally limited to 15% of Westbury Bank’s unimpaired capital and surplus (25% if the amount in excess of 15% is secured by “readily marketable collateral” or 30% for certain residential development loans). At September 30, 2017, our largest credit relationship totaled $10.5 million and was secured by non-owner-occupied real estate in our market area. At September 30, 2017, this loan was performing in accordance with its terms. Our second largest relationship at this date was a $10.3 million loan secured by owner-occupied real estate in our market area. At September 30, 2017, this loan was performing in accordance with its terms. Both loans comply with our loans to one borrower limits at September 30, 2017.
Our lending is subject to written underwriting standards and origination procedures. Decisions on loan applications are made on the basis of detailed applications submitted by the prospective borrower and property valuations (consistent with our appraisal policy) prepared by outside independent licensed appraisers approved by our board of directors as well as internal evaluations, where permitted by regulations. The loan applications are designed primarily to gather information to allow us to determine the borrower’s ability to repay the requested loan, and the more significant items on the application are verified through use of credit reports, financial statements and tax returns.
Generally, we require title insurance on our mortgage loans as well as fire and extended coverage casualty insurance in amounts at least equal to the principal amount of the loan or the value of improvements on the property, depending on the type of loan. We also require flood insurance if the property is determined to be in a flood zone area.
Individual officers and employees do not have approval authority with respect to residential real estate loans. We use the Desktop Underwriter™ system for residential real estate loans, and any loans that are not approved under this system, and loans in excess of the current Fannie Mae eligibility guidelines, may only be approved by our management loan committee, which consists of our Executive Vice President - Community Banking, our Vice President - Retail Loan Operations, our Vice President - Underwriting and our Assistant Vice President - Consumer Lending for loans up to $500,000. For loans exceeding $500,000, the Chief Financial Officer or Chief Credit Officer are included to increase the approval limit to $1,000,000. Residential real estate loans

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greater than $1,000,000 must be approved by the directors' loan committee, which consists of at least three independent directors.
Our President, our Executive Vice President - Commercial Lending, our Chief Credit Officer and our Chief Financial Officer each have approval authority of up to $500,000 for commercial business, commercial real estate and multifamily lending relationships and up to $3,000 for unsecured consumer loans. Our other lending personnel have approval authority of lesser amounts, up to a maximum of $250,000, depending on each person’s lending experience and the results of credit review of loans that they have approved over a period of time.
In addition, any two persons, one of whom reports directly to the other, may approve commercial business, commercial real estate and multifamily lending relationships up to the aggregate of their individual lending authorities. Our President, our Executive Vice President - Commercial Lending, our Chief Credit Officer and our Chief Financial Officer may, together, approve a commercial business, commercial real estate or multifamily lending relationship of up to $5,000,000. Aggregate credit exposure to one borrower in excess of $5,000,000 must be approved by the directors’ loan committee, which consists of at least three independent directors. Our President, our Executive Vice President - Commercial Lending, our Chief Financial Officer and our Chief Credit Officer participate in directors’ loan committee meetings, but are not voting members of the committee. Approval of the directors’ loan committee requires the approval of all of the independent directors serving on the committee.
Commercial Real Estate and Multifamily Lending. Consistent with our strategy to diversify our loan portfolio and increase the yield on our loan portfolio, we are focused on increasing our origination of commercial real estate and multifamily loans, with a target loan size of between $2.0 million to $8.0 million. At September 30, 2017, we had $354.6 million in commercial real estate and multifamily loans, representing 58.3% of our total loan portfolio compared to $304.7 million, or 56.5% of our total loan portfolio at September 30, 2016. Subject to future economic, market and regulatory conditions, we intend to engage in a disciplined increase in commercial real estate and multifamily lending in our market area.
Our fixed-rate commercial real estate and multifamily loans generally have initial terms of three to five years and amortization terms of 10-25 years for commercial real estate loans and 15-30 years for multifamily loans, with a balloon payment at the end of the initial term. Our adjustable rate commercial real estate and multifamily loans generally have initial terms of three to five years and a re-pricing option. The maximum loan-to-value ratio of our commercial real estate loans and multifamily loans is generally 75% and 80%, respectively, of the lower of cost or appraised value of the property securing the loan. Our commercial real estate loans are typically secured by retail, industrial, warehouse, service, medical or other commercial properties, and our multifamily loans are typically secured by apartment buildings.

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Set forth below is information regarding our commercial real estate and multifamily loans, by industry, at September 30, 2017.
Industry Type

Number of Loans

Balance




(Dollars in thousands)
Non-owner occupied real estate:




Multifamily

84


$
134,094

Commercial real estate development and rental

95


151,686

Total non-owner occupied real estate:
 
179

 
285,780

 
 
 
 
 
Owner-occupied real estate:




Education services

6


14,397

Real estate, rental and leasing

24


13,247

Manufacturing

17


12,243

Health care and social

9


7,932

Retail trade

10


4,710

Professional, scientific, and technical services

7


4,603

Construction

8


3,859

Other services

18


3,770

Transportation and warehousing

3


1,376

Wholesale trade

2


1,055

Arts, entertainment, and recreation

2


606

Accommodation and food

4


598

Finance and insurance

3


425

Remediation services

1


18

Total owner-occupied real estate:
 
114

 
$
68,839

 
 
 
 
 
Total

293


$
354,619


At September 30, 2017, the average loan balance of our outstanding commercial real estate and multifamily loans was $1.2 million, and the largest of such loans was a $10.5 million loan secured by non-owner-occupied real estate in our market area. This loan was performing in accordance with its original terms at September 30, 2017.
We consider a number of factors in originating commercial real estate and multifamily loans. We evaluate the qualifications and financial condition of the borrower, including project-level and global cash flows, credit history, and management expertise, as well as the value and condition of the property securing the loan. When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service). We generally require a debt service coverage ratio of at least 1.20x for commercial real estate loans and 1.15x for multifamily loans. All commercial real estate and multifamily loans are appraised by outside independent appraisers approved by the Bank's Board of Directors. We also have an independent third party review of each appraisal, and conduct an internal valuation of any commercial real estate or multifamily property. We generally extend credit based upon the lowest valuation of the three methods.
Personal guarantees are generally obtained from the principals of commercial real estate and multifamily loans, although this requirement may be waived depending upon the loan-to-value ratio and the debt service ratio associated with the loan. We require borrowers to carry property and casualty insurance, and flood insurance if the

9



property is determined to be in a flood zone area. In addition, all purchase-money and refinance borrowers are required to obtain title insurance.
Commercial and multifamily real estate loans entail greater credit risks compared to one- to four-family residential real estate loans because they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment of loans secured by income-producing properties typically depends on the successful operation of the property, as repayment of the loan generally is dependent, in large part, on sufficient income from the property to cover operating expenses and debt service. Changes in economic conditions that are not in the control of the borrower or lender could affect the value of the collateral for the loan or the future cash flow of the property. Additionally, any decline in real estate values may be more pronounced for commercial and multifamily real estate than residential properties.
Single Family Residential Real Estate Lending. At September 30, 2017, we had $163.8 million of loans secured by single family (considered to be housing consisting of no more than four units) real estate, representing 26.9% of our total loan portfolio. In addition, at September 30, 2017, we had $827,000 of residential mortgages held for sale. We originate fixed-rate and adjustable-rate residential mortgage loans and home equity loans. At September 30, 2017, 52.2% of our single family residential real estate loans due after 2018 were fixed-rate loans, and 47.8% of such loans were adjustable-rate loans.
Our fixed-rate single family residential real estate loans are generally underwritten according to Fannie Mae guidelines, and we refer to loans that conform to such guidelines as “conforming loans.” We generally originate both fixed- and adjustable-rate mortgage loans in amounts up to the maximum conforming loan limits as established by the Federal Housing Finance Agency for Fannie Mae, which as of September 30, 2017 was generally $417,000 for single-family homes in our market area. Substantially all of our home equity loans are adjustable-rate loans, and are originated in accordance with the same standards as single family residential loans. We also originate loans above the lending limit for conforming loans, which are referred to as “jumbo loans.” We also offer FHA and VA loans, all of which we originate for sale on a servicing-released, non-recourse basis in accordance with FHA and VA guidelines. Virtually all of our single family residential real estate loans are secured by properties located in our market area.
We generally limit the loan-to-value ratios of our mortgage loans to 80% of the sales price or appraised value, whichever is lower. On a limited basis, loans with a loan-to-value ratio of up to 90% may be made without private mortgage insurance. In these cases, the borrower must have a credit score greater than 700 and a higher interest rate is charged commensurate with the higher risk. Loans with loan-to-value ratios up to 95% may be made when the borrower obtains private mortgage insurance.
Our fixed-rate single family residential real estate loans typically have terms of 10 to 30 years. Our adjustable-rate single family residential real estate loans generally have fixed rates for initial terms of one, three, five or seven years, and adjust annually thereafter at a margin over an index. Our adjustable-rate single family residential real estate loans carry terms to maturity ranging from 10 to 30 years.
Although adjustable-rate mortgage loans may reduce, to an extent, our vulnerability to changes in market interest rates because they periodically re-price, as interest rates increase the required payments due from the borrower also increase (subject to rate caps), increasing the potential for default by the borrower. At the same time, the ability of the borrower to repay the loan and the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustments of the contractual interest rate are also limited by the maximum periodic and lifetime rate adjustments permitted by our loan documents. Moreover, the interest rates on our adjustable-rate loans may not adjust for up to seven years after origination. As a result, the effectiveness of adjustable-rate mortgage loans in compensating for changes in general interest rates may be limited during periods of rapidly rising interest rates.
We offer single family residential real estate loans, secured by non-owner occupied properties, exclusively for sale on a servicing-released, non-recourse basis. Generally, we require personal guarantees from the borrowers on these properties, and we will not make loans in excess of 80% loan to value on non-owner-occupied properties.

10



Home equity loans have greater risk than single family residential real estate loans secured by first mortgages. We face the risk that the value of the collateral may not be sufficient to compensate us for the amount of the unpaid loan and costs of foreclosure and we may be unsuccessful in recovering the remaining balance from those customers. Particularly with respect to our home equity loans, decreases in real estate values could adversely affect the value of property used as collateral. We do not extend home equity loans unless the combined loan-to-value ratio of the first mortgage and the home equity loan is 80% or less, except in cases where the borrower has a credit score greater than 700 where we may accept a loan-to-value ratio of 90% with a higher interest rate charged to the borrower commensurate with the higher risk.
We do not offer “interest only” mortgage loans on permanent single family residential real estate loans (where the borrower pays interest for an initial period, after which the loan converts to a fully amortizing loan). We do not offer an interest-only home equity loan. We also do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan. We do not offer “subprime loans” on single family residential real estate loans (i.e., loans to borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments or bankruptcies, or loans to borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios), or “Alt-A” loans (i.e., loans that generally target borrowers with better credit scores who borrow with alternative documentation such as little or no verification of income).
We also sell, in the secondary market, a significant portion of the longer-term (20 to 30 year) fixed-rate residential mortgage loans that we originate, on both a servicing-retained and servicing-released, non-recourse basis, while retaining shorter-term (10 to 15 year) fixed-rate residential mortgage loans and adjustable rate residential mortgage loans, in order to manage the maturity and time to repricing of our loan portfolio. We also originate FHA and VA loans for sale on a servicing-released basis. During the years ended September 30, 2017 and September 30, 2016, we sold $34.3 million and $48.4 million of residential mortgage loans, respectively. At September 30, 2017 and 2016, we serviced a portfolio of $100.9 million and $126.1 million, respectively, of residential mortgage loans that we had originated and sold.

Commercial Business Lending. At September 30, 2017, we had $53.1 million of commercial business loans, representing 8.7% of our total loan portfolio. Our commercial business loans are generally term loans with terms of one to five years, and are generally made to businesses, with revenues between $3.0 million and $20.0 million, operating in our market area, for purchasing equipment, property improvements, business expansion or acquisition, or working capital, with a target loan size of between $1.0 million to $2.0 million. Our commercial business loans are generally secured by equipment, furniture and fixtures, inventory, accounts receivable or other business assets, or, in very limited circumstances, may be unsecured. If a commercial business loan is secured by equipment, we fix the maturity of a term loan to correspond to 80% of the useful life of equipment purchased or seven years, whichever is less. We also offer regular lines of credit and revolving lines of credit with terms of up to 12 months to finance short-term working capital needs such as accounts payable and inventory. Our commercial lines of credit are generally priced on an adjustable-rate basis and may be secured or, in very limited circumstances, unsecured. We generally obtain personal guarantees with commercial business loans.
We also offer commercial business loans utilizing the Small Business Administration’s ("SBA") various programs.  The loan guaranty provided under the SBA program reduces our credit risk.  In addition, the guaranteed portion of the credit can be sold in the secondary market generating fee income opportunities.  We face recourse liability on these loans if they do not meet all SBA requirements. We address this risk by utilizing a third-party SBA partner which specializes in underwriting, portfolio composition and servicing of SBA credit facilities. The Bank has Preferred Lender Status with the SBA. During the year ended September 30, 2017, we originated no SBA guaranteed commercial business loans. 
We typically originate commercial business loans on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business, the experience and stability of the borrower’s management team,

11



earnings projections and the underlying assumptions, and the value and marketability of any collateral securing the loan. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself and the general economic environment in our market area. Therefore, commercial business loans that we originate have greater credit risk than one- to four-family residential real estate loans or, generally, consumer loans. In addition, commercial business loans often result in larger outstanding balances to single borrowers, or related groups of borrowers, and also generally require substantially greater evaluation and oversight efforts on our part.
The table below sets forth information regarding our commercial business loans at September 30, 2017.
Industry Type
 
Number of Loans
 
Balance
 
 
 
 
(Dollars in thousands)
Manufacturing

71


$
33,163

Construction

19


6,987

Transportation and warehousing

11


3,336

Real estate, rental and leasing

7


2,183

Wholesale trade

10


1,980

Public administration

2


1,925

Retail trade

4


1,221

Professional, scientific, and technical services

8


1,192

Remediation services

10


671

Other services

7


264

Health care and social

5


206

Arts, entertainment, and recreation

1


21

Total
 
155

 
$
53,149


At September 30, 2017, the average loan balance of our outstanding commercial business loans was $343,000, and the largest outstanding balance of such loans was a $7.4 million loan secured by corporate assets including corporate owned life insurance. This loan was performing in accordance with its original terms at September 30, 2017.
We believe that commercial business loans will provide growth opportunities for us, and we expect to continue to increase, subject to our underwriting standards and market conditions, this business line in the future. We have recently hired seasoned commercial business lenders, which has increased our outstanding commercial business and owner-occupied commercial real estate loan balances and our pipeline of commercial business and owner-occupied commercial real estate loan commitments.
Construction and Land Lending. At September 30, 2017, we had $18.9 million, or 3.1% of our total loan portfolio, in construction and land loans. Of these, $5.6 million were loans on vacant land held for development by individuals for their primary residences, $8.7 million were commercial construction and land development loans, and $4.5 million were loans for the construction by individuals of their primary residences. All $5.6 million of loans on vacant land were fully amortizing loans, with the borrower obligated to pay principal and interest. At September 30, 2017, our largest construction and land loan was a $2.4 million loan secured by a multifamily property in our market area. This loan was performing in accordance with its original terms at September 30, 2017.
Our residential construction loans generally have initial terms of 12 months (subject to extension), during which the borrower pays interest only. Upon completion of construction, these loans convert to conventional amortizing mortgage loans. Our residential construction loans have rates and terms comparable to single family residential real estate loans that we originate. The maximum loan-to-value ratio of our residential construction loans is generally 80% of the lesser of the appraised value of the completed property or the contract price for the land plus the value of the improvements, and up to 90% for loans where the borrower obtains private mortgage insurance. Residential construction loans are generally underwritten pursuant to the same guidelines used for

12



originating permanent residential mortgage loans, except that all residential construction loans are appraised by independent appraisers approved by the Bank's Board of Directors.
Our commercial and multifamily construction loans generally have initial terms of 6-12 months, during which the borrower pays interest only. Upon completion of construction, these loans convert to permanent loans. Our commercial and multifamily construction loans have rates and terms comparable to commercial real estate and multifamily loans that we originate. The maximum loan-to-value of our commercial and multifamily construction loans is 75% and 80%, respectively, of the lesser of the appraised value of the completed property or the contract price for the land plus the value of the improvements, and ranges from 40% to 75% for commercial construction and 40% to 80% for multifamily construction depending on the collateral and the purpose of the improvements upon completion of construction. Commercial and multifamily construction loans are generally underwritten pursuant to the same guidelines used for originating permanent commercial real estate and multifamily loans.
To a lesser extent, we will make loans to developers for the construction and development of one- to four-family residential homes in our market area. Generally, no more than two such loans may be outstanding to one borrower at any time. These loans are originated pursuant to the same standards as, and generally have terms similar to, commercial and multifamily construction loans. We generally obtain personal guarantees for these loans.
All construction and land development loans are appraised by independent appraisers approved by the Bank's Board of Directors. All borrowers are required to obtain title insurance, property and casualty insurance, and, if the property is determined to be located in a flood zone area, flood insurance. The provider of title insurance on these loans inspects the properties for progress and authorizes all draws.
Construction financing generally involves greater credit risk than long-term financing on improved commercial real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost is inaccurate, we may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project is inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment of the construction loan upon the sale of the property. Construction loans also expose us to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated.

The table below sets forth, by type of collateral property, the number and amount of our construction and land loans at September 30, 2017, all of which are secured by properties located in our market area.
 
Number of Loans
 
Balance
 
 
 
(Dollars in thousands)
Single family construction
17

 
$
4,542

Multifamily construction
5

 
4,525

Commercial construction
19

 
4,170

Land
63

 
5,623

Total
104

 
$
18,860


Consumer Lending. At September 30, 2017, we had $17.4 million, or 2.9% of our loan portfolio, in consumer loans, including $14.0 million in home equity lines of credit, $2.9 million in education loans and $501,000 in other consumer loans.
Home Equity Lines of Credit. At September 30, 2017, we had $14.0 million, or 2.3% of our loan portfolio, in home equity lines of credit. Our home equity lines of credit are secured by residential property, and generally

13



have no set maturity. We do not extend home equity lines of credit unless the combined loan-to-value ratio of all senior mortgages and the line of credit is less than 80%. We offer fixed and variable rate home equity lines of credit, with variable rate home equity lines of credit bearing interest rates based upon the prime rate, subject to maximum rates. Unused commitments on home equity lines of credit were $28.1 million at September 30, 2017.
Home equity lines of credit have greater risk than single family residential real estate loans secured by other mortgages. We face the risk that the collateral may not be sufficient to compensate us for the amount of the unpaid loan and we may be unsuccessful in recovering the remaining balance from those customers. Particularly with respect to our home equity lines of credit, decreases in real estate values could adversely affect the value of property used as collateral.
At September 30, 2017, the average loan balance of our outstanding home equity lines of credit was $23,400. The largest outstanding balance of any such loan was $2.3 million. This loan was performing in accordance with its original terms at September 30, 2017. The borrower is a local commercial real estate loan customer; however, the residential property securing this loan is located out of our market area. Approximately 60% of our home equity lines of credit are secured by property where we also hold the first mortgage.
Other Consumer Loans. Consumer loans other than home equity lines of credit have either a variable or fixed-rate of interest for a term of up to 72 months, depending on the type of collateral and the creditworthiness of the borrower. Our consumer loans may be secured by deposits, automobiles, boats, motorcycles or recreational vehicles, and loans of up to $3,000 may be unsecured.
Our education loans are all insured by Sallie Mae. We no longer originate education loans.
Consumer loans generally have shorter terms to maturity, which reduces our exposure to changes in interest rates. In addition, our management believes that offering consumer loan products helps to expand and create stronger ties to our existing customer base by increasing the number of customer relationships and providing cross-marketing opportunities.
Consumer loans generally have greater risk compared to longer-term loans secured by improved real estate, particularly unsecured loans and consumer loans that are secured by rapidly depreciable assets, such as automobiles. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. As a result, consumer loan collections are dependent on the borrower’s continuing financial stability and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.


Originations, Purchases and Sales of Loans
We originate real estate and other loans through employee marketing and advertising efforts, our existing customer base, walk-in customers and referrals from customers and service providers, such as real estate brokers, builders and attorneys. All loans that we originate are underwritten pursuant to our policies and procedures.
We may sell a certain amount of the fixed-rate single-family mortgage loans we originate into the secondary market. We are approved to sell similar loans to the Federal Home Loan Bank of Chicago, Fannie Mae and Freddie Mac, on a servicing-retained basis, but have not sold to them in recent years. We also originate residential mortgage loans for sale on a servicing-released basis. In addition, all FHA and VA loans and single family residential loans secured by non-owner-occupied properties are originated for sale in the secondary market on a servicing-released basis. Otherwise, we consider our balance sheet as well as market conditions on an ongoing basis in making decisions as to whether to hold the mortgage loans we originate for investment or to sell such loans to investors, choosing the strategy that we believe to be most advantageous to us from a profitability and risk management

14



standpoint. For the year ended September 30, 2017, we sold no mortgage loans on a servicing-retained basis and $34.3 million of mortgage loans on a servicing-released basis. For the year ended September 30, 2016, we sold no mortgage loans on a servicing-retained basis and $48.4 million of mortgage loans on a servicing-released basis. At September 30, 2017 and 2016, we serviced $100.9 million and $126.1 million, respectively, of fixed-rate, single family residential real estate loans that we originated and sold in the secondary market.
From time to time, we may purchase commercial loan participations secured by properties within and outside of our primary lending market area in which we are not the lead lender. In these circumstances, we follow our customary loan underwriting and approval policies. We use loan participations sold to manage our loan concentrations and to enable us to make loans to customers with credit needs that exceed our legal lending limit. We held $14.4 million and $9.5 million, respectively, of commercial loan participations purchased in our loan portfolio and serviced $44.3 million and $37.2 million, respectively, of commercial loan participations sold at September 30, 2017 and 2016.
Delinquencies and Non-Performing Assets
Delinquency Procedures. When a borrower fails to make a required monthly payment on a residential real estate loan, we attempt to contact the borrower to determine the reason for nonpayment and to discuss future payments. Our policies provide that a late notice be sent when a loan is 15 days past due. Once the loan is considered in default, generally at 30 days past due, a letter is sent to the borrower explaining that the entire balance of the loan is due and payable, and additional efforts are made to contact the borrower. A demand letter is mailed at 60 days past due giving the borrower 30 days to bring the account current. If the borrower does not respond, we generally initiate foreclosure proceedings when the loan is 120 days past due. If the loan is reinstated, foreclosure proceedings will be discontinued and the borrower will be permitted to continue to make payments. In certain instances, we may modify the loan or grant a limited exemption from loan payments to allow the borrower to reorganize his or her financial affairs. We attempt to work with our borrowers to establish a repayment schedule that will cure the delinquency in a timely manner based on a full financial review.
When we acquire real estate as a result of foreclosure or by deed in lieu of foreclosure, the real estate is classified as foreclosed real estate until it is sold. The real estate is recorded at estimated fair value at the date of acquisition less estimated costs to sell, and any write-down resulting from the acquisition is charged to the allowance for loan losses. Estimated fair value is based on a new appraisal which is obtained as soon as practicable, typically after the foreclosure process is completed. Subsequent decreases in the value of the property are charged to operations. After acquisition, all costs incurred in maintaining the property are expensed. Costs relating to the development and improvement of the property, however, are capitalized up to the estimated fair value less estimated costs to sell.
Delinquent consumer loans are handled in a similar fashion. Our procedures for repossession and sale of consumer collateral are subject to various requirements under applicable laws, including applicable consumer protection laws. In addition, we may determine that foreclosure and sale of such collateral would not be cost-effective for us.
Delinquent commercial business, commercial real estate, construction and multifamily loans are initially handled by the loan officer responsible for the origination of the loan. Our collections department works with the loan officer to ensure that the necessary steps are taken to collect on delinquent loans, including the mailing of delinquency notices. A collection officer takes over any delinquent loan once the loan is 30 days past due, and that collection officer handles any additional collection procedures, including letters from our attorneys. If we cannot reach an acceptable workout of a delinquent commercial business, commercial real estate, construction or multifamily loan between 30 and 60 days of the due date of the first missed payment, we generally initiate foreclosure or repossession proceedings on any collateral securing the loan.


15



Delinquent Loans. The following table sets forth our loan delinquencies by type and amount at the dates indicated.
 
Loans Delinquent For
 
Total
 
30-59 Days
 
60-89 Days
 
90 Days and Over
 
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
(Dollars in thousands)
At September 30, 2017:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single family
10

 
$
825

 

 
$

 
1

 
$
3

 
11

 
$
828

Multi-family

 

 

 

 

 

 

 

Commercial real estate - non-owner occupied

 

 

 

 

 

 

 

Commercial real estate - owner occupied

 

 

 

 

 

 

 

Construction and land

 

 

 

 
1

 
25

 
1

 
25

Total real estate
10

 
825

 

 

 
2

 
28

 
12

 
853

Commercial business loans

 

 

 

 

 

 

 

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity lines of credit

 

 

 

 

 

 

 

Education
2

 
14

 
4

 
136

 
11

 
106

 
17

 
256

Automobile

 

 

 

 

 

 

 

Other consumer loans

 

 

 

 

 

 

 

Total consumer loans
2

 
14

 
4

 
136

 
11

 
106

 
17

 
256

Total
12

 
$
839

 
4

 
$
136

 
13

 
$
134

 
29

 
$
1,109

 
Loans Delinquent For
 
Total
 
30-59 Days
 
60-89 Days
 
90 Days and Over
 
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At September 30, 2016:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single family
5

 
$
239

 
3

 
$
426

 
2

 
$
73

 
10

 
$
738

Multi-family

 

 

 

 

 

 

 

Commercial real estate - non-owner occupied

 

 

 

 

 

 

 

Commercial real estate - owner occupied

 

 

 

 

 

 

 

Construction and land

 

 

 

 

 

 

 

Total real estate
5

 
239

 
3

 
426

 
2

 
73

 
10

 
738

Commercial business loans

 

 

 

 

 

 

 

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity lines of credit

 

 

 

 
1

 
27

 
1

 
27

Education
3

 
11

 
4

 
39

 
7

 
149

 
14

 
199

Automobile

 

 

 

 

 

 

 

Other consumer loans

 

 

 

 

 

 

 

Total consumer loans
3

 
11

 
4

 
39

 
8

 
176

 
15

 
226

Total
8

 
$
250

 
7

 
$
465

 
10

 
$
249

 
25

 
$
964


16



 
Loans Delinquent For
 
Total
 
30-59 Days
 
60-89 Days
 
90 Days and Over
 
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At September 30, 2015:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single family
10

 
$
473

 
1

 
$
83

 
5

 
$
340

 
16

 
$
896

Multi-family

 

 

 

 

 

 

 

Commercial real estate - non-owner occupied

 

 

 

 

 

 

 

Commercial real estate - owner occupied

 

 

 

 

 

 

 

Construction and land
1

 
4

 

 

 

 

 
1

 
4

Total real estate
11

 
477

 
1

 
83

 
5

 
340

 
17

 
900

Commercial business loans

 

 

 

 

 

 

 

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity lines of credit

 

 

 

 
3

 
190

 
3

 
190

Education
5

 
79

 

 

 
10

 
245

 
15

 
324

Automobile

 

 

 

 

 

 

 

Other consumer loans

 

 

 

 

 

 

 

Total consumer loans
5

 
79

 

 

 
13

 
435

 
18

 
514

Total
16

 
$
556

 
1

 
$
83

 
18

 
$
775

 
35

 
$
1,414

 
Loans Delinquent For
 
Total
 
30-59 Days
 
60-89 Days
 
90 Days and Over
 
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At September 30, 2014:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single family
16

 
$
1,623

 
2

 
$
162

 
6

 
$
450

 
24

 
$
2,235

Multi-family

 

 

 

 

 

 

 

Commercial real estate - non-owner occupied
1

 
178

 

 

 
1

 
32

 
2

 
210

Commercial real estate - owner occupied

 

 
1

 
163

 
1

 
164

 
2

 
327

Construction and land

 

 

 

 

 

 

 

Total real estate
17

 
1,801

 
3

 
325

 
8

 
646

 
28

 
2,772

Commercial business loans

 

 

 

 
2

 
22

 
2

 
22

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity lines of credit
3

 
228

 

 

 
3

 
129

 
6

 
357

Education
4

 
28

 
6

 
44

 
10

 
120

 
20

 
192

Automobile

 

 

 

 
1

 
2

 
1

 
2

Other consumer loans

 

 

 

 

 

 

 

Total consumer loans
7

 
256

 
6

 
44

 
14

 
251

 
27

 
551

Total
24

 
$
2,057

 
9

 
$
369

 
24

 
$
919

 
57

 
$
3,345


17



 
Loans Delinquent For
 
Total
 
30-59 Days
 
60-89 Days
 
90 Days and Over
 
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At September 30, 2013:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single family
4

 
$
406

 
11

 
$
1,571

 
20

 
$
2,888

 
35

 
$
4,865

Multi-family

 

 

 

 

 

 

 

Commercial real estate - non-owner occupied

 

 
3

 
5,305

 

 

 
3

 
5,305

Commercial real estate - owner occupied

 

 
1

 
180
 
2

 
1,069
 
3

 
1,249
Construction and land

 

 

 

 
1

 
192
 
1

 
192
Total real estate
4

 
406
 
15

 
7,056
 
23

 
4,149
 
42

 
11,611
Commercial business loans
2

 
27
 

 

 

 

 
2

 
27
Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity lines of credit
5

 
116
 
4

 
90
 
7

 
266
 
16

 
472
Education
6

 
64
 
3

 
26
 
14

 
108
 
23

 
198
Automobile

 

 
1

 
1
 
3

 
4
 
4

 
5
Other consumer loans
1

 
2

 

 

 

 

 
1

 
2
Total consumer loans
12

 
182
 
8

 
117
 
24

 
378
 
44

 
677
Total
18

 
$
615

 
23

 
$
7,173

 
47

 
$
4,527

 
88

 
$
12,315




Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the FDIC to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as “special mention” by our management.
When management classifies problem assets as either substandard or doubtful, after reviewing the assets for impairment, it may establish specific allowances in an amount deemed prudent by management to cover probable losses. When an insured institution classifies problem assets as “loss,” it is required to charge-off such amount. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to discretion by management and to a review by the regulatory authorities, which may require the establishment of additional general or specific loss allowances.
In connection with the filing of our periodic reports and in accordance with our classification of assets policy, we regularly review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable regulations. Loans are listed on the “watch list” initially because of financial weaknesses even though the loan is currently performing as agreed or because of delinquency status. Management reviews the status of each loan on our watch list on a quarterly basis with the directors’ loan committee and then with the full Bank Board of Directors. If a loan deteriorates in asset quality, the classification is changed to “special

18



mention,” “substandard,” “doubtful” or “loss” depending on the circumstances and the evaluation. Generally, loans 90 days or more past due are placed on nonaccrual status and classified “substandard.”
On the basis of this review of our assets, we had classified or held as special mention the following assets as of the date indicated:
 
At September 30,
 
2017
 
2016
 
2015
 
2014
 
2013
 
 
 
(Dollars in thousands)
Classified Loans:
 
 
 
 
 
 
 
 
 
Loss
$

 
$

 
$

 
$

 
$

Doubtful

 

 

 

 

Substandard – performing:
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
Single family
966

 
1,418

 
1,390

 
1,239

 
623

Multi-family

 

 

 
160
 
173

Commercial real estate - non-owner occupied

 

 

 
342
 
186

Commercial real estate - owner occupied

 

 
307

 
1,135
 
552

Construction and land
1

 
2

 

 
5

 

Total real estate loans
967

 
1,420

 
1,697

 
2,881
 
1,534

Commercial business loans
980

 

 
1,639

 
82
 
5

Consumer loans:
 
 
 
 
 
 
 
 
 
Home equity lines of credit
64

 
68

 
55

 
58
 
61

Other consumer loans

 

 

 

 

Total consumer loans
64

 
68

 
55

 
58
 
61

Total substandard – performing
2,011

 
1,488

 
3,391

 
3,021
 
1,600

 
 
 
 
 
 
 
 
 
 
Substandard – Nonperforming:
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
Single family
16

 
337

 
195

 
596
 
3,903

Multi-family

 

 

 
0
 
2,638

Commercial real estate - non-owner occupied

 

 

 
186
 
35

Commercial real estate - owner occupied

 

 

 
164
 
1,249

Construction and land
25

 

 

 
0
 
191

Total real estate loans
41

 
337

 
195

 
946
 
8,016

Commercial business loans

 

 

 
22

 

Consumer loans:
 
 
 
 
 
 
 
 
 
Home equity lines of credit

 
27

 
190

 
129
 
285

Other consumer loans

 

 

 
2
 
3

Total consumer loans

 
27

 
190

 
131
 
288

Total substandard – nonperforming
41

 
364

 
385

 
1,099
 
8,304

 
 
 
 
 
 
 
 
 
 
Total classified loans(1)   
2,052

 
1,852

 
3,776

 
4,120
 
9,904

 
 
 
 
 
 
 
 
 
 
Foreclosed real estate

 
99

 
283

 
2,355
 
1,690

 
 
 
 
 
 
 
 
 
 
Total classified assets
$
2,052

 
$
1,951

 
$
4,059

 
$
6,475

 
$
11,594

 
 
 
 
 
 
 
 
 
 
Special mention:
 
 
 
 
 
 
   
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
Single family
$

 
$

 
$

 
$
118

 
$
121

Multi-family

 

 

 
445

 

Commercial real estate - non-owner occupied

 
396

 
410

 
424
 
1,221

Commercial real estate - owner occupied

 

 

 
434
 
1,328

Construction and land

 

 

 

 

Total real estate loans

 
396

 
410

 
1,421
 
2,670

Commercial business loans

 
214

 

 
0
 
928

Consumer loans:
 
 
 
 
 
 
 
 
 
Home equity lines of credit