Loans and Allowance for Loan Losses

9 Months Ended

Jun. 30, 2017

Accounts, Notes, Loans and Financing Receivable, Gross, Allowance, and Net [Abstract]

Loans and Allowance for Loan Losses

3. Loans and Allowance for Loan Losses

Loans at June 30, 2017 and September 30, 2016 consisted of the following:

	June 30,		September 30,
	2017		2016
	(In thousands)
Real estate mortgage:
1-4 family residential	$	173,620	$	178,364
Commercial		254,871		217,378
Multifamily residential		18,696		18,431
Residential construction		33,837		24,275
Commercial construction		35,829		33,685
Land and land development		9,303		11,137
Commercial business loans		52,411		41,967
Consumer:
Home equity loans		21,811		21,370
Auto loans		6,825		4,858
Other consumer loans		2,120		2,102
Gross loans		609,323		553,567
Undisbursed portion of construction loans		(36,718)		(27,623)
Principal loan balance		572,605		525,944
Deferred loan origination fees and costs, net		161		(211)
Allowance for loan losses		(7,995)		(7,122)
Loans, net	$	564,771	$	518,611

During the nine-month period ended June 30, 2017, there was no significant change in the Company’s lending activities or methodology used to estimate the allowance for loan losses as disclosed in the Company’s Annual Report on Form 10-K for the year ended September 30, 2016.

At June 30, 2017 and September 30, 2016, the recorded investment in consumer mortgage loans collateralized by residential real estate properties in the process of foreclosure was $1.2 million and $837,000, respectively.

The following table provides the components of the recorded investment in loans as of June 30, 2017:

	Residential		Commercial						Land & Land		Commercial
	Real Estate		Real Estate		Multifamily		Construction		Development		Business		Consumer		Total
	(In thousands)
Recorded Investment in Loans:
Principal loan balance	$	173,620	$	254,871	$	18,696	$	32,948	$	9,303	$	52,411	$	30,756	$	572,605
Accrued interest receivable		482		844		33		175		22		213		58		1,827
Net deferred loan origination fees and costs		79		(97)		(15)		40		4		170		(20)		161
Recorded investment in loans	$	174,181	$	255,618	$	18,714	$	33,163	$	9,329	$	52,794	$	30,794	$	574,593
Recorded Investment in Loans as Evaluated for Impairment:
Individually evaluated for impairment	$	4,589	$	5,464	$	-	$	-	$	314	$	198	$	196	$	10,761
Collectively evaluated for impairment		169,592		250,154		18,714		33,163		9,015		52,596		30,598		563,832
Ending balance	$	174,181	$	255,618	$	18,714	$	33,163	$	9,329	$	52,794	$	30,794	$	574,593

The following table provides the components of the recorded investment in loans as of September 30, 2016:

	Residential		Commercial						Land & Land		Commercial
	Real Estate		Real Estate		Multifamily		Construction		Development		Business		Consumer		Total
	(In thousands)
Recorded Investment in Loans:
Principal loan balance	$	178,364	$	217,378	$	18,431	$	30,337	$	11,137	$	41,967	$	28,330	$	525,944
Accrued interest receivable		505		592		38		95		23		143		55		1,451
Net deferred loan origination fees and costs		158		(254)		(17)		(126)		4		37		(13)		(211)
Recorded investment in loans	$	179,027	$	217,716	$	18,452	$	30,306	$	11,164	$	42,147	$	28,372	$	527,184
Recorded Investment in Loans as Evaluated for Impairment:
Individually evaluated for impairment	$	4,342	$	6,298	$	-	$	-	$	241	$	231	$	249	$	11,361
Collectively evaluated for impairment		174,685		211,418		18,452		30,306		10,923		41,916		28,123		515,823
Ending balance	$	179,027	$	217,716	$	18,452	$	30,306	$	11,164	$	42,147	$	28,372	$	527,184

An analysis of the allowance for loan losses as of June 30, 2017 is as follows:

	Residential		Commercial						Land & Land		Commercial
	Real Estate		Real Estate		Multifamily		Construction		Development		Business		Consumer		Total
	(In thousands)
Ending Allowance Balance Attributable to Loans:
Individually evaluated for impairment	$	189	$	-	$	-	$	-	$	-	$	-	$	2	$	191
Collectively evaluated for impairment		286		5,484		95		820		201		809		109		7,804
Ending balance	$	475	$	5,484	$	95	$	820	$	201	$	809	$	111	$	7,995

An analysis of the allowance for loan losses as of September 30, 2016 is as follows:

	Residential		Commercial						Land & Land		Commercial
	Real Estate		Real Estate		Multifamily		Construction		Development		Business		Consumer		Total
	(In thousands)
Ending Allowance Balance Attributable to Loans:
Individually evaluated for impairment	$	43	$	-	$	-	$	-	$	-	$	-	$	5	$	48
Collectively evaluated for impairment		292		5,160		109		845		295		284		89		7,074
Ending balance	$	335	$	5,160	$	109	$	845	$	295	$	284	$	94	$	7,122

An analysis of the changes in the allowance for loan losses for the three months ended June 30, 2017 is as follows:

	Residential		Commercial						Land & Land		Commercial
	Real Estate		Real Estate		Multifamily		Construction		Development		Business		Consumer		Total
	(In thousands)
Changes in Allowance for Loan Losses:
Beginning balance	$	311	$	5,870	$	116	$	703	$	267	$	348	$	103	$	7,718
Provisions		201		(386)		(21)		117		(66)		461		(15)		321
Charge-offs		(41)		-		-		-		-		-		(25)		(66)
Recoveries		4		-		-		-		-		-		18		22
Ending balance	$	475	$	5,484	$	95	$	820	$	201	$	809	$	111	$	7,995

An analysis of the changes in the allowance for loan losses for the nine months ended June 30, 2017 is as follows:

	Residential		Commercial						Land & Land		Commercial
	Real Estate		Real Estate		Multifamily		Construction		Development		Business		Consumer		Total
	(In thousands)
Changes in Allowance for Loan Losses:
Beginning balance	$	335	$	5,160	$	109	$	845	$	295	$	284	$	94	$	7,122
Provisions		211		324		(14)		(25)		(94)		536		64		1,002
Charge-offs		(80)		-		-		-		-		(25)		(87)		(192)
Recoveries		9		-		-		-		-		14		40		63
Ending balance	$	475	$	5,484	$	95	$	820	$	201	$	809	$	111	$	7,995

An analysis of the changes in the allowance for loan losses for the three months ended June 30, 2016 is as follows:

	Residential		Commercial						Land & Land		Commercial
	Real Estate		Real Estate		Multifamily		Construction		Development		Business		Consumer		Total
	(In thousands)
Changes in Allowance for Loan Losses:
Beginning balance	$	286	$	4,595	$	157	$	651	$	345	$	625	$	92	$	6,751
Provisions		113		526		(46)		92		(32)		(358)		8		303
Charge-offs		(114)		-		-		-		-		(10)		(20)		(144)
Recoveries		33		-		-		-		-		1		25		59
Ending balance	$	318	$	5,121	$	111	$	743	$	313	$	258	$	105	$	6,969

An analysis of the changes in the allowance for loan losses for the nine months ended June 30, 2016 is as follows:

	Residential		Commercial						Land & Land		Commercial
	Real Estate		Real Estate		Multifamily		Construction		Development		Business		Consumer		Total
	(In thousands)
Changes in Allowance for Loan Losses:
Beginning balance	$	444	$	4,327	$	156	$	551	$	369	$	678	$	99	$	6,624
Provisions		(69)		794		(45)		192		(56)		(411)		23		428
Charge-offs		(170)		-		-		-		-		(10)		(77)		(257)
Recoveries		113		-		-		-		-		1		60		174
Ending balance	$	318	$	5,121	$	111	$	743	$	313	$	258	$	105	$	6,969

The following table presents impaired loans individually evaluated for impairment as of June 30, 2017 and for the three and nine months ended June 30, 2017 and 2016.

	At June 30, 2017						Three Months Ended June 30,						Nine Months Ended June 30,
							2017		2017		2016		2016		2017		2017		2016		2016
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
Loans with no related allowance recorded:
Residential real estate	$	4,204	$	4,478	$	-	$	4,371	$	36	$	4,929	$	36	$	4,264	$	106	$	5,252	$	109
Commercial real estate		5,464		5,567		-		5,731		50		6,508		48		6,085		149		6,646		148
Multifamily		-		-		-		-		-		-		-		-		-		-		-
Construction		-		-		-		-		-		-		-		-		-		-		-
Land and land development		314		270		-		270		1		-		-		254		1		-		-
Commercial business		198		203		-		206		1		248		2		211		4		299		4
Consumer		117		118		-		120		1		197		1		151		3		202		4
	$	10,297	$	10,636	$	-	$	10,698	$	89	$	11,882	$	87	$	10,965	$	263	$	12,399	$	265
Loans with an allowance recorded:
Residential real estate	$	385	$	401	$	189	$	406	$	-	$	72	$	-	$	444	$	-	$	30	$	-
Commercial real estate		-		-		-		-		-		-		-		-		-		-		-
Multifamily		-		-		-		-		-		-		-		-		-		-		-
Construction		-		-		-		-		-		-		-		-		-		-		-
Land and land development		-		-		-		-		-		-		-		-		-		-		-
Commercial business		-		-		-		-		-		-		-		-		-		-		-
Consumer		79		79		2		88		-		83		-		86		-		78		-
	$	464	$	480	$	191	$	494	$	-	$	155	$	-	$	530	$	-	$	108	$	-
Total:
Residential real estate	$	4,589	$	4,879	$	189	$	4,777	$	36	$	5,001	$	36	$	4,708	$	106	$	5,282	$	109
Commercial real estate		5,464		5,567		-		5,731		50		6,508		48		6,085		149		6,646		148
Multifamily		-		-		-		-		-		-		-		-		-		-		-
Construction		-		-		-		-		-		-		-		-		-		-		-
Land and land development		314		270		-		270		1		-		-		254		1		-		-
Commercial business		198		203		-		206		1		248		2		211		4		299		4
Consumer		196		197		2		208		1		280		1		237		3		280		4
	$	10,761	$	11,116	$	191	$	11,192	$	89	$	12,037	$	87	$	11,495	$	263	$	12,507	$	265

The Company did not recognize any interest income using the cash receipts method during the three and nine month periods ended June 30, 2017 and 2016.

The following table presents impaired loans individually evaluated for impairment as of September 30, 2016.

	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(In thousands)
Loans with no related allowance recorded:
Residential real estate	$	3,891	$	4,171	$	-
Commercial real estate		6,298		6,394		-
Multifamily		-		-		-
Construction		-		-		-
Land and land development		241		238		-
Commercial business		231		224		-
Consumer		175		175		-
	$	10,836	$	11,202	$	-
Loans with an allowance recorded:
Residential real estate	$	451	$	450	$	43
Commercial real estate		-		-		-
Multifamily		-		-		-
Construction		-		-		-
Land and land development		-		-		-
Commercial business		-		-		-
Consumer		74		74		5
	$	525	$	524	$	48
Total:
Residential real estate	$	4,342	$	4,621	$	43
Commercial real estate		6,298		6,394		-
Multifamily		-		-		-
Construction		-		-		-
Land and land development		241		238		-
Commercial business		231		224		-
Consumer		249		249		5
	$	11,361	$	11,726	$	48

Nonperforming loans consist of nonaccrual loans and loans over 90 days past due and still accruing interest. The following table presents the recorded investment in nonperforming loans at June 30, 2017:

			Loans 90+
			Days		Total
	Nonaccrual		Past Due		Nonperforming
	Loans		Still Accruing		Loans
	(In thousands)
Residential real estate	$	1,953	$	378	$	2,331
Commercial real estate		1,423		-		1,423
Multifamily		-		216		216
Construction		-		-		-
Land and land development		282		-		282
Commercial business		85		-		85
Consumer		97		-		97
Total	$	3,840	$	594	$	4,434

The following table presents the recorded investment in nonperforming loans at September 30, 2016: 

			Loans 90+
			Days		Total
	Nonaccrual		Past Due		Nonperforming
	Loans		Still Accruing		Loans
	(In thousands)
Residential real estate	$	1,752	$	22	$	1,774
Commercial real estate		1,606		-		1,606
Multifamily		-		-		-
Construction		-		-		-
Land and land development		241		-		241
Commercial business		136		-		136
Consumer		140		-		140
Total	$	3,875	$	22	$	3,897

The following table presents the aging of the recorded investment in past due loans at June 30, 2017: 

	30-59		60-89		90 +
	Days		Days		Days		Total				Total
	Past Due		Past Due		Past Due		Past Due		Current		Loans
	(In thousands)
Residential real estate	$	2,140	$	1,134	$	1,304	$	4,578	$	169,603	$	174,181
Commercial real estate		144		-		105		249		255,369		255,618
Multifamily		-		-		216		216		18,498		18,714
Construction		-		-		-		-		33,163		33,163
Land and land development		-		-		282		282		9,047		9,329
Commercial business		10		-		-		10		52,784		52,794
Consumer		44		-		-		44		30,750		30,794
Total	$	2,338	$	1,134	$	1,907	$	5,379	$	569,214	$	574,593

The following table presents the aging of the recorded investment in past due loans at September 30, 2016: 

	30-59		60-89		90 +
	Days		Days		Days		Total				Total
	Past Due		Past Due		Past Due		Past Due		Current		Loans
	(In thousands)
Residential real estate	$	2,019	$	860	$	1,070	$	3,949	$	175,078	$	179,027
Commercial real estate		367		-		94		461		217,255		217,716
Multifamily		-		-		-		-		18,452		18,452
Construction		-		-		-		-		30,306		30,306
Land and land development		-		-		241		241		10,923		11,164
Commercial business		40		-		42		82		42,065		42,147
Consumer		76		1		40		117		28,255		28,372
Total	$	2,502	$	861	$	1,487	$	4,850	$	522,334	$	527,184

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, public information, historical payment experience, credit documentation, and current economic conditions and trends, among other factors. The Company classifies loans based on credit risk at least quarterly. The Company uses the following regulatory 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 Company’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 Company 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.

Loss: Loans classified as loss are considered uncollectible and of such little value that their continuance on the Company’s books as an asset is not warranted.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans. As of June 30, 2017, and based on the most recent analysis performed, the recorded investment in loans by risk category was as follows:

	Residential		Commercial						Land and Land		Commercial
	Real Estate		Real Estate		Multifamily		Construction		Development		Business		Consumer		Total
	(In thousands)
Pass	$	167,238	$	249,223	$	16,180	$	32,624	$	9,015	$	52,700	$	30,632	$	557,612
Special Mention		421		3,133		2,534		95		-		-		11		6,194
Substandard		6,380		3,262		-		444		314		94		149		10,643
Doubtful		142		-		-		-		-		-		2		144
Loss		-		-		-		-		-		-		-		-
Total	$	174,181	$	255,618	$	18,714	$	33,163	$	9,329	$	52,794	$	30,794	$	574,593

As of September 30, 2016, the recorded investment in loans by risk category was as follows:

	Residential		Commercial						Land and Land		Commercial
	Real Estate		Real Estate		Multifamily		Construction		Development		Business		Consumer		Total
	(In thousands)
Pass	$	173,477	$	211,247	$	18,452	$	30,206	$	10,924	$	41,986	$	28,197	$	514,489
Special Mention		459		-		-		100		-		25		-		584
Substandard		5,002		6,469		-		-		240		136		160		12,007
Doubtful		89		-		-		-		-		-		15		104
Loss		-		-		-		-		-		-		-		-
Total	$	179,027	$	217,716	$	18,452	$	30,306	$	11,164	$	42,147	$	28,372	$	527,184

Troubled Debt Restructurings

Modification of a loan is considered to be a troubled debt restructuring (“TDR”) if the debtor is experiencing financial difficulties and the Company grants a concession to the debtor that it would not otherwise consider. By granting the concession, the Company expects to obtain more cash or other value from the debtor, or to increase the probability of receipt, than would be expected by not granting the concession. The concession may include, but is not limited to, reduction of the stated interest rate of the loan, reduction of accrued interest, extension of the maturity date or reduction of the face amount or maturity amount of the debt. A concession will be granted when, as a result of the restructuring, the Company does not expect to collect all amounts due, including interest at the original stated rate. A concession may also be granted if the debtor is not able to access funds elsewhere at a market rate for debt with similar risk characteristics as the restructured debt. The Company’s determination of whether a loan modification is a TDR considers the individual facts and circumstances surrounding each modification.

Loans modified in a TDR may be retained on accrual status if the borrower has maintained a period of performance in which the borrower’s lending relationship was not greater than ninety days delinquent at the time of restructuring and the Company determines the future collection of principal and interest is reasonably assured. Loans modified in a TDR that are placed on nonaccrual status at the time of restructuring will continue on nonaccrual status until the Company determines the future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate a period of performance according to the restructured terms of at least six consecutive months.

The following table summarizes the Company’s recorded investment in TDRs at June 30, 2017 and September 30, 2016. There was no specific reserve included in the allowance for loan losses related to TDRs at June 30, 2017 and September 30, 2016.

	Accruing		Nonaccrual		Total
	(In thousands)
June 30, 2017:
Residential real estate	$	2,636	$	77	$	2,713
Commercial real estate		4,041		1,318		5,359
Land and land development		32		-		32
Commercial business		113		85		198
Consumer		99		-		99
Total	$	6,921	$	1,480	$	8,401
September 30, 2016:
Residential real estate	$	2,590	$	-	$	2,590
Commercial real estate		4,692		1,512		6,204
Commercial business		95		120		215
Consumer		109		-		109
Total	$	7,486	$	1,632	$	9,118

The following table summarizes information in regard to TDRs that were restructured during the three and nine month periods ended June 30, 2017 and 2016:

			Pre-		Post-
			Modification		Modification
	Number of		Principal		Principal
	Loans		Balance		Balance
			(In thousands)
Three Months Ended June 30, 2017:
Residential real estate		1	$	21	$	21
Commercial business		1		103		103
Total		2	$	124	$	124
Nine Months Ended June 30, 2017:
Residential real estate		2	$	472	$	474
Land and land development		1		31		32
Commercial business		1		103		103
Total		4	$	606	$	609
Three Months Ended June 30, 2016:
Commercial real estate		1	$	94	$	131
Commercial business		1		97		97
Total		2	$	191	$	228
Nine Months Ended June 30, 2016:
Residential real estate		5	$	181	$	247
Commercial real estate		1		94		131
Commercial business		3		186		216
Total		9	$	461	$	594

For the TDRs listed above, the terms of modification included deferral of contractual principal and interest payments, reduction of the stated interest rate and extension of the maturity date where the debtor was unable to access funds elsewhere at a market interest rate for debt with similar risk characteristics.

At June 30, 2017 and September 30, 2016, the Company had not committed to lend any additional amounts to customers with outstanding loans classified as TDRs.

There were no principal charge-offs recorded as a result of TDRs during the three and nine month periods ended June 30, 2017 and 2016. There was no specific allowance for loan losses related to TDRs modified during the three and nine month periods ended June 30, 2017 and 2016. In the event that a TDR subsequently defaults, the Company evaluates the restructuring for possible impairment. As a result, the related allowance for loan losses may be increased or charge-offs may be taken to reduce the carrying amount of the loan.

During the three and nine month periods ended June 30, 2017 and 2016, the Company did not have any TDRs that were modified within the previous twelve months and for which there was a payment default.

Loan Servicing Rights

The Company originates loans to commercial customers under the SBA 7(a) and other programs. During the fiscal year ended September 30, 2016, the Company began selling the guaranteed portion of the SBA loans with servicing retained. Loan servicing rights on originated SBA loans that have been sold are initially recorded at fair value. Capitalized servicing rights are then amortized in proportion to and over the period of estimated net servicing income. Impairment of servicing rights is assessed using the present value of estimated future cash flows.

The aggregate fair value of loan servicing rights approximates its carrying value. A valuation model employed by an independent third party calculates the present value of future cash flows and is used to estimate fair value at the date of sale and on a quarterly basis for impairment analysis purposes. Management periodically compares the valuation model inputs and results to published industry data in order to validate the model results and assumptions. Key assumptions used to estimate the fair value of the loan servicing rights include the discount rate and prepayment speed assumptions. For purposes of impairment, risk characteristics such as interest rate, loan type, term and investor type are used to stratify the loan servicing rights. Impairment is recognized through a valuation allowance to the extent that fair value is less than the carrying amount. Changes in the valuation allowance are reported in net gain on sales of loans in the consolidated statements of income.

The unpaid principal balance of SBA loans serviced for others was $45.1 million, $13.6 million and $10.7 million at June 30, 2017, September 30, 2016 and June 30, 2016, respectively. Contractually specified late fees and ancillary fees earned on SBA loans were $1,000 and $45,000 for the three and nine month periods ended June 30, 2017, respectively. Contractually specified late fees and ancillary fees earned on SBA loans were $35,000 and $62,000 for the three and nine month periods ended June 30, 2016, respectively. Net servicing costs (contractually specified servicing fees offset by direct servicing expenses) related to SBA loans of $41,000 and $110,000 for the three and nine month periods ended June 30, 2017, respectively, and $34,000 and $69,000 for the three and nine month periods ended June 30, 2016, respectively, are included in other noninterest income in the consolidated statements of income.

An analysis of SBA loan servicing rights for the three and nine month periods ended June 30, 2017 and 2016 are as follows:

	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
	(In thousands)
Balance, beginning of period	$	783	$	156	$	310	$	-
Servicing rights resulting from transfers of loans		274		126		781		282
Amortization		(31)		-		(65)		-
Change in valuation allowance		-		-		-		-
Balance, end of period	$	1,026	$	282	$	1,026	$	282

Residential mortgage loans originated for sale in the secondary market continue to be sold with servicing released.