LOANS AND ALLOWANCE FOR LOAN LOSSES

6 Months Ended

Jun. 30, 2013

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES

There were no changes during the three and six month periods ended June 30, 2013 in the Company’s loan policies, including those pertaining to non-accrual loans, troubled debt restructurings and the allowance for loan losses methodology.

The following is a summary of the balances of loans at June 30, 2013 and December 31, 2012:

	June 30,			December 31,
	2013			2012
	(In thousands)
Mortgage loans:
One-to-four family residential	$	234,151		$	228,428
Equity loans and lines of credit		15,996			16,995
Commercial and multi-family residential		104,189			109,372
Construction		5,795			4,117
		360,131			358,912
Other loans:
Commercial loans		906			998
Consumer loans		353			311
Total loans		361,390			360,221

Less: Allowance for loan losses		(3,911	)		(4,031	)
Net deferred loan fees		(1,190	)		(1,152	)

Loans, net	$	356,289		$	355,038

The following table provides further information pertaining to the allowance for loan losses:

	One-to-Four		Equity Loans			Commercial
	Family		and Lines			and Multi-Family						Other
	Residential		of Credit			Residential			Construction			Loans			Total
	(In thousands)

Three months ended June 30, 2013
Allowance for loan losses:
Balance at beginning of period	$	1,219	$	129		$	2,490		$	125		$	20		$	3,983
Provision (credit) for loans losses		20		(2	)		10			(13	)		(1	)		14
Loans charged-off		—		—			(93	)		—			—			(93	)
Recoveries of loans
previously charged-off		—		—			7			—			—			7
Balance at end of period	$	1,239	$	127		$	2,414		$	112		$	19		$	3,911

Six months ended June 30, 2013
Allowance for loan losses:
Balance at beginning of period	$	1,212	$	134		$	2,589		$	76		$	20		$	4,031
Provision (credit) for loans losses		27		(7	)		(41	)		36			(1	)		14
Loans charged-off		—		—			(160	)		—			—			(160	)
Recoveries of loans
previously charged-off		—		—			26			—			—			26
Balance at end of period	$	1,239	$	127		$	2,414		$	112		$	19		$	3,911

Three months ended June 30, 2012
Allowance for loan losses:
Balance at beginning of period	$	1,076	$	139		$	2,376		$	58		$	30		$	3,679
Provision (credit) for loans losses		47		(2	)		301			(6	)		1			341
Loans charged-off		—		—			(363	)		—			—			(363	)
Recoveries of loans
previously charged-off		—		—			12			—			—			12
Balance at end of period	$	1,123	$	137		$	2,326		$	52		$	31		$	3,669

Six months ended June 30, 2012
Allowance for loan losses:
Balance at beginning of period	$	1,070	$	147		$	2,373		$	94		$	25		$	3,709
Provision (credit) for loans losses		53		15			590			(42	)		6			622
Loans charged-off		—		(25	)		(663	)		—			—			(688	)
Recoveries of loans
previously charged-off		—		—			26			—			—			26
Balance at end of period	$	1,123	$	137		$	2,326		$	52		$	31		$	3,669

The following table provides further information pertaining to the allowance for loan losses and impaired loans:

	One-to-Four		Equity Loans		Commercial
	Family		and Lines		and Multi-Family				Other
	Residential		of Credit		Residential		Construction		Loans		Total
	(In thousands)
June 30, 2013
Amount of allowance for loan losses
for loans deemed to be impaired	$	70	$	7	$	182	$	—	$	—	$	259

Amount of allowance for loan losses
for loans not deemed to be impaired		1,169		120		2,232		112		19		3,652
Total allowance for loan losses	$	1,239	$	127	$	2,414	$	112	$	19	$	3,911

Recorded investment in:
Loans deemed to be impaired	$	512	$	56	$	5,211	$	—	$	—	$	5,779
Loans deemed not to be impaired		233,639		15,940		98,978		5,795		1,259		355,611
Total	$	234,151	$	15,996	$	104,189	$	5,795	$	1,259	$	361,390

December 31, 2012
Amount of allowance for loan losses
for loans deemed to be impaired	$	72	$	7	$	203	$	—	$	—	$	282

Amount of allowance for loan losses
for loans not deemed to be impaired		1,140		127		2,386		76		20		3,749
Total allowance for loan losses	$	1,212	$	134	$	2,589	$	76	$	20	$	4,031

Recorded investment in:
Loans deemed to be impaired	$	518	$	56	$	5,176	$	—	$	—	$	5,750
Loans deemed not to be impaired		227,910		16,939		104,196		4,117		1,309		354,471
Total	$	228,428	$	16,995	$	109,372	$	4,117	$	1,309	$	360,221

The following is a summary of past due and non-accrual loans at June 30, 2013 and December 31, 2012:

					90 Days
	30-59 Days		60-89 Days		or More		Total		Loans on
	Past Due		Past Due		Past Due		Past Due		Non-accrual
June 30, 2013	(In thousands)

Mortgage loans:
One-to-four family residential	$	500	$	—	$	—	$	500	$	—
Equity loans and lines of credit		89		—		—		89		—
Commercial and multi-family residential		608		—		733		1,341		1,639
Total	$	1,197	$	—	$	733	$	1,930	$	1,639

December 31, 2012

Mortgage loans:
One-to-four family residential	$	1,075	$	—	$	—	$	1,075	$	518
Equity loans and lines of credit		—		—		—		—		56
Commercial and multi-family residential		—		—		1,209		1,209		1,586
Total	$	1,075	$	—	$	1,209	$	2,284	$	2,160

At June 30, 2013 and December 31, 2012, there were no loans greater than ninety days past due and still accruing interest.

Further information pertaining to impaired loans follows:

	June 30, 2013				December 31, 2012
	Recorded Investment		Unpaid Principal Balance		Recorded Investment		Unpaid Principal Balance
	(In thousands)
Impaired loans without a valuation allowance:
Mortgage loans:
Commercial and multi-family residential	$	2,840	$	3,156	$	2,781	$	2,970

	June 30, 2013						December 31, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
					(In thousands)
Impaired loans with a valuation allowance:
Mortgage loans:
One-to-four family residential	$	512	$	512	$	70	$	518	$	518	$	72
Equity loans and lines of credit		56		56		7		56		56		7
Commercial and multi-family residential		2,371		2,371		182		2,395		2,395		203
Total	$	2,939	$	2,939	$	259	$	2,969	$	2,969	$	282

The following is a summary of the average recorded investment and interest income recognized on impaired loans for the periods indicated:

	Three Months Ended June 30, 2013						Six Months Ended June 30, 2013
	Average Recorded Investment		Interest Income Recognized		Interest Income Recognized on Cash Basis		Average Recorded Investment		Interest Income Recognized		Interest Income Recognized on Cash Basis
	(In thousands)
Mortgage loans:
One-to-four family residential	$	638	$	7	$	—	$	586	$	15	$	—
Equity loans and lines of credit		145		2		—		107		2		—
Commercial and multi-family residential		4,910		21		21		4,919		132		42
Total	$	5,693	$	30	$	21	$	5,612	$	149	$	42

	Three Months Ended June 30, 2012						Six Months Ended June 30, 2012
	Average Recorded Investment		Interest Income Recognized		Interest Income Recognized on Cash Basis		Average Recorded Investment		Interest Income Recognized		Interest Income Recognized on Cash Basis
	(In thousands)
Mortgage loans:
One-to-four family residential	$	1,129	$	—	$	—	$	1,123	$	6	$	6
Equity loans and lines of credit		134		—		—		125		—		—
Commercial and multi-family residential		3,824		5		5		3,300		28		23
Total	$	5,087	$	5	$	5	$	4,548	$	34	$	29

There were no additional funds committed to be advanced in connection with impaired loans at June 30, 2013 and December 31, 2012.

The following is a summary of troubled debt restructurings for the three months ended March 31, 2013 and June 30, 2013:

			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Contracts		Investment		Investment
	(Dollars in thousands)
Three Months Ended June 30, 2013
Commercial and multi-family residential		2	$	548	$	548

Three Months Ended March 31, 2013
Commercial and multi-family residential		1	$	740	$	740

For all loans noted above the maturity term was extended for less than one year. Management performs a discounted cash flow calculation to determine the amount of impairment reserve required on all troubled debt restructurings. Any reserve required is recorded through the provision for loan losses.

The following tables present loans modified in a troubled debt restructuring within the previous twelve months for which there was a payment default, defined as 30 days past due, during the six months ended June 30, 2013:

	Number of		Recorded
	Contracts		Investment
	(Dollars in thousands)

Commercial and multi-family residential		2	$	1,092

There were no troubled debt restructurings that defaulted during the three and six months ended June 30, 2013, and for which the default was within one year of the restructure date.

Credit Quality Information:

The Company utilizes a nine-grade internal loan rating system for commercial and multi-family residential loans, construction loans and commercial loans as follows:

Loans rated 1 – 4 are considered “pass” loans with low to average risk.

Loans rated 5 are considered “watch” loans. Loans classified as watch are “pass” loans that management is monitoring more closely but remain acceptable credit.

Loans rated 6 are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.

Loans rated 7 are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

Loans rated 8 are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

Loans rated 9 are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted.

On a quarterly basis, or more often if needed, the Company formally reviews the ratings on all commercial and multi-family residential, construction and commercial loans. Annually, the Company engages an independent third-party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its review process.

Information pertaining to the Company’s loans by risk rating follows:

	Commercial and
	Multi-family
	Residential		Construction		Commercial		Total
	(In thousands)
June 30, 2013

Loans rated 1 - 4	$	74,446	$	794	$	857	$	76,097
Loans rated 5		8,744		5,001		35		13,780
Loans rated 6		10,623		—		14		10,637
Loans rated 7		10,376		—		—		10,376
Loans rated 8		—		—		—		—
Loans rated 9		—		—		—		—
	$	104,189	$	5,795	$	906	$	110,890

December 31, 2012

Loans rated 1 - 4	$	78,391	$	1,343	$	976	$	80,710
Loans rated 5		10,252		2,774		—		13,026
Loans rated 6		10,395		—		22		10,417
Loans rated 7		10,334		—		—		10,334
Loans rated 8		—		—		—		—
Loans rated 9		—		—		—		—
	$	109,372	$	4,117	$	998	$	114,487

The Company utilizes a rating scale of pass, special mention, substandard or doubtful for one-to-four family residential loans and equity loans and lines of credit. On a quarterly basis, or more often if needed, the Company reviews the ratings of these loans and makes adjustments as deemed necessary. At June 30, 2013, residential one-to-four family residential loans rated substandard amounted to $512,000 and equity loans and lines of credit rated substandard amounted to $56,000. At December 31, 2012, residential one-to-four family residential loans rated substandard amounted to $518,000 and equity loans and lines of credit rated substandard amounted to $56,000. All other one-to-four family residential loans and equity loans and lines of credit were classified as pass at June 30, 2013 and December 31, 2012.

- 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.

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Newport Bancorp Inc 10-Q