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LOANS RECEIVABLE, NET AND RELATED ALLOWANCE FOR LOAN LOSSES

3 Months Ended

Dec. 31, 2022

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:

	December 31,			September 30,
	2022			2022
	(In thousands)

One-to-four family residential	$	215,263		$	214,377
Commercial real estate		389,247			342,791
Construction		17,880			15,230
Home equity lines of credit		18,471			18,704
Commercial business		31,616			34,672
Other		3,260			3,130
Total loans receivable		675,737			628,904
Net deferred loan costs		(907	)		(628	)
Allowance for loan losses		(8,750	)		(8,433	)
Total loans receivable, net	$	666,080		$	619,843

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: first lien, amortizing term loans, and the combination of second lien amortizing term loans and home equity lines of credit. The commercial loan segment is further disaggregated into three classes: loans secured by multifamily structures, loans secured by owner-occupied commercial structures, and loans secured by non-owner occupied nonresidential properties. The construction loan segment consists primarily of 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 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 current 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 those for which a specific allowance was not necessary for the periods presented:

					Impaired
					Loans with
	Impaired Loans with				No Specific
	Specific Allowance				Allowance		Total Impaired Loans
									Unpaid
	Recorded		Related		Recorded		Recorded		Principal
	Investment		Allowance		Investment		Investment		Balance
December 31, 2022	(In thousands)

One-to-four family residential	$	—	$	—	$	1,381	$	1,381	$	1,381
Commercial real estate		—		—		1,378		1,378		1,378
Construction		2,835		114		—		2,835		2,900
Commercial business		102		102		151		253		253
Total impaired loans	$	2,937	$	216	$	2,910	$	5,847	$	5,912

September 30, 2022

One-to four-family residential	$	—	$	—	$	1,512	$	1,512	$	1,512
Commercial real estate		—		—		1,159		1,159		1,159
Construction		2,835		114		—		2,835		2,900
Commercial business		—		—		153		153		153
Total impaired loans	$	2,835	$	114	$	2,824	$	5,659	$	5,724

The average recorded investment in impaired loans was $5.8 million and $10.8 million for the three months ended December 31, 2022 and 2021, 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 loan totaling $97,000 during the three months December 31, 2022 and there were no TDRs during the three months ended December 31, 2021.

The following tables present the average recorded investment in impaired loans and the interest income recognized on such loans for the three months ended December 31, 2022 and 2021.

	Three Months
	Ended December 31, 2022
	(In thousands)

One-to-four family residential	$	1,447
Commercial real estate		1,269
Construction		2,835
Commercial business		203
Average investment in impaired loans	$	5,754

Interest income recognized on
an accrual basis on impaired loans	$	36
Interest income recognized on
a cash basis on impaired loans	$	—

	Three Months
	Ended December 31, 2021
	(In thousands)

One-to-four family residential	$	2,464
Commercial real estate		2,236
Construction		4,580
Commercial business		1,507
Average investment in impaired loans	$	10,787

Interest income recognized on
an accrual basis on impaired loans	$	48
Interest income recognized on
a cash basis on impaired loans	$	—

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 Bank’s 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 for the periods presented:

			Special
	Pass		Mention		Substandard		Doubtful		Total
	(In thousands)
December 31, 2022
One-to-four family residential	$	214,067	$	974	$	222	$	—	$	215,263
Commercial real estate		388,662		197		388		—		389,247
Construction		13,310		—		4,570		—		17,880
Home equity lines of credit		18,471		—		—		—		18,471
Commercial business		31,514		102		—		—		31,616
Other		3,260		—		—		—		3,260
Total	$	669,284	$	1,273	$	5,180	$	—	$	675,737

September 30, 2022
One-to-four family residential	$	213,173	$	980	$	224	$	—	$	214,377
Commercial real estate		342,593		198		—		—		342,791
Construction		10,652		—		4,578		—		15,230
Home equity lines of credit		18,704		—		—		—		18,704
Commercial business		34,672		—		—		—		34,672
Other		3,130		—		—		—		3,130
Total	$	622,924	$	1,178	$	4,802	$	—	$	628,904

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 for the periods 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, 2022
One-to-four family residential	$	214,955	$	—	$	308	$	—	$	308	$	—	$	215,263
Commercial real estate		388,676		67		116		388		571		388		389,247
Construction		15,045		—		—		2,835		2,835		2,835		17,880
Home equity lines of credit		18,471		—		—		—		—		—		18,471
Commercial business		31,514		102		—		—		102		—		31,616
Other		2,584		—		—		676		676		676		3,260
Total	$	671,245	$	169	$	424	$	3,899	$	4,492	$	3,899	$	675,737

September 30, 2022
One-to four-family residential	$	213,903	$	300	$	174	$	—	$	474	$	—	$	214,377
Commercial real estate		342,404		—		387		—		387		—		342,791
Construction		12,395		—		—		2,835		2,835		2,835		15,230
Home equity lines of credit		18,704		—		—		—		—		—		18,704
Commercial business		34,672		—		—		—		—		—		34,672
Other		3,130		—		—		—		—		—		3,130
Total	$	625,208	$	300	$	561	$	2,835	$	3,696	$	2,835	$	628,904

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.

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 five 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, 2022 and 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, 2022	$	1,223		$	4,612		$	461	$	263		$	1,484		$	1		$	389		$	8,433
Charge-offs		—			—			—		—			—			—			—			—
Recoveries		—			—			—		—			—			—			—			—
Provision (credit)		12			518			65		(7	)		(109	)		—			(162	)		317
Balance- December 31, 2022	$	1,235		$	5,130		$	526	$	256		$	1,375		$	1		$	227		$	8,750

Balance- September 30, 2021	$	1,136		$	3,744		$	594	$	232		$	2,046		$	15		$	308		$	8,075
Charge-offs		—			—			—		—			—			—			—			—
Recoveries		—			52			—		—			—			—			—			52
Provision (credit)		(43	)		(90	)		130		—			83			(14	)		35			101
Balance- December 31, 2021	$	1,093		$	3,706		$	724	$	232		$	2,129		$	1		$	343		$	8,228

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, 2022 and September 30, 2022:

	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, 2022	$	1,235	$	5,130	$	526	$	256	$	1,375	$	1	$	227	$	8,750
Individually evaluated for impairment		—		—		114		—		102		—		—		216
Collectively evaluated for impairment		1,235		5,130		412		256		1,273		1		227		8,534

Loans receivable:
Balance - December 31, 2022	$	215,263	$	389,247	$	17,880	$	18,471	$	31,616	$	3,260	$	—	$	675,737
Individually evaluated for impairment		1,381		1,378		2,835		—		253		—		—		5,847
Collectively evaluated for impairment		213,882		387,869		15,045		18,471		31,363		3,260		—		669,890

	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, 2022	$	1,093	$	3,706	$	724	$	263	$	2,129	$	1	$	343	$	8,259
Individually evaluated for impairment		—		—		114		—		—		—		—		114
Collectively evaluated for impairment		1,093		3,706		610		263		2,129		1		343		8,145

Loans receivable:
Balance - September 30, 2022	$	214,377	$	342,791	$	15,230	$	18,704	$	34,672	$	3,130	$	—	$	628,904
Individually evaluated for impairment		1,512		1,159		2,835		—		153		—		—		5,659
Collectively evaluated for impairment		212,865		341,632		12,395		18,704		34,519		3,130		—		623,245

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. 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. During the three months ended December 31, 2022 there was one TDR loan totaling $387,000 that became delinquent greater than 90 days. The loan is secured by commercial real estate and was in the process of foreclosure at December 31, 2022.

There was one TDR loan during the three months ended December 31, 2022 and no TDRs during the three months ended December 31, 2021.

	Three Months Ended December 31, 2022
	Number of		Investment Before		Investment After
	Loans		TDR Modification		TDR Modification
	(Dollars in thousands)
One-to four-family residential		1	$	97	$	107

Total		1	$	97	$	107