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LOANS RECEIVABLE, NET AND RELATED ALLOWANCE FOR LOAN LOSSES
 3 Months Ended
Dec. 31, 2018
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:

 

   December 31,   September 30, 
   2018   2018 
   (In thousands) 
         
One-to four-family residential  $186,328   $185,287 
Commercial real estate   223,146    219,347 
Construction   31,287    30,412 
Home equity lines of credit   18,518    17,982 
Commercial business   49,842    53,320 
Other   5,317    6,150 
Total loans receivable   514,438    512,498 
Net deferred loan costs   125    132 
Allowance for loan losses   (4,402)   (4,200)
           
Total loans receivable, net  $510,161   $508,430 

 

 

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: 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 other loan segment consists primarily of stock-secured installment consumer 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 90 days or more 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 tables present 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 
December 31, 2018  Investment   Allowance   Investment   Investment   Balance 
   (In thousands) 
                     
One-to four-family residential  $—   $—   $1,130   $1,130   $1,130 
Commercial real estate   —    —    3,935    3,935    3,935 
Construction   —    —    2,900    2,900    2,900 
Home equity lines of credit   —    —    58    58    58 
Commercial business   —    —    708    708    798 
Total impaired loans  $—   $—   $8,731   $8,731   $8,821 

 

 

           Impaired         
           Loans with         
   Impaired Loans with   No Specific         
   Specific Allowance   Allowance   Total Impaired Loans 
                   Unpaid 
   Recorded   Related   Recorded   Recorded   Principal 
September 30, 2018  Investment   Allowance   Investment   Investment   Balance 
   (In thousands) 
                     
One-to four-family residential  $—   $—   $1,132   $1,132   $1,132 
Commercial real estate   —    —    3,961    3,961    3,961 
Home equity lines of credit   —    —    58    58    58 
Commercial business   —    —    710    710    801 
Total impaired loans  $—   $—   $5,861   $5,861   $5,952 

 

 

The average recorded investment in impaired loans was $7.3 million and $7.0 million for the three months ended December 31, 2018 and 2017, respectively. The Company’s impaired loans include delinquent non-accrual loans and performing Troubled Debt Restructurings (“TDRs”), as TDRs remain impaired loans until fully repaid. During the three months ended December 31, 2018 and 2017, interest income of $64,000 and $65,000, respectively, was recognized for TDR loans while no interest income was recognized for delinquent non-accrual loans.

 

The following tables present 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 
   Ended December 31, 2018 
   (In thousands) 
     
One-to four-family residential  $1,131 
Commercial real estate   3,948 
Construction   1,450 
Home equity lines of credit   58 
Commercial business   709 
Average investment in impaired loans  $7,296 

 

 

   Three Months 
   Ended December 31, 2017 
   (In thousands) 
     
One-to four-family residential  $2,841 
Commercial real estate   3,881 
Commercial business   303 
Average investment in impaired loans  $7,025 

 

 

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 tables present 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 
                     
   (In  thousands) 
December 31, 2018                         
One-to four-family residential  $186,152   $—   $176   $—   $186,328 
Commercial real estate   221,745    750    651    —    223,146 
Construction   28,387    —    2,900    —    31,287 
Home equity lines of credit   18,460    —    58    —    18,518 
Commercial business   49,367    —    475    —    49,842 
Other   5,317    —    —    —    5,317 
Total  $509,428   $750   $4,260   $—   $514,438 

 

 

       Special             
   Pass   Mention   Substandard   Doubtful   Total 
                     
   (In  thousands) 
September 30, 2018                    
One-to four-family residential  $185,118   $—   $169   $—   $185,287 
Commercial real estate   217,935    753    659    —    219,347 
Construction   30,412    —    —    —    30,412 
Home equity lines of credit   17,924    —    58    —    17,982 
Commercial business   52,845    —    475    —    53,320 
Other   6,150    —    —    —    6,150 
Total  $510,384   $753   $1,361   $—   $512,498 

 

 

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 tables present 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 
   (In  thousands) 
December 31, 2018                            
One-to four-family residential  $184,741   $1,411   $—   $176   $1,587   $176   $186,328 
Commercial real estate   218,163    3,586    945    452    4,983    452    223,146 
Construction   28,387    —    —    2,900    2,900    2,900    31,287 
Home equity lines of credit   18,431    29    —    58    87    58    18,518 
Commercial business   48,967    384    16    475    875    475    49,842 
Other   5,317    —    —    —    —    —    5,317 
Total  $504,006   $5,410   $961   $4,061   $10,432   $4,061   $514,438 

 

 

       30-59   60-89                 
       Days   Days   90 Days +   Total   Non-   Total 
   Current   Past Due   Past Due   Past Due   Past Due   Accrual   Loans 
   (In  thousands) 
September 30, 2018                            
One-to four-family residential  $185,132   $17   $—   $138   $155   $138   $185,287 
Commercial real estate   218,892    —    —    455    455    455    219,347 
Construction   30,412    —    —    —    —    —    30,412 
Home equity lines of credit   17,892    —    —    90    90    90    17,982 
Commercial business   52,845    252    —    223    475    223    53,320 
Other   6,150    —    —    —    —    —    6,150 
Total  $511,323   $269   $—   $906   $1,175   $906   $512,498 

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 three months ended December 31, 2018:

  

   One-to-Four           Home Equity                 
   Family   Commercial       Lines of   Commercial             
   Residential   Real Estate   Construction   Credit   Business   Other   Unallocated   Total 
   (In  thousands) 
                                 
Balance- September 30, 2018  $687   $1,540   $493   $109   $1,151   $25   $195   $4,200 
Charge-offs   —    —    —    —    —    —    —    — 
Recoveries   —    —    —    1    —    —    —    1 
Provision   11    50    181    11    31    (21)   (62)   201 
Balance- December 31, 2018  $698   $1,590   $674   $121   $1,182   $4   $133   $4,402 

 

The following table summarizes the ALL by loan category and the related activity for the three months ended December 31, 2017:

   One-to-Four           Home Equity                 
   Family   Commercial       Lines of   Commercial             
   Residential   Real Estate   Construction   Credit   Business   Other   Unallocated   Total 
   (In  thousands) 
                                 
Balance-September 30, 2017  $587   $1,277   $490   $57   $956   $6   $102   $3,475 
Charge-offs   (127)   —    —    —    (170)   —    —    (297)
Recoveries   82    23    3    —    1    —    —    109 
Provision   21    (1)   (109)   74    265    (2)   2    250 
Balance-December 31, 2017  $563   $1,299   $384   $131   $1,052   $4   $104   $3,537 

 

The following tables summarize 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 December 31, 2018 and September 30, 2018:  

 

   One-to-Four           Home Equity                 
   Family   Commercial       Lines of   Commercial             
   Residential   Real Estate   Construction   Credit   Business   Other   Unallocated   Total 
   (In  thousands) 
Allowance for Loan Losses:                                        
Balance - December 31, 2018  $698   $1,590   $674   $121   $1,182   $4   $133   $4,402 
Individually evaluated                                        
for impairment   —    —    —    —    —    —    —    — 
Collectively evaluated                                        
for impairment   698    1,590    674    121    1,182    4    133    4,402 
                                         
Loans receivable:                                        
Balance - December 31, 2018  $186,328   $223,146   $31,287   $18,518   $49,842   $5,317   $—   $514,438 
Individually evaluated                                        
for impairment   1,130    3,935    2,900    58    708    —    —    8,731 
Collectively evaluated                                        
for impairment   185,198    219,211    28,387    18,460    49,134    5,317    —    505,707 

 

 

   One-to- Four           Home Equity                 
   Family   Commercial       Lines of   Commercial             
   Residential   Real Estate   Construction   Credit   Business   Other   Unallocated   Total 
   (In  thousands) 
Allowance for Loan Losses:                                        
Balance - September 30, 2018  $687   $1,540   $493   $109   $1,151   $25   $195   $4,200 
Individually evaluated                                        
for impairment   —    —    —    —    —    —    —    — 
Collectively evaluated                                        
for impairment   687    1,540    493    109    1,151    25    195    4,200 
                                         
Loans receivable:                                        
Balance - September 30, 2018  $185,287   $219,347   $30,412   $17,982   $53,320   $6,150   $—   $512,498 
Individually evaluated                                        
for impairment   1,132    3,961    —    58    710    —    —    5,861 
Collectively evaluated                                        
for impairment   184,155    215,386    30,412    17,924    52,610    6,150    —    506,637 

 

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.

 

A Troubled Debt Restructuring (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 defaults on TDRs for three months ended December 31, 2018 and 2017.