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Loans Receivable

3 Months Ended

Sep. 30, 2022

4. Loans receivable

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal amount outstanding, adjusted for deferred loan origination costs, net, discounts on purchased loans, and the allowance for loan losses. Interest income is accrued on the unpaid principal balance unless the collectability of the loan is in doubt. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. Interest income on one- to four-family residential loans is generally discontinued at the time a loan is 180 days delinquent and on other loans at the time a loan is 90 days delinquent. All other loans are moved to non-accrual status in accordance with the Company’s policy, typically 90 days after the loan becomes delinquent. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The composition of the loan portfolio was as follows:

	September 30,			June 30,
(in thousands)	2022			2022
Residential real estate
One- to four-family	$	225,314		$	216,432
Multi-family		23,259			14,252
Construction		3,875			1,363
Land		266			1,062
Farm		1,319			1,338
Nonresidential real estate		30,342			31,441
Commercial and industrial		978			1,006
Consumer and other:
Loans on deposits		833			891
Home equity		7,500			7,670
Automobile		112			117
Unsecured		503			540
		294,301			276,112
Allowance for loan losses		(1,642	)		(1,529	)
	$	292,659		$	274,583

The amounts above include net deferred loan costs of $309,000 and $290,000 as of September 30, 2022 and June 30, 2022, respectively.

The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loss experience, the nature and volume of the portfolio, trends in the level of delinquent and problem loans, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and current and anticipated economic conditions in the primary lending area. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component covers all loans and is based on historical loss experience adjusted for current factors. In consultation with regulators, the Company considers a time frame of two years when estimating the appropriate level of allowance for loan losses. This period may be shortened or extended based on anticipated trends in the banks or in the banks’ markets.

The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent eight quarters. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment.

These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; changes in lending policies, procedures and practices; experience, ability and depth of lending management and other relevant staff; economic trends and conditions; industry conditions; and effects of changes in credit concentrations. Our portfolio segments include residential real estate, nonresidential real estate and land, loans on deposits and consumer and other loans. Risk factors associated with our portfolio segments are as follows:

Residential Real Estate

Our primary lending activity is the origination of mortgage loans, which enable a borrower to purchase or refinance existing homes in the Banks’ respective market areas. We further classify our residential real estate loans as one- to four-family (owner-occupied vs nonowner-occupied), multi-family or construction. We believe that our first mortgage position on loans secured by residential real estate presents lower risk than our other loans, with the exception of loans secured by deposits.

We offer a mix of adjustable-rate and fixed-rate mortgage loans with terms up to 30 years for owner-occupied properties. For these properties a borrower may be able to borrow up to 97% of the value with private mortgage insurance. Alternatively, the borrower may be able to borrow up to 90% of the value through other programs offered by the bank.

We offer loans on one- to four-family rental properties at a maximum of 80% loan-to-value (“LTV”) ratio and we generally charge a slightly higher interest rate on such loans.

We also originate loans to individuals to finance the construction of residential dwellings for personal use or for use as rental property. We occasionally lend to builders for construction of speculative or custom residential properties for resale, but on a limited basis. Construction loans are generally less than one year in length, do not exceed 80% of the appraised value, and provide for the payment of interest only during the construction phase. Funds are disbursed as progress is made toward completion of the construction.

Multi-family and Nonresidential Loans

We offer mortgage loans secured by residential multi-family (five or more units), and nonresidential real estate. Nonresidential real estate loans are comprised generally of commercial office buildings, churches and properties used for other purposes. Generally, these loans are originated for 25 years or less and do not exceed 80% of the appraised value. Loans secured by multi-family and commercial real estate generally have larger balances and involve a greater degree of risk than one- to four-family residential mortgage loans. These loans depend on the borrower’s creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income properties often depend on successful operation and management of the properties. As a result, repayment on such loans may be subject to a greater extent to adverse conditions in the real estate market or economy than owner-occupied residential loans.

Consumer lending

Our consumer loans include home equity lines of credit, loans secured by savings deposits, automobile loans, and unsecured loans. Home equity loans are generally second mortgage loans subordinate only to first mortgages also held by the bank and do not exceed 80% of the estimated value of the property. We do offer home equity loans up to 90% of the estimated value to qualified borrowers and these loans carry a premium interest rate. Loans secured by savings are originated up to 90% of the depositor’s savings account balance and bear interest at a rate higher than the rate paid on the deposit account. Because the deposit account must be pledged as collateral to secure the loan, the inherent risk of this type of loan is minimal. Loans secured by automobiles are made directly to consumers (there are no relationships with dealers) and are based on the value of the vehicle and the borrower’s creditworthiness. Vehicle loans present a higher level of risk because of the natural decline in the value of the property as well as its mobility. Unsecured loans are based entirely on the borrower’s creditworthiness and present the highest level of risk to the bank.

The Banks choose the most appropriate method for accounting for impaired loans. For secured loans, which make up the vast majority of the loans in the Banks’ portfolio, this method involves determining the fair value of the collateral, reduced by estimated selling costs. Where appropriate, the Banks would account for impaired loans by determining the present value of expected future cash flows discounted at the loan’s effective interest rate.

A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Although most of our loans are secured by collateral, we rely heavily on the capacity of our borrowers to generate sufficient cash flow to service their debt. As a result, our loans do not become collateral-dependent until there is deterioration in the borrower’s cash flow and financial condition, which makes it necessary for us to look to the collateral for our sole source of repayment. Collateral-dependent loans which are more than ninety days delinquent are considered to constitute more than a minimum delay in repayment and are evaluated for impairment under the policy at that time.

We utilize updated independent appraisals to determine fair value for collateral-dependent loans, adjusted for estimated selling costs, in determining our specific reserve. In some situations, management does not secure an updated independent appraisal. These situations may involve small loan amounts or loans that, in management’s opinion, have an abnormally low loan-to-value ratio.

With respect to the Banks’ investment in troubled debt restructurings, multi-family and nonresidential loans, and the evaluation of impairment thereof, such loans are nonhomogenous and, as such, may be deemed to be collateral-dependent when they become more than 90 days delinquent. We obtain updated independent appraisals in these situations or when we suspect that the previous appraisal may no longer be reflective of the property’s current fair value. This process varies from loan to loan, borrower to borrower, and also varies based on the nature of the collateral.

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2022:

(in thousands)	Beginning balance		Provision for loan losses			Loans charged off		Recoveries		Ending balance
Residential real estate:
One-to four-family	$	800	$	8		$	–	$	–	$	808
Multi-family		231		150			–		–		381
Construction		4		10			–		–		14
Land		3		(3	)		–		–		–
Farm		5		1			–		–		6
Nonresidential real estate		461		(51	)		–		–		410
Commercial nonmortgage		2		–			–		–		2
Consumer and other:
Loans on deposits		1		–			–		–		1
Home equity		21		(2	)		–		–		19
Automobile		–		–			–		–		–
Unsecured		1		–			–		–		1
Totals	$	1,529	$	113		$	–	$	–	$	1,642

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2021:

(in thousands)	Beginning balance		Provision for loan losses			Loans charged off			Recoveries		Ending balance
Residential real estate:
One-to four-family	$	794	$	(31	)	$	(9	)	$	–	$	754
Multi-family		291		(1	)		–			–		290
Construction		12		1			–			–		13
Land		3		(3	)		–			–		–
Farm		5		1			–			–		6
Nonresidential real estate		494		32			–			–		526
Commercial nonmortgage		5		(2	)		–			–		3
Consumer and other:
Loans on deposits		2		–			–			–		2
Home equity		15		1			–			–		16
Automobile		–		–			–			–		–
Unsecured		1		2			(3	)		–		–
Totals	$	1,622	$	–		$	(12	)	$	–	$	1,610

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio class and based on impairment method as of September 30, 2022. The recorded investment in loans excludes accrued interest receivable due to immateriality.

September 30, 2022:

(in thousands)	Loans individually evaluated		Loans acquired with deteriorated credit quality*		Unpaid principal balance and recorded investment		Ending allowance attributed to loans
Loans individually evaluated for impairment:
Residential real estate:
One- to four-family	$	3,116	$	391	$	3,507	$	–
Multi-family		564		–		564		–
Farm		261		–		261		–
Nonresidential real estate		1,349		–		1,349		–
		5,290		391		5,681		–

Loans collectively evaluated for impairment:
Residential real estate:
One- to four-family					$	221,807	$	808
Multi-family						22,695		381
Construction						3,875		14
Land						266		–
Farm						1,058		6
Nonresidential real estate						28,993		410
Commercial nonmortgage						978		2
Consumer:
Loans on deposits						833		1
Home equity						7,500		19
Automobile						112		–
Unsecured						503		1
						288,620		1,642
					$	294,301	$	1,642

These loans were evaluated at acquisition date at their estimated fair value and there has been no subsequent deterioration since acquisition.

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio class and based on impairment method as of June 30, 2022.

June 30, 2022:

(in thousands)	Loans individually evaluated		Loans acquired with deteriorated credit quality*		Ending loans balance		Ending allowance attributed to loans
Loans individually evaluated for impairment:
Residential real estate
One- to four-family	$	3,221	$	400	$	3,621	$	–
Multi-family		570		–		570		–
Farm		270		–		270		–
Nonresidential real estate		1,073		–		1,073		–
Consumer and other
Home equity		87		–		87		–
Unsecured		5		–		5		–
		5,226		400		5,626		–

Loans collectively evaluated for impairment:
Residential real estate
One- to four-family					$	212,811	$	800
Multi-family						13,682		231
Construction						1,363		4
Land						1,062		3
Farm						1,068		5
Nonresidential real estate						30,368		461
Commercial and industrial						1,006		2
Consumer and other
Loans on deposits						891		1
Home equity						7,583		21
Automobile						117		–
Unsecured						535		1
						270,486		1,529
					$	276,112	$	1,529

These loans were evaluated at acquisition date at their estimated fair value and there has been no subsequent deterioration since acquisition.

The following table presents interest income on loans individually evaluated for impairment by class of loans for the three months ended September 30:

(in thousands)	Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
	2022						2021
With no related allowance recorded:
Residential real estate:
One- to four-family	$	3,167	$	24	$	24	$	3,642	$	36	$	36
Multi-family		567		5		5		617		5		5
Farm		266		–		–		273		–		–
Nonresidential real estate		1,211		2		2		1,358		16		16
Consumer and other		47		1		1		21		–		–
Purchased credit-impaired loans		396		6		6		527		7		7
	$	5,654	$	38	$	38	$	6,438	$	64	$	64

There were no impaired loans with an allowance recorded at September 30, 2022.

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of September 30, 2022, and June 30, 2022:

	September 30, 2022				June 30, 2022
(in thousands)	Nonaccrual		Loans Past Due Over 90 Days Still Accruing		Nonaccrual		Loans Past Due Over 90 Days Still Accruing
Residential real estate:
One- to four-family residential real estate	$	3,003	$	308	$	3,528	$	287
Multifamily		564		–		570		–
Farm		261		–		270		–
Nonresidential real estate and land		1,111		–		1,073		–
Commercial and industrial		–		–		--		1
Consumer		–		28		90		–
	$	4,939	$	336	$	5,531	$	288

One- to four-family loans in process of foreclosure totaled $319,000 and $489,000 at September 30, 2022 and June 30, 2022, respectively.

Troubled Debt Restructurings:

A Troubled Debt Restructuring (“TDR”) is the situation where the Bank grants a concession to the borrower that the Banks would not otherwise have considered due to the borrower’s financial difficulties. All TDRs are considered “impaired.”

In December 2020, Congress amended the CARES Act through the Consolidated Appropriation Act of 2021, which provided additional COVID-19 relief to American families and businesses, including extending the TDR relief under the CARES Act until the earlier of December 31, 2021 or 60 days following the termination of the national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt these provisions of the CARES Act. In response to the COVID-19 pandemic and the widespread economic downturn that immediately resulted, the Company adopted a loan forbearance plan in which then-current affected borrowers could request deferral of their loan payments for a period of three months. A total of $815,000 in loans were accepted into the plan for the twelve months ended June 30, 2021. At June 30, 2021 all of those loans had reached the end of their three-month deferral data period and returned to regular payment status.

At September 30, 2022 and June 30, 2022, the Company had $1.3 million and $1.4 million of loans classified as TDRs, respectively. Of the TDRs at September 30, 2022, approximately 16.4% were related to the borrower’s completion of Chapter 7 bankruptcy proceedings with no reaffirmation of the debt to the Banks.

During the three months ended September 30, 2022, and 2021 the Company added no loans restructured as TDRs. No TDRs defaulted during the three-month periods ended September 30, 2022, or 2021.

The following table presents the aging of the principal balance outstanding in past due loans as of September 30, 2022, by class of loans:

(in thousands)	30-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Loans Not Past Due		Total
Residential real estate:
One-to four-family	$	4,148	$	1,282	$	5,430	$	219,884	$	225,314
Multi-family		–		–		–		23,259		23,259
Construction		638		–		638		3,237		3,875
Land		–		–		–		266		266
Farm		–		–		–		1,319		1,319
Nonresidential real estate		–		–		–		30,342		30,342
Commercial and industrial		699		–		699		279		978
Consumer and other:
Loans on deposits		–		–		–		833		833
Home equity		144		–		144		7,356		7,500
Automobile		–		–		–		112		112
Unsecured		2		28		30		473		503
Total	$	5,631	$	1,310	$	6,941	$	287,360	$	294,301

The following tables present the aging of the principal balance outstanding in past due loans as of June 30, 2022, by class of loans:

June 30, 2022:

(in thousands)	30-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due		Total

Residential real estate
One- to four-family	$	2,662	$	1,326	$	3,988	$	212,444	$	216,432
Multi-family		–		–		–		14,252		14,252
Construction		5		–		5		1,358		1,363
Land		–		–		–		1,062		1,062
Farm		–		–		–		1,338		1,338
Nonresidential real estate		–		–		–		31,441		31,441
Commercial and industrial		72		1		73		933		1,006
Consumer and other
Loans on deposits		–		–		–		891		891
Home equity		188		71		259		7,411		7,670
Automobile		–		–		–		117		117
Unsecured		–		–		–		540		540
	$	2,927	$	1,398	$	4,325	$	271,787	$	276,112

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on an annual basis. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be pass rated loans. Loans listed that are not rated are included in groups of homogeneous loans and are evaluated for credit quality based on performing status. See the aging of past due loan table above. As of September 30, 2022, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

(in thousands)	Pass		Special Mention		Substandard		Doubtful
Residential real estate:
One- to four-family	$	219,621	$	188	$	5,505	$	–
Multi-family		22,695		–		564		–
Construction		3,875		–		–		–
Land		266		–		–		–
Farm		1,058		–		261		–
Nonresidential real estate		28,532		699		1,111		–
Commercial nonmortgage		978		–		–		–
Consumer:
Loans on deposits		833		–		–		–
Home equity		7,466		–		34		–
Automobile		112		–		–		–
Unsecured		498		–		5		–
	$	285,935	$	887	$	7,479	$	–

At June 30, 2022, the risk category of loans by class of loans was as follows:

(in thousands)	Pass		Special Mention		Substandard		Doubtful
Residential real estate:
One- to four-family	$	210,830	$	194	$	5,408	$	–
Multi-family		13,682		–		570		–
Construction		1,363		–		–		–
Land		1,062		–		–		–
Farm		1,068		–		270		–
Nonresidential real estate		29,666		702		1,073		–
Commercial nonmortgage		1,006		–		–		–
Consumer:
Loans on deposits		891		–		–		–
Home equity		7,548		–		122		–
Automobile		117		–		–		–
Unsecured		535		–		5		–
	$	267,768	$	896	$	7,448	$	–

Purchased Credit Impaired Loans:

The Company purchased loans during fiscal year 2013 for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans, net of a purchase credit discount of $88,000 and $88,000 at September 30, 2022 and June 30, 2022, respectively, is as follows:

(in thousands)		September 30, 2022				June 30, 2022
One- to four-family residential real estate		$	391			$	400

Accretable yield, or income expected to be collected, is as follows:

(in thousands)	Three months ended September 30, 2022			Twelve months ended June 30, 2022
Balance at beginning of period	$	339		$	390
Accretion of income		(12	)		(51	)
Balance at end of period	$	327		$	339

For those purchased loans disclosed above, the Company made no increase in allowance for loan losses for the year ended June 30, 2022, nor for the three-month period ended September 30, 2022. Neither were any allowance for loan losses reversed during those periods.