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LOANS RECEIVABLE, NET AND RELATED ALLOWANCE FOR LOAN LOSSES

6 Months Ended

Mar. 31, 2021

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,
	2021			2020
	(In thousands)

One-to-four family residential	$	208,656		$	210,360
Commercial real estate		275,678			248,134
Construction		22,495			28,242
Home equity lines of credit		17,621			19,373
Commercial business		98,127			100,993
Other		3,746			4,157
Total loans receivable		626,323			611,259
Net deferred loan costs		(1,794	)		(1,749	)
Allowance for loan losses		(7,554	)		(6,400	)

Total loans receivable, net	$	616,975		$	603,110

The Bank is a participant in the Paycheck Protection Program (“PPP”), which was designed by the U.S. Treasury to provide liquidity using the SBA’s platform to small businesses and self-employed individuals to maintain their staff and operations through the COVID-19 pandemic. This liquidity is in the form of a loan, 100% guaranteed by the SBA, that is forgivable provided the funds are used on qualifying payroll costs, and to a lesser extent, rent, utilities and interest on qualifying mortgage payments. The PPP loans, which are included with the commercial business loans in the table above, bear a fixed rate of 1.0% and loan payments are deferred for the first 10 months following the covered period, which is eight to twenty-four weeks following the date the loan is made. The Company originated 350 “First Draw” loans totaling $56.0 million through March 31, 2021 for which it received $2.0 million in origination fees from the SBA. These fees are being amortized over the expected life of the loans, which is two years for loans originated prior to June 4, 2020 and five years for loans originated June 5, 2020 or later. Through March 31, 2021, 214 loans totaling $30.3 million had been forgiven by the SBA.

On December 27, 2020 the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues (“Economic Aid”) Act was signed into law, extending the SBA’s authority to guarantee Second Draw PPP loans, under generally the same terms and conditions available under the First Draw program, through March 31, 2021, subsequently extended by the Paycheck Protection Program Extension Act of 2021 to May 31, 2021. In order to qualify for a Second Draw PPP loan, an applicant must have experienced a revenue reduction of at least 25% in 2020 relative to 2019. As of March 31, 2021, the Company originated 185 PPP loans totaling $26.9 million under the Economic Aid Act to its eligible customers, for which it received $1.2 million in origination fees from the SBA. These fees are being amortized over the expected life of the loans, which is five years. The Economic Aid Act also expanded the eligible expenditures that a business could use PPP proceeds for and provided for a simplified forgiveness application for PPP loans $150,000 or less. At March 31, 2021, PPP loans totaled $52.5 million.

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, 2021	Investment		Allowance		Investment		Investment		Balance
	(In thousands)

One-to-four family residential	$	—	$	—	$	2,367	$	2,367	$	2,367
Commercial real estate		599		10		3,077		3,676		3,676
Construction		1,745		29		2,835		4,580		4,645
Commercial business		—		—		1,889		1,889		1,889
Total impaired loans	$	2,344	$	39	$	10,168	$	12,512	$	12,577

					Impaired
					Loans with
	Impaired Loans with				No Specific
	Specific Allowance				Allowance		Total Impaired Loans
									Unpaid
	Recorded		Related		Recorded		Recorded		Principal
September 30, 2020	Investment		Allowance		Investment		Investment		Balance
	(In thousands)

One-to-four family residential	$	—	$	—	$	2,601	$	2,601	$	2,601
Commercial real estate		599		46		3,806		4,405		4,405
Construction		2,306		175		2,835		5,141		5,206
Commercial business		—		—		2,014		2,014		2,218
Total impaired loans	$	2,905	$	221	$	11,256	$	14,161	$	14,430

The average recorded investment in impaired loans was $13.3 million and $10.3 million for the six months ended March 31, 2021 and 2020, 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 was one TDR totaling $218,000 during the six months ended March 31, 2021 and there were no TDRs during the six months ended March 31, 2020.

The following tables present the average recorded investment in impaired loans for the three and six months ended March 31, 2021 and 2020. There was no interest income recognized on impaired loans during the periods presented.

	Three Months		Six Months
	Ended March 31, 2021		Ended March 31, 2021
	(In thousands)

One-to-four family residential	$	2,373	$	2,449
Commercial real estate		4,006		4,139
Construction		4,580		4,767
Commercial business		1,896		1,935
Average investment in impaired loans	$	12,855	$	13,290

	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

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, 2021
One-to-four family residential	$	206,936	$	—	$	1,720	$	—	$	208,656
Commercial real estate		270,419		2,704		2,555		—		275,678
Construction		17,915		—		4,580		—		22,495
Home equity lines of credit		17,621		—		—		—		17,621
Commercial business		96,603		12		1,512		—		98,127
Other		3,746		—		—		—		3,746
Total	$	613,240	$	2,716	$	10,367	$	—	$	626,323

			Special
	Pass		Mention		Substandard		Doubtful		Total
	(In thousands)
September 30, 2020
One-to-four family residential	$	208,658	$	—	$	1,702	$	—	$	210,360
Commercial real estate		242,003		2,623		3,508		—		248,134
Construction		23,101		—		5,141		—		28,242
Home equity lines of credit		19,373		—		—		—		19,373
Commercial business		98,967		178		1,848		—		100,993
Other		4,157		—		—		—		4,157
Total	$	596,259	$	2,801	$	12,199	$	—	$	611,259

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)
March 31, 2021
One-to-four family residential	$	207,199	$	546	$	—	$	911	$	1,457	$	911	$	208,656
Commercial real estate		272,591		—		539		2,548		3,087		2,548		275,678
Construction		17,915		—		—		4,580		4,580		4,580		22,495
Home equity lines of credit		17,621		—		—		—		—		—		17,621
Commercial business		96,615		—		—		1,512		1,512		1,512		98,127
Other		3,746		—		—		—		—		—		3,746
Total	$	615,687	$	546	$	539	$	9,551	$	10,636	$	9,551	$	626,323

			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, 2020
One-to-four family residential	$	209,455	$	—	$	—	$	905	$	905	$	905	$	210,360
Commercial real estate		245,029		—		886		2,219		3,105		2,219		248,134
Construction		23,101		—		—		5,141		5,141		5,141		28,242
Home equity lines of credit		19,373		—		—		—		—		—		19,373
Commercial business		99,397		—		129		1,467		1,596		1,467		100,993
Other		4,157		—		—		—		—		—		4,157
Total	$	600,512	$	—	$	1,015	$	9,732	$	10,747	$	9,732	$	611,259

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, 2021:

	One-to-Four									Home Equity
	Family			Commercial						Lines of			Commercial
	Residential			Real Estate			Construction			Credit			Business		Other			Unallocated			Total
	(In thousands)

Balance- September 30, 2020	$	1,035		$	3,232		$	672		$	179		$	1,034	$	1		$	247		$	6,400
Charge-offs		—			—			—			—			—		—			—			—
Recoveries		—			—			—			—			90		—			—			90
Provision (credit)		120			176			(202	)		88			592		1			(135	)		640
Balance- December 31, 2020	$	1,155		$	3,408		$	470		$	267		$	1,716	$	2		$	112		$	7,130
Charge-offs		—			(50	)		—			—			—		—			—			(50	)
Recoveries		1			—			—			—			6		—			—			7
Provision (credit)		(29	)		351			(22	)		(10	)		30		(1	)		148			467
Balance- March 31, 2021	$	1,127		$	3,709		$	448		$	257		$	1,752	$	1		$	260		$	7,554

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
	(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 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, 2021 and September 30, 2020:

	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 - March 31, 2021	$	1,127	$	3,709	$	448	$	257	$	1,752	$	1	$	260	$	7,554
Individually evaluated
for impairment		—		10		29		—		—		—		—		39
Collectively evaluated
for impairment		1,127		3,699		419		257		1,752		1		260		7,515

Loans receivable:
Balance - March 31, 2021	$	208,656	$	275,678	$	22,495	$	17,621	$	98,127	$	3,746	$	—	$	626,323
Individually evaluated
for impairment		2,367		3,676		4,580		—		1,889		—		—		12,512
Collectively evaluated
for impairment		206,289		272,002		17,915		17,621		96,238		3,746		—		613,811

	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, 2020	$	1,035	$	3,232	$	672	$	179	$	1,034	$	1	$	247	$	6,400
Individually evaluated
for impairment		—		46		175		—		—		—		—		221
Collectively evaluated
for impairment		1,035		3,186		497		179		1,034		1		247		6,179

Loans receivable:
Balance - September 30, 2020	$	210,250	$	248,134	$	28,352	$	19,373	$	100,993	$	4,157	$	—	$	611,259
Individually evaluated
for impairment		2,601		4,405		5,141		—		2,014		—		—		14,161
Collectively evaluated
for impairment		207,649		243,729		23,211		19,373		98,979		4,157		—		597,098

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 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. A 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 TDR 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 was one TDR totaling $218,000 for the six months ended March 31, 2021, and there were no TDRs for the six months ended March 31, 2020. The TDR during the six months ended March 31, 2021 was performing in accordance with its restructured terms at March 31, 2021.

	Six Months Ended March 31, 2021
	Number of		Investment Before		Investment After
	Loans		TDR Modification		TDR Modification
	(Dollars in thousands)
One-to-four family residential		1	$	218	$	249

Total		1	$	218	$	249