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LOANS RECEIVABLE, NET AND RELATED ALLOWANCE FOR LOAN LOSSES
 9 Months Ended
Jun. 30, 2023
Receivables [Abstract]  
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:

 

   June 30,   September 30, 
   2023   2022 
   (In thousands) 
         
One-to-four family residential  $236,633   $214,377 
Commercial real estate   402,349    342,791 
Construction   19,249    15,230 
Home equity lines of credit   18,737    18,704 
Commercial business   23,129    34,672 
Other   2,433    3,130 
Total loans receivable   702,530    628,904 
Net deferred loan fees   (844)   (628)
Allowance for loan losses   (8,378)   (8,433)
Total loans receivable, net  $693,308   $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 
June 30, 2023  (In thousands) 
                          
One-to-four family residential  $
—
   $
—
   $1,788   $1,788   $1,788 
Commercial real estate   
—
    
—
    1,138    1,138    1,138 
Construction   
—
    
—
    777    777    842 
Commercial business   
—
    
—
    148    148    148 
Total impaired loans  $
—
   $
—
   $3,851   $3,851   $3,916 
                          
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 $106,000 during the nine months ended June 30, 2023 and there were two TDR loans totaling $373,000 during the nine months ended June 30, 2022.

 

The following tables present the average recorded investment in impaired loans and the interest income recognized on impaired loans for the three and nine months ended June 30, 2023 and 2022.

 

 

   Three Months Ended   Nine Months Ended 
   June 30, 2023   June 30, 2023 
   (In thousands) 
         
One-to-four family residential  $1,777   $1,645 
Commercial real estate   1,142    1,220 
Construction   1,806    2,149 
Commercial business   342    312 
Average investment in impaired loans  $5,067   $5,326 
           
Interest income recognized on          
an accrual basis on impaired loans          
One-to-four family residential  $22   $64 
Commercial real estate   13    39 
Commercial business   2    5 
Total  $37   $108 

 

   Three Months Ended   Nine Months Ended 
   June 30, 2022   June 30, 2022 
   (In thousands) 
         
One-to-four family residential  $1,531   $1,760 
Commercial real estate   1,174    1,516 
Construction   4,580    4,580 
Commercial business   829    1,055 
Average investment in impaired loans  $8,114   $8,911 
           
Interest income recognized on          
an accrual basis on impaired loans          
One-to-four family residential  $21   $63 
Commercial real estate   23    71 
Commercial business   2    5 
Total  $46   $139 

 

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) 
June 30, 2023                    
One-to-four family residential  $235,248   $962   $423   $
—
   $236,633 
Commercial real estate   401,962    
—
    387    
—
    402,349 
Construction   16,752    
—
    2,497    
—
    19,249 
Home equity lines of credit   18,737    
—
    
—
    
—
    18,737 
Commercial business   23,129    
—
    
—
    
—
    23,129 
Other   2,433    
—
    
—
    
—
    2,433 
Total  $698,261   $962   $3,307   $
—
   $702,530 
                          
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 
   (Dollars in  thousands) 
June 30, 2023                                   
One-to-four family residential  $236,093   $
—
   $369   $171   $540   $171   $236,633 
Commercial real estate   399,621    
—
    116    2,612    2,728    2,612    402,349 
Construction   18,472    
—
    
—
    777    777    777    19,249 
Home equity lines of credit   18,737    
—
    
—
    
—
    
—
    
—
    18,737 
Commercial business   23,109    
—
    20    
—
    20    
—
    23,129 
Other   2,433    
—
    
—
    
—
    
—
    
—
    2,433 
Total  $698,465   $
—
   $505   $3,560   $4,065   $3,560   $702,530 
                                    
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 nine months ended June 30, 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   
—
    
—
    
—
    
—
    
—
    
—
    
—
    
—
 
Provision (credit)   35    280    (58)   (10)   62    
—
    (113)   196 
Balance- March 31, 2023  $1,270   $5,410   $468   $246   $1,335   $1   $114   $8,844 
Charge-offs   
—
    
—
    
—
    
—
    (386)   
—
    
—
    (386)
Recoveries   1    
—
    
—
    
—
    
—
    
—
    
—
    1 
Provision (credit)   (102)   (318)   (21)   (15)   (41)   
—
    416    (81)
Balance- June 30, 2023  $1,169   $5,092   $447   $231   $908   $1   $530   $8,378 

 

   One-to-Four           Home Equity                 
   Family   Commercial       Lines of   Commercial             
   Residential   Real Estate   Construction   Credit   Business   Other   Unallocated   Total 
   (In thousands) 
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 
Charge-offs   
—
    
—
    
—
    
—
    
—
    
—
    
—
    
—
 
Recoveries   
—
    
—
    
—
    
—
    
—
    
—
    
—
    
—
 
Provision (credit)   35    334    (196)   5    (62)   (1)   90    205 
Balance- June 30, 2022  $1,148   $4,416   $607   $225   $1,777   $1   $331   $8,505 

 

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 June 30, 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 - June 30, 2023  $1,169   $5,092   $447   $231   $908   $1   $530   $8,378 
Individually evaluated for impairment   
—
    
—
    
—
    
—
    
—
    
—
    
—
    
—
 
Collectively evaluated for impairment   1,169    5,092    447    231    908    1    530    8,378 
                                         
Loans receivable:                                        
Balance - June 30, 2023  $236,633   $402,349   $19,249   $18,737   $23,129   $2,433   $
—
   $702,530 
                                        
Individually evaluated for impairment   1,788    1,138    777    
—
    148    
—
    
—
    3,851 
Collectively evaluated for impairment   234,845    401,211    18,472    18,737    22,981    2,433    
—
    698,679 

 

   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 TDR loans default during the three or nine months ended June 30, 2023.

 

There was one TDR loan modification totaling $106,000 during the nine months ended June 30, 2023. Information on the TDR is summarized as follows:

 

   Three Months Ended June 30, 2023 
   Number of   Investment Before   Investment After 
   Loans   TDR Modification   TDR Modification 
   (Dollars in thousands) 
One-to four-family residential   
—
   $
—
   $
—
 
                
Total   
—
   $
—
   $
—
 

 

 

   Nine Months Ended June 30, 2023 
   Number of   Investment Before   Investment After 
   Loans   TDR Modification   TDR Modification 
   (Dollars in thousands) 
One-to four-family residential   1   $97   $106 
                
Total   1   $97   $106 

 

There was one TDR loan totaling $124,000 for the three months ended June 30, 2022, and there were two TDR loans totaling $373,000 during the nine months ended June 30, 2022. Information on the TDR loans are summarized as follows:

 

   Three Months Ended June 30, 2022 
   Number of   Investment Before   Investment After 
   Loans   TDR Modification   TDR Modification 
   (Dollars in thousands) 
One-to four-family residential   1    112    124 
                
Total   1   $112   $124 

 

   Nine Months Ended June 30, 2022 
   Number of   Investment Before   Investment After 
   Loans   TDR Modification   TDR Modification 
   (Dollars in thousands) 
One-to four-family residential   2    330    373 
                
Total   2   $330   $373