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LOANS RECEIVABLE, NET AND RELATED ALLOWANCE FOR LOAN LOSSES

6 Months Ended

Mar. 31, 2023

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:

	March 31,			September 30,
	2023			2022
	(In thousands)

One-to-four family residential	$	223,030		$	214,377
Commercial real estate		392,246			342,791
Construction		19,456			15,230
Home equity lines of credit		17,633			18,704
Commercial business		21,997			34,672
Other		2,568			3,130
Total loans receivable		676,930			628,904
Net deferred loan costs		(820	)		(628	)
Allowance for loan losses		(8,844	)		(8,433	)
Total loans receivable, net	$	667,266		$	619,843

The segments of the Company’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

March 31, 2023 (In thousands)

One-to-four family residential $
—
$
—
$ 1,766 $ 1,766 $ 1,766

Commercial real estate
—

—
1,145 1,145 1,145

Construction — — 2,835 2,835 2,900

Commercial business 386 386 150 536 536

Total impaired loans $ 386 $ 386 $ 5,896 $ 6,282 $ 6,347

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 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 $107,000 during the six months ended March 31, 2023 and there were no TDRs during the six months ended March 31, 2022.

The following tables present the average recorded investment in impaired loans and the interest income recognized on impaired loans for the three and six months ended March 31, 2023 and 2022.

	Three Months		Six Months
	Ended March 31, 2023		Ended March 31, 2023
	(In thousands)

One-to-four family residential	$	1,574	$	1,553
Commercial real estate		1,262		1,227
Construction		2,835		2,835
Commercial business		395		314
Average investment in impaired loans	$	6,066	$	5,929

Interest income recognized on an accrual basis on impaired loans	$	36	$	71

	Three Months		Six Months
	Ended March 31, 2022		Ended March 31, 2022
	(In thousands)

One-to-four family residential	$	1,877	$	2,155
Commercial real estate		1,690		1,883
Construction		4,580		4,580
Commercial business		1,505		1,506
Average investment in impaired loans	$	9,652	$	10,124

Interest income recognized on an accrual basis on impaired loans	$	45	$	93

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 Company 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 Company’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 Company’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 Company’s internal risk rating system for the periods presented:

			Special
	Pass		Mention		Substandard		Doubtful		Total
	(In thousands)
March 31, 2023
One-to-four family residential	$	221,670	$	968	$	392	$	—	$	223,030
Commercial real estate		391,662		196		388		—		392,246
Construction		14,894		—		4,562		—		19,456
Home equity lines of credit		17,633		—		—		—		17,633
Commercial business		21,611		386		—		—		21,997
Other		2,568		—		—		—		2,568
Total	$	670,038	$	1,550	$	5,342	$	—	$	676,930

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)
March 31, 2023
One-to-four family residential	$	222,187	$	537	$	134	$	172	$	843	$	172	$	223,030
Commercial real estate		388,979		2,879		—		388		3,267		388		392,246
Construction		16,621		—		—		2,835		2,835		2,835		19,456
Home equity lines of credit		17,633		—		—		—		—		—		17,633
Commercial business		21,611		—		386		—		386		—		21,997
Other		2,568		—		—		—		—		—		2,568
Total	$	669,599	$	3,416	$	520	$	3,395	$	7,331	$	3,395	$	676,930

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 Company’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 six months ended March 31, 2023 and 2022:

	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
Charge-offs		—			—			—			—			(102	)		—			—			(102	)
Recoveries		1			—			—			—			—			—			—			1
Provision (credit)		34			280			(58	)		(10	)		62			—			(113	)		195
Balance- March 31, 2023	$	1,270		$	5,410		$	468		$	246		$	1,335		$	1		$	114		$	8,844

Balance- September 30, 2021	$	1,136		$	3,744		$	594		$	232		$	2,046		$	15		$	308		$	8,075
Charge-offs		—			—			—			—			—			—			—			—
Recoveries		—			53			—			—			—			—			—			53
Provision (credit)		(43	)		(90	)		130			—			83			(14	)		35			100
Balance- December 31, 2021	$	1,093		$	3,706		$	724		$	232		$	2,129		$	1		$	343		$	8,228
Charge-offs		—			—			—			—			—			—			—			—
Recoveries		1			—			—			—			—			—			—			1
Provision (credit)		19			376			79			(12	)		(290	)		1			(102	)		71
Balance- March 31, 2022	$	1,113		$	4,082		$	803		$	220		$	1,839		$	2		$	241		$	8,300

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, 2023 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 - March 31, 2023	$	1,270	$	5,410	$	468	$	246	$	1,335	$	1	$	114	$	8,844
Individually evaluated for impairment		—		—		—		—		386		—		—		386
Collectively evaluated for impairment		1,270		5,410		468		246		949		1		114		8,458

Loans receivable:
Balance - March 31, 2023	$	223,030	$	392,246	$	19,456	$	17,633	$	21,997	$	2,568	$	—	$	676,930
Individually evaluated for impairment		1,766		1,145		2,835		—		536		—		—		6,282
Collectively evaluated for impairment		221,264		391,101		16,621		17,633		21,461		2,568		—		670,648

	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	$	1,223	$	4,612	$	461	$	263	$	1,484	$	1	$	389	$	8,433
Individually evaluated for impairment		—		—		114		—		—		—		—		114
Collectively evaluated for impairment		1,223		4,612		347		263		1,484		1		389		8,319

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 within twelve months of the restructure. The Company did not have any TDRs default during the three or six months ended March 31, 2023.

During the six months ended March 31, 2023 there was one new TDR loan totaling $107,000 and there were no new TDRs during the six months ended March 31, 2022. Information on the new TDR is summarized as follows:

	Six Months Ended March 31, 2023
	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

There no residential mortgage loans in the process of foreclosure at March 31, 2023 and September 30, 2022.