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LOANS RECEIVABLE, NET AND RELATED ALLOWANCE FOR LOAN LOSSES
 9 Months Ended
Jun. 30, 2016
Loans Receivable, Net [Abstract]  
LOANS RECEIVABLE, NET AND RELATED ALLOWANCE FOR LOAN LOSSES

NOTE J – LOANS RECEIVABLE, NET AND RELATED ALLOWANCE FOR LOAN LOSSES

 

Loans receivable, net were comprised of the following:

 

    June 30,     September 30,  
    2016     2015  
    (Dollars in thousands)  
             
One-to four-family residential   $ 168,284     $ 169,781  
Commercial real estate     188,469       173,864  
Construction     14,587       6,679  
Home equity lines of credit     22,554       21,176  
Commercial business     39,056       41,485  
Other     9,306       10,305  
Total loans receivable     442,256       423,290  
Net deferred loan costs     177       192  
Allowance for loan losses     (2,900 )     (2,886 )
                 
Total loans receivable, net   $ 439,533     $ 420,596  

 

The segments of the Bank’s loan portfolio are disaggregated to a level that allows management to monitor risk and performance. The residential mortgage loan segment is further disaggregated into two classes: amortizing term loans, which are primarily first liens, and home equity lines of credit, which are generally second liens.  The commercial real estate loan segment is further disaggregated into three classes: commercial real estate loans include loans secured by multifamily structures, owner-occupied commercial structures, and non-owner occupied nonresidential properties.  The construction loan segment consists primarily of loans to developers or investors for the purpose of acquiring, developing and constructing residential or commercial structures and to a lesser extent one-to-four family residential construction loans made to individuals for the acquisition of and/or construction on a lot or lots on which a residential dwelling is to be built.  Construction loans to developers and investors have a higher risk profile because the ultimate buyer, once development is completed, is generally not known at the time of the loan.  The commercial business loan segment consists of loans made for the purpose of financing the activities of commercial customers and consists primarily of revolving lines of credit. The consumer loan segment consists primarily of stock-secured installment loans, but also includes unsecured personal loans and overdraft lines of credit connected with customer deposit accounts.

 

Management evaluates individual loans in all segments for possible impairment if the loan either is in nonaccrual status, or is risk rated Substandard and is greater than 90 days past due.  Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

 

Once the determination has been made that a loan is impaired, the recorded investment in the loan is compared to the fair value of the loan using one of three methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral securing the loan, less anticipated selling and disposition costs. The method is selected on a loan-by loan basis, with management primarily utilizing the fair value of collateral method. If there is a shortfall between the fair value of the loan and the recorded investment in the loan, the Company charges the difference to the allowance for loan loss as a charge-off and carries the impaired loan on its books at fair value. It is the Company’s policy to evaluate impaired loans on an annual basis to ensure the recorded investment in a loan does not exceed its fair value.

 

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and charged-off and those for which a specific allowance was not necessary at the dates presented:

 

                Impaired              
                Loans with              
    Impaired Loans with     No Specific              
    Specific Allowance     Allowance     Total Impaired Loans  
                            Unpaid  
    Recorded     Related     Recorded     Recorded     Principal  
At June 30, 2016   Investment     Allowance     Investment     Investment     Balance  
    (Dollars in thousands)  
                               
One-to four-family residential   $ —     $ —     $ 3,771     $ 3,771     $ 4,002  
Commercial real estate     —       —       3,863       3,863       3,863  
Construction     —       —       —       —       —  
Home equity lines of credit     —       —       —       —       —  
Commercial business     1,307       95       253       1,560       1,852  
Other     —       —       —       —       —  
Total impaired loans   $ 1,307     $ 95     $ 7,887     $ 9,194     $ 9,717  
                Impaired              
                Loans with              
    Impaired Loans with     No Specific              
    Specific Allowance     Allowance     Total Impaired Loans  
                            Unpaid  
    Recorded     Related     Recorded     Recorded     Principal  
At September 30, 2015   Investment     Allowance     Investment     Investment     Balance  
    (Dollars in thousands)  
                               
One-to four-family residential   $ —     $ —     $ 3,017     $ 3,017     $ 3,134  
Commercial real estate     —       —       5,447       5,447       6,556  
Home equity lines of credit     —       —       417       417       521  
Commercial business     1,690       201       66       1,756       1,756  
Total impaired loans   $ 1,690     $ 201     $ 8,947     $ 10,637     $ 11,967  

 

The following table presents the average recorded investment in impaired loans for the periods indicated. There was no interest income recognized on impaired loans during the periods presented.

 

    Three Months     Nine Months  
    Ended June 30, 2016     Ended June 30, 2016  
    (Dollars in thousands)  
             
One-to four-family residential   $ 3,952     $ 3,626  
Commercial real estate     4,429       4,761  
Construction     —       —  
Home equity lines of credit     15       92  
Commercial business     1,570       1,702  
Average investment in impaired loans   $ 9,966     $ 10,181  

 

    Three Months     Nine Months  
    Ended June 30, 2015     Ended June 30, 2015  
    (Dollars in thousands)  
             
One-to four-family residential   $ 4,502     $ 6,451  
Commercial real estate     5,563       5,271  
Construction     1,692       1,961  
Home equity lines of credit     841       660  
Commercial business     1,762       1,474  
Average investment in impaired loans   $ 14,358     $ 15,817  

 

Management uses a ten point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. All loans greater than three months past due are considered Substandard. Any portion of a loan that has been charged off is placed in the Loss category.

 

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight.  Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as severe delinquency, bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. The Bank’s Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. The Asset Review Committee performs monthly reviews of all commercial relationships internally rated 6 (“Watch”) or worse.  Confirmation of the appropriate risk grade is performed by an external Loan Review Company that semi-annually reviews and assesses loans within the portfolio.  Generally, the external consultant reviews commercial relationships greater than $500,000 and/or criticized relationships greater than $250,000. Detailed reviews, including plans for resolution, are performed on loans classified as Substandard on a monthly basis.

 

The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the Bank’s internal risk rating system at the dates presented:

 

          Special                    
    Pass     Mention     Substandard     Doubtful     Total  
                               
    (Dollars in  thousands)  
June 30, 2016                                        
One-to four-family residential   $ 164,885     $ —     $ 3,399     $ —     $ 168,284  
Commercial real estate     185,787       —       2,682       —       188,469  
Construction     12,109       —       2,478       —       14,587  
Home equity lines of credit     22,554       —       —       —       22,554  
Commercial business     37,749       —       —       1,307       39,056  
Other     9,306       —       —       —       9,306  
Total   $ 432,390     $ —     $ 8,559     $ 1,307     $ 442,256  

 

          Special                    
    Pass     Mention     Substandard     Doubtful     Total  
                               
    (Dollars in  thousands)  
September 30, 2015                              
One-to four-family residential   $ 166,846     $ —     $ 2,935     $ —     $ 169,781  
Commercial real estate     169,239       210       3,309       1,106       173,864  
Construction     2,468       —       4,211       —       6,679  
Home equity lines of credit     19,436       —       1,740       —       21,176  
Commercial business     39,764       —       1,721       —       41,485  
Other     10,305       —       —       —       10,305  
Total   $ 408,058     $ 210     $ 13,916     $ 1,106     $ 423,290  

 

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans at the dates presented:

 

          30-59     60-89                          
          Days     Days     90 Days +     Total     Non-     Total  
    Current     Past Due     Past Due     Past Due     Past Due     Accrual     Loans  
    (Dollars in  thousands)  
June 30, 2016                                          
One-to four-family residential   $ 165,337     $ 11     $ 677     $ 2,259     $ 2,947     $ 2,259     $ 168,284  
Commercial real estate     188,026       —       69       374       443       374       188,469  
Construction     14,587       —       —       —       —       —       14,587  
Home equity lines of credit     22,451       99       —       4       103       4       22,554  
Commercial business     37,748       1       —       1,307       1,308       1,307       39,056  
Other     9,306       —       —       —       —       —       9,306  
Total   $ 437,455     $ 111     $ 746     $ 3,944     $ 4,801     $ 3,944     $ 442,256  
          30-59     60-89                          
          Days     Days     90 Days +     Total     Non-     Total  
    Current     Past Due     Past Due     Past Due     Past Due     Accrual     Loans  
    (Dollars in  thousands)  
September 30, 2015                                          
One-to four-family residential   $ 166,993     $ —     $ 730     $ 2,058     $ 2,788     $ 2,058     $ 169,781  
Commercial real estate     171,969       —       —       1,895       1,895       1,895       173,864  
Construction     6,679       —       —       —       —       —       6,679  
Home equity lines of credit     20,921       —       —       255       255       255       21,176  
Commercial business     39,777       —       19       1,689       1,708       1,689       41,485  
Other     10,305       —       —       —       —       —       10,305  
Total   $ 416,644     $ —     $ 749     $ 5,897     $ 6,646     $ 5,897     $ 423,290  

 

An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio.  The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans (“NPLs”).

 

The Bank’s methodology for determining the ALL is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment (discussed above) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance.

 

Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative and economic factors.

 

The loans are segmented into classes based on their inherent varying degrees of risk, as described above. Management tracks the historical net charge-off activity by segment and utilizes this figure, as a percentage of the segment, as the general reserve percentage for pooled, homogenous loans that have not been deemed impaired. Typically, an average of losses incurred over a defined number of consecutive historical years is used.

 

Non-impaired credits are segregated for the application of qualitative factors. Management has identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources include: national and local economic trends and conditions; levels of and trends in delinquency rates and non-accrual loans; trends in volumes and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry and/or geographic standpoint.

 

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL.  When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL. Since loans individually evaluated for impairment are promptly written down to their fair value, typically there is no portion of the ALL for loans individually evaluated for impairment.

 

The following table summarizes the ALL by loan category and the related activity for the nine months ended June 30, 2016:

 

    One-to-Four                 Home Equity                          
    Family     Commercial           Lines of     Commercial                    
    Residential     Real Estate     Construction     Credit     Business     Other     Unallocated     Total  
    (Dollars in  thousands)  
                                                 
Balance- September 30, 2015   $ 395     $ 931     $ 453     $ 53     $ 969     $ 6     $ 79     $ 2,886  
Charge-offs     (45 )     —       —       —       —       —       —       (45 )
Recoveries     —       —       —       80       1       —       —       81  
Provision     36       4       (71 )     (78 )     255       3       29       178  
Balance- December 31, 2015   $ 386     $ 935     $ 382     $ 55     $ 1,225     $ 9     $ 108     $ 3,100  
Charge-offs     —       (61 )     —       (84 )     (383 )     —       —       (528 )
Recoveries     —       —       1       —       26       —       —       27  
Provision     113       (3 )     (115 )     100       125       (1 )     72       291  
Balance- March 31, 2016   $ 499     $ 871     $ 268     $ 71     $ 993     $ 8     $ 180     $ 2,890  
Charge-offs     (88 )     —       —       —       (424 )     —       —       (512 )
Recoveries     —       100       2       —       —       —       —       102  
Provision     (15 )     (49 )     39       (2 )     467       (1 )     (19 )     420  
Balance- June 30, 2016   $ 396     $ 922     $ 309     $ 69     $ 1,036     $ 7     $ 161     $ 2,900  

 

The following table summarizes the ALL by loan category and the related activity for the nine months ended June 30, 2015:

 

    One-to-Four                 Home Equity                          
    Family     Commercial           Lines of     Commercial                    
    Residential     Real Estate     Construction     Credit     Business     Other     Unallocated     Total  
    (Dollars in  thousands)  
                                                 
Balance- September 30, 2014   $ 402     $ 826     $ 784     $ 62     $ 643     $ 9     $ 109     $ 2,835  
Charge-offs     (12 )     (193 )     —       (147 )     —       (1 )     —       (353 )
Recoveries     —       —       37       —       —       —       —       37  
Provision     84       199       (73 )     151       90       (2 )     (29 )     420  
Balance- December 31, 2014   $ 474     $ 832     $ 748     $ 66     $ 733     $ 6     $ 80     $ 2,939  
Charge-offs     (90 )     —       (342 )     —       (263 )     —       —       (695 )
Recoveries     400       —       —       —       —       —       —       400  
Provision     (415 )     10       114       (11 )     434       —       38       170  
Balance- March 31, 2015   $ 369     $ 842     $ 520     $ 55     $ 904     $ 6     $ 118     $ 2,814  
Charge-offs     (34 )     (136 )     —       (13 )     (11 )     —       —       (194 )
Recoveries     —       —       —       —       —       —       —       —  
Provision     46       229       (34 )     17       42       —       46       346  
Balance- June 30, 2015   $ 381     $ 935     $ 486     $ 59     $ 935     $ 6     $ 164     $ 2,966  

 

The following table summarizes the ALL by loan category, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of June 30, 2016 and September 30, 2015:  

 

    One-to-Four                 Home Equity                          
    Family     Commercial           Lines of     Commercial                    
    Residential     Real Estate     Construction     Credit     Business     Other     Unallocated     Total  
    (Dollars in  thousands)  
Allowance for Loan Losses:                                                                
Balance - June 30, 2016   $ 396     $ 922     $ 309     $ 69     $ 1,036     $ 7     $ 161     $ 2,900  
Individually evaluated                                                                
for impairment     —       —       —       —       95       —       —       95  
Collectively evaluated                                                                
for impairment     396       922       309       69       941       7       161       2,805  
                                                                 
Loans receivable:                                                                
Balance - June 30, 2016   $ 168,284     $ 188,469     $ 14,587     $ 22,554     $ 39,056     $ 9,306     $ —     $ 442,256  
Individually evaluated                                                                
for impairment     3,771       3,863       —       —       1,560       —       —       9,194  
Collectively evaluated                                                                
for impairment     164,513       184,606       14,587       22,554       37,496       9,306       —       433,062  

 

    One-to- Four                 Home Equity                          
    Family     Commercial           Lines of     Commercial                    
    Residential     Real Estate     Construction     Credit     Business     Other     Unallocated     Total  
    (Dollars in  thousands)  
Allowance for Loan Losses:                                                                
Balance - September 30, 2015   $ 395     $ 931     $ 453     $ 53     $ 969     $ 6     $ 79     $ 2,886  
Individually evaluated                                                                
for impairment     —       —       —       —       201       —       —       201  
Collectively evaluated                                                                
for impairment     395       931       453       53       768       6       79       2,685  
                                                                 
Loans receivable:                                                                
Balance - September 30, 2015   $ 169,781     $ 173,864     $ 6,679     $ 21,176     $ 41,485     $ 10,305     $ —     $ 423,290  
Individually evaluated                                                                
for impairment     3,017       5,447       —       417       1,756       —       —       10,637  
Collectively evaluated                                                                
for impairment     166,764       168,417       6,679       20,759       39,729       10,305       —       412,653  

 

The allowance for loan losses is based on estimates, and actual losses will vary from current estimates. Management believes that the segmentation of the loan portfolio into homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date.

 

The Bank has adopted FASB ASU No. 2011-02 on the determination of whether a loan restructuring is considered to be a Troubled Debt Restructuring (“TDR”). A TDR is a loan that has been modified whereby the Bank has agreed to make certain concessions to a borrower to meet the needs of both the borrower and the Bank to maximize the ultimate recovery of a loan. TDR occurs when a borrower is experiencing, or is expected to experience, financial difficulties and the loan is modified using a modification that would otherwise not be granted to the borrower. The types of concessions granted generally include, but are not limited to, interest rate reductions, limitations on the accrued interest charged, term extensions, and deferment of principal.

 

A default on a troubled debt restructured loan for purposes of this disclosure occurs when a borrower is 90 days past due or a foreclosure or repossession of the applicable collateral has occurred. There were no TDRs for the three and nine months ended June 30, 2016 and there was one TDR loan during the three and nine months ended June 30, 2015. The following tables summarize the one TDR during the three and nine month period ended June 30, 2015 that was classified as a TDR due to the financial condition of the borrower. The loan was performing in accordance with its restructured terms at June 30, 2016.

 

    Three Months Ended June 30, 2015  
    Number of     Investment Before     Investment After  
    Loans     TDR Modification     TDR Modification  
    (Dollars in thousands)  
One-to four-family residential     1     $ 524     $ 563  
                         
Total     1     $ 524     $ 563  

  

    Nine Months Ended June 30, 2015  
    Number of     Investment Before     Investment After  
    Loans     TDR Modification     TDR Modification  
    (Dollars in thousands)  
One-to four-family residential     1     $ 524     $ 563  
                         
Total     1     $ 524     $ 563  

  

The Company foreclosed $1.8 million of residential real estate loans during the nine months ended June 30, 2016, and $2.3 million of consumer mortgage loans collateralized by residential real estate property were in the process of foreclosure at June 30, 2016.