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LOANS RECEIVABLE, NET AND RELATED ALLOWANCE FOR LOAN LOSSES

6 Months Ended

Mar. 31, 2020

LOANS RECEIVABLE, NET AND RELATED ALLOWANCE FOR LOAN LOSSES

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

Loans receivable, net were comprised of the following:

	March 31,			September 30,
	2020			2019
	(In thousands)

One-to-four family residential	$	204,575		$	190,415
Commercial real estate		245,860			232,544
Construction		22,333			28,451
Home equity lines of credit		22,170			17,832
Commercial business		47,684			48,769
Other		4,782			4,990
Total loans receivable		547,404			523,001
Net deferred loan costs		42			104
Allowance for loan losses		(5,525	)		(4,888	)

Total loans receivable, net	$	541,921		$	518,217

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
March 31, 2020	Investment		Allowance		Investment		Investment		Balance
	(In thousands)

One-to-four family residential	$	—	$	—	$	2,177	$	2,177	$	2,177
Commercial real estate		599		46		2,768		3,367		3,367
Construction		2,306		175		2,900		5,206		5,206
Commercial business		—		—		1,404		1,404		1,404
Total impaired loans	$	2,905	$	221	$	9,249	$	12,154	$	12,154

					Impaired
					Loans with
	Impaired Loans with				No Specific
	Specific Allowance				Allowance		Total Impaired Loans
									Unpaid
	Recorded		Related		Recorded		Recorded		Principal
September 30, 2019	Investment		Allowance		Investment		Investment		Balance
	(In thousands)

One-to-four family residential	$	—	$	—	$	1,405	$	1,405	$	1,405
Commercial real estate		—		—		4,593		4,593		4,593
Construction		—		—		2,900		2,900		2,900
Commercial business		—		—		1,456		1,456		1,456
Total impaired loans	$	—	$	—	$	10,354	$	10,354	$	10,354

The average recorded investment in impaired loans was $10.3 million and $7.8 million for the six months ended March 31, 2020 and 2019, 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. There were no TDRs during the six months ended March 31, 2020. There was one TDR during the six months ended March 31, 2019 totaling $365,000 that resulted from the restructure of a previously impaired, non-accrual loan. During the six months ended March 31, 2020 and 2019, interest income of $75,000 and $109,000, respectively, were 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		Six Months
	Ended March 31, 2020		Ended March 31, 2020
	(In thousands)

One-to-four family residential	$	1,787	$	1,659
Commercial real estate		2,995		3,528
Construction		4,053		3,669
Commercial business		1,441		1,446
Average investment in impaired loans	$	10,276	$	10,302

	Three Months		Six Months
	Ended March 31, 2019		Ended March 31, 2019
	(In thousands)

One-to-four family residential	$	1,240	$	1,204
Commercial real estate		3,923		3,936
Construction		2,900		1,933
Home equity lines of credit		49		52
Commercial business		646		667
Average investment in impaired loans	$	8,758	$	7,792

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)
March 31, 2020
One-to-four family residential	$	203,308	$	—	$	1,267	$	—	$	204,575
Commercial real estate		243,683		406		1,771		—		245,860
Construction		17,035		—		5,298		—		22,333
Home equity lines of credit		22,170		—		—		—		22,170
Commercial business		46,435		13		1,236		—		47,684
Other		4,782		—		—		—		4,782
Total	$	537,413	$	419	$	9,572	$	—	$	547,404

			Special
	Pass		Mention		Substandard		Doubtful		Total

	(In thousands)
September 30, 2019
One-to-four family residential	$	189,938	$	—	$	477	$	—	$	190,415
Commercial real estate		228,156		1,409		2,979		—		232,544
Construction		25,551		—		2,900		—		28,451
Home equity lines of credit		17,832		—		—		—		17,832
Commercial business		47,541		—		1,228		—		48,769
Other		4,990		—		—		—		4,990
Total	$	514,008	$	1,409	$	7,584	$	—	$	523,001

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
	(Dollars in thousands)
March 31, 2020
One-to-four family residential	$	200,712	$	2,957	$	—	$	906	$	3,863	$	906	$	204,575
Commercial real estate		240,540		3,549		—		1,771		5,320		1,771		245,860
Construction		17,127		—		—		5,206		5,206		5,206		22,333
Home equity lines of credit		22,072		6		92		—		98		—		22,170
Commercial business		45,028		1,420		—		1,236		2,656		1,236		47,684
Other		4,782		—		—		—		—		—		4,782
Total	$	530,261	$	7,932	$	92	$	9,119	$	17,143	$	9,119	$	547,404

			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, 2019
One-to-four family residential	$	190,301	$	—	$	—	$	114	$	114	$	114	$	190,415
Commercial real estate		229,331		503		58		2,652		3,213		2,652		232,544
Construction		25,551		—		—		2,900		2,900		2,900		28,451
Home equity lines of credit		17,832		—		—		—		—		—		17,832
Commercial business		47,541		—		—		1,228		1,228		1,228		48,769
Other		4,990		—		—		—		—		—		4,990
Total	$	515,546	$	503	$	58	$	6,894	$	7,455	$	6,894	$	523,001

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 six months ended March 31, 2020:

	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, 2019	$	731		$	2,066		$	511	$	138	$	1,184		$	8		$	250		$	4,888
Charge-offs		—			—			—		—		—			—			—			—
Recoveries		2			—			—		—		—			—			—			2
Provision (credit)		(26	)		(147	)		63		2		311			(6	)		13			210
Balance- December 31, 2019	$	707		$	1,919		$	574	$	140	$	1,495		$	2		$	263		$	5,100
Charge-offs		—			—			—		—		—			—			—			—
Recoveries		5			—			—		—		—			—			—			5
Provision (credit)		227			457			70		42		(287	)		(2	)		(87	)		420
Balance- March 31, 2020	$	939		$	2,376		$	644	$	182	$	1,208		$	—		$	176		$	5,525

The following table summarizes the ALL by loan category and the related activity for the six months ended March 31, 2019:

	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 (credit)		11			50		181		11		31			(21	)		(62	)		201
Balance- December 31, 2018	$	698		$	1,590	$	674	$	121	$	1,182		$	4		$	133		$	4,402
Charge-offs		—			—		—		—		—			—			—			—
Recoveries		92			—		—		—		—			—			—			92
Provision (credit)		(80	)		95		142		17		(78	)		(1	)		11			106
Balance- March 31, 2019	$	710		$	1,685	$	816	$	138	$	1,104		$	3		$	144		$	4,600

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 March 31, 2020 and September 30, 2019:

	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 - March 31, 2020	$	939	$	2,376	$	644	$	182	$	1,208	$	—	$	176	$	5,525
Individually evaluated
for impairment		—		46		175		—		—		—		—		221
Collectively evaluated
for impairment		939		2,330		469		182		1,208		—		176		5,304

Loans receivable:
Balance - March 31, 2020	$	204,575	$	245,860	$	22,333	$	22,170	$	47,684	$	4,782	$	—	$	547,404
Individually evaluated
for impairment		2,177		3,367		5,206		—		1,404		—		—		12,154
Collectively evaluated
for impairment		202,398		242,493		17,127		22,170		46,280		4,782		—		535,250

	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, 2019	$	731	$	2,066	$	511	$	138	$	1,184	$	8	$	250	$	4,888
Individually evaluated
for impairment		—		—		—		—		—		—		—		—
Collectively evaluated
for impairment		731		2,066		511		138		1,184		8		250		4,888

Loans receivable:
Balance - September 30, 2019	$	190,415	$	232,544	$	28,451	$	17,832	$	48,769	$	4,990	$	—	$	523,001
Individually evaluated
for impairment		1,405		4,593		2,900		—		1,456		—		—		10,354
Collectively evaluated
for impairment		189,010		227,951		25,551		17,832		47,313		4,990		—		512,647

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 TDRs for the three and six months ended March 31, 2020 compared with one TDR of a one-to-four family residential loan for the three and six months ended March 31, 2019.