Loans and Allowance for Loan Losses

3 Months Ended

Dec. 31, 2018

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

Loans and Allowance for Loan Losses

4. Loans and Allowance for Loan Losses

Loans at December 31, 2018 and September 30, 2018 consisted of the following:

	December 31, 2018			September 30, 2018
	(In thousands)
Real estate mortgage:
1-4 family residential	$	196,810		$	195,274
Commercial		355,951			343,498
Multifamily residential		27,731			28,814
Residential construction		23,825			19,527
Commercial construction		10,383			8,669
Land and land development		10,960			10,504
Commercial business		75,834			67,786
Consumer:
Home equity		25,133			24,635
Auto		12,007			11,720
Other consumer		4,802			2,918
Total Loans		743,436			713,345
Deferred loan origination fees and costs, net		245			249
Allowance for loan losses		(9,620	)		(9,323	)
Loans, net	$	734,061		$	704,271

During the three-month period ended December 31, 2018, 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, 2018.

At December 31, 2018 and September 30, 2018, the recorded investment in consumer mortgage loans collateralized by residential real estate properties in the process of foreclosure was $1.2 million and $1.3 million, respectively.

The following table provides the components of the recorded investment in loans as of December 31, 2018:

	Residential Real Estate			Commercial Real Estate		Multifamily			Construction			Land & Land Development			Commercial Business		Consumer			Total
	(In thousands)
Recorded Investment in Loans:
Principal loan balance	$	196,810		$	355,951	$	27,731		$	34,208		$	10,960		$	75,834	$	41,942		$	743,436
Accrued interest receivable		552			1,546		65			127			22			412		70			2,794
Net deferred loan origination fees and costs		(73	)		114		(29	)		(22	)		(4	)		288		(29	)		245
Recorded investment in loans	$	197,289		$	357,611	$	27,767		$	34,313		$	10,978		$	76,534	$	41,983		$	746,475
Recorded Investment in Loans as Evaluated for Impairment:
Individually evaluated for impairment	$	4,924		$	7,848	$	-		$	-		$	-		$	294	$	340		$	13,406
Collectively evaluated for impairment		192,365			349,763		27,767			34,313			10,978			76,240		41,643			733,069
Ending balance	$	197,289		$	357,611	$	27,767		$	34,313		$	10,978		$	76,534	$	41,983		$	746,475

The following table provides the components of the recorded investment in loans as of September 30, 2018:

	Residential Real Estate			Commercial Real Estate		Multifamily			Construction			Land & Land Development			Commercial Business		Consumer			Total
	(In thousands)
Recorded Investment in Loans:
Principal loan balance	$	195,274		$	343,498	$	28,814		$	28,196		$	10,504		$	67,786	$	39,273		$	713,345
Accrued interest receivable		589			1,403		81			156			24			365		69			2,687
Net deferred loan origination fees and costs		(62	)		104		(30	)		(5	)		(4	)		275		(29	)		249
Recorded investment in loans	$	195,801		$	345,005	$	28,865		$	28,347		$	10,524		$	68,426	$	39,313		$	716,281
Recorded Investment in Loans as Evaluated for Impairment:
Individually evaluated for impairment	$	5,107		$	7,719	$	-		$	-		$	27		$	231	$	243		$	13,327
Collectively evaluated for impairment		190,694			337,286		28,865			28,347			10,497			68,195		39,070			702,954
Ending balance	$	195,801		$	345,005	$	28,865		$	28,347		$	10,524		$	68,426	$	39,313		$	716,281

An analysis of the allowance for loan losses as of December 31, 2018 is as follows:

	Residential Real Estate		Commercial Real Estate		Multifamily		Construction		Land & Land Development		Commercial Business		Consumer		Total
	(In thousands)
Ending Allowance Balance Attributable to Loans:
Individually evaluated for impairment	$	2	$	654	$	-	$	-	$	-	$	-	$	39	$	695
Collectively evaluated for impairment		247		6,062		158		693		219		1,288		258		8,925
Ending balance	$	249	$	6,716	$	158	$	693	$	219	$	1,288	$	297	$	9,620

An analysis of the allowance for loan losses as of September 30, 2018 is as follows:

	Residential Real Estate		Commercial Real Estate		Multifamily		Construction		Land & Land Development		Commercial Business		Consumer		Total
	(In thousands)
Ending Allowance Balance Attributable to Loans:
Individually evaluated for impairment	$	7	$	492	$	-	$	-	$	-	$	-	$	12	$	511
Collectively evaluated for impairment		267		6,333		195		580		210		1,041		186		8,812
Ending balance	$	274	$	6,825	$	195	$	580	$	210	$	1,041	$	198	$	9,323

An analysis of the changes in the allowance for loan losses for the three months ended December 31, 2018 is as follows:

	Residential Real Estate			Commercial Real Estate			Multifamily			Construction		Land & Land Development		Commercial Business		Consumer			Total
	(In thousands)
Changes in Allowance for Loan Losses:
Beginning balance	$	274		$	6,825		$	195		$	580	$	210	$	1,041	$	198		$	9,323
Provisions		(30	)		(109	)		(37	)		113		9		247		122			315
Charge-offs		(1	)		-			-			-		-		-		(42	)		(43	)
Recoveries		6			-			-			-		-		-		19			25
Ending balance	$	249		$	6,716		$	158		$	693	$	219	$	1,288	$	297		$	9,620

An analysis of the changes in the allowance for loan losses for the three months ended December 31, 2017 is as follows:

	Residential Real Estate			Commercial Real Estate		Multifamily			Construction		Land & Land Development			Commercial Business			Consumer			Total
	(In thousands)
Changes in Allowance for Loan Losses:
Beginning balance	$	252		$	5,739	$	106		$	810	$	223		$	839		$	123		$	8,092
Provisions		(18	)		367		(4	)		93		(4	)		(23	)		51			462
Charge-offs		(13	)		-		-			-		-			-			(52	)		(65	)
Recoveries		12			-		-			-		-			-			10			22
Ending balance	$	233		$	6,106	$	102		$	903	$	219		$	816		$	132		$	8,511

The following table presents impaired loans individually evaluated for impairment as of December 31, 2018 and for the three months ended December 31, 2018 and 2017.

	At December 31, 2018						Three Months Ended  December 31,
							2018		2018		2017		2017
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
Loans with no related allowance recorded:
Residential real estate	$	4,654	$	5,135	$	-	$	4,744	$	34	$	4,751	$	36
Commercial real estate		6,525		6,714		-		6,547		82		6,147		64
Multifamily		-		-		-		-		-		-		-
Construction		-		-		-		-		-		-		-
Land and land development		-		-		-		14		-		30		-
Commercial business		294		305		-		263		2		274		2
Consumer		117		126		-		120		1		100		1
	$	11,590	$	12,280	$	-	$	11,688	$	119	$	11,302	$	103
Loans with an allowance recorded:
Residential real estate	$	270	$	281	$	2	$	272	$	-	$	235	$	-
Commercial real estate		1,323		1,376		654		1,237		-		-		-
Multifamily		-		-		-		-		-		-		-
Construction		-		-		-		-		-		-		-
Land and land development		-		-		-		-		-		-		-
Commercial business		-		-		-		-		-		-		-
Consumer		223		223		39		172		-		101		-
	$	1,816	$	1,880	$	695	$	1,681	$	-	$	336	$	-
Total:
Residential real estate	$	4,924	$	5,416	$	2	$	5,016	$	34	$	4,986	$	36
Commercial real estate		7,848		8,090		654		7,784		82		6,147		64
Multifamily		-		-		-		-		-		-		-
Construction		-		-		-		-		-		-		-
Land and land development		-		-		-		14		-		30		-
Commercial business		294		305		-		263		2		274		2
Consumer		340		349		39		292		1		201		1
	$	13,406	$	14,160	$	695	$	13,369	$	119	$	11,638	$	103

The Company did not recognize any interest income on impaired loans using the cash receipts method during the three-month periods ended December 31, 2018 and 2017.

The following table presents impaired loans individually evaluated for impairment as of September 30, 2018.

	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(In thousands)
Loans with no related allowance recorded:
Residential real estate	$	4,833	$	5,285	$	-
Commercial real estate		6,568		6,715		-
Multifamily		-		-		-
Construction		-		-		-
Land and land development		27		28		-
Commercial business		231		241		-
Consumer		122		123		-
	$	11,781	$	12,392	$	-
Loans with an allowance recorded:
Residential real estate	$	274	$	282	$	7
Commercial real estate		1,151		1,293		492
Multifamily		-		-		-
Construction		-		-		-
Land and land development		-		-		-
Commercial business		-		-		-
Consumer		121		128		12
	$	1,546	$	1,703	$	511
Total:
Residential real estate	$	5,107	$	5,567	$	7
Commercial real estate		7,719		8,008		492
Multifamily		-		-		-
Construction		-		-		-
Land and land development		27		28		-
Commercial business		231		241		-
Consumer		243		251		12
	$	13,327	$	14,095	$	511

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 December 31, 2018:

	Nonaccrual Loans		Loans 90+ Days Past Due Still Accruing		Total Nonperforming Loans
	(In thousands)
Residential real estate	$	2,684	$	57	$	2,741
Commercial real estate		1,528		-		1,528
Multifamily		-		-		-
Construction		-		-		-
Land and land development		-		-		-
Commercial business		79		-		79
Consumer		260		-		260
Total	$	4,551	$	57	$	4,608

The following table presents the recorded investment in nonperforming loans at September 30, 2018:

	Nonaccrual Loans		Loans 90+ Days Past Due Still Accruing		Total Nonperforming Loans
	(In thousands)
Residential real estate	$	2,711	$	91	$	2,802
Commercial real estate		1,284		-		1,284
Multifamily		-		-		-
Construction		-		-		-
Land and land development		27		-		27
Commercial business		-		-		-
Consumer		160		-		160
Total	$	4,182	$	91	$	4,273

The following table presents the aging of the recorded investment in past due loans at December 31, 2018:

	30-59 Days Past Due		60-89 Days Past Due		90 + Days Past Due		Total Past Due		Current		Total Loans
	(In thousands)
Residential real estate	$	1,903	$	815	$	998	$	3,716	$	193,573	$	197,289
Commercial real estate		1,306		-		1,239		2,545		355,066		357,611
Multifamily		80		-		-		80		27,687		27,767
Construction		-		-		-		-		34,313		34,313
Land and land development		-		-		-		-		10,978		10,978
Commercial business		43		-		79		122		76,412		76,534
Consumer		159		12		3		174		41,809		41,983
Total	$	3,491	$	827	$	2,319	$	6,637	$	739,838	$	746,475

The following table presents the aging of the recorded investment in past due loans at September 30, 2018:

	30-59 Days Past Due		60-89 Days Past Due		90 + Days Past Due		Total Past Due		Current		Total Loans
	(In thousands)
Residential real estate	$	2,088	$	649	$	1,202	$	3,939	$	191,862	$	195,801
Commercial real estate		696		-		210		906		344,099		345,005
Multifamily		-		-		-		-		28,865		28,865
Construction		-		-		-		-		28,347		28,347
Land and land development		-		27		-		27		10,497		10,524
Commercial business		7		-		-		7		68,419		68,426
Consumer		43		37		32		112		39,201		39,313
Total	$	2,834	$	713	$	1,444	$	4,991	$	711,290	$	716,281

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 December 31, 2018, and based on the most recent analysis performed, the recorded investment in loans by risk category was as follows:

	Residential Real Estate		Commercial Real Estate		Multifamily		Construction		Land and Land Development		Commercial Business		Consumer		Total
	(In thousands)
Pass	$	192,749	$	344,399	$	27,275	$	34,313	$	10,895	$	74,208	$	41,932	$	725,771
Special Mention		-		5,096		-		-		83		-		-		5,179
Substandard		4,470		8,116		492		-		-		2,326		51		15,455
Doubtful		70		-		-		-		-		-		-		70
Loss		-		-		-		-		-		-		-		-
Total	$	197,289	$	357,611	$	27,767	$	34,313	$	10,978	$	76,534	$	41,983	$	746,475

As of September 30, 2018, the recorded investment in loans by risk category was as follows:

	Residential Real Estate		Commercial Real Estate		Multifamily		Construction		Land and Land Development		Commercial Business		Consumer		Total
	(In thousands)
Pass	$	190,647	$	338,256	$	28,365	$	28,347	$	10,207	$	66,162	$	39,246	$	701,230
Special Mention		19		-		-		-		290		-		-		309
Substandard		5,061		6,749		500		-		27		2,264		67		14,668
Doubtful		74		-		-		-		-		-		-		74
Loss		-		-		-		-		-		-		-		-
Total	$	195,801	$	345,005	$	28,865	$	28,347	$	10,524	$	68,426	$	39,313	$	716,281

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 December 31, 2018 and September 30, 2018. There was no specific reserve included in the allowance for loan losses related to TDRs at December 31, 2018. There was $5,000 of specific reserve included in the allowance for loan losses related to TDRs at September 30, 2018.

	Accruing		Nonaccrual		Total
	(In thousands)
December 31, 2018:
Residential real estate	$	2,240	$	136	$	2,376
Commercial real estate		6,320		68		6,388
Commercial business		215		-		215
Consumer		80		-		80
Total	$	8,855	$	204	$	9,059
September 30, 2018:
Residential real estate	$	2,396	$	21	$	2,417
Commercial real estate		6,435		65		6,500
Commercial business		231		-		231
Consumer		83		-		83
Total	$	9,145	$	86	$	9,231

There were no TDRs that were restructured during the three-month period ended December 31, 2018.

The following table summarizes information in regard to TDRs that were restructured during the three-month period ended December 31, 2017:

	Number of Loans		Pre- Modification Principal Balance		Post- Modification Principal Balance
	(Dollars in thousands)
Three Months Ended December 31, 2017:
Commercial real estate		1	$	1,674	$	1,674
Commercial business		1		170		170
Consumer		1		3		3
Total		3	$	1,847	$	1,847

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 December 31, 2018 and September 30, 2018, the Company had committed to lend $1,000 to customers with outstanding loans classified as TDRs.

There were no principal charge-offs recorded as a result of TDRs during the three-month periods ended December 31, 2018 and 2017. There was no specific allowance for loan losses related to TDRs modified during the three-month periods ended December 31, 2018 and 2017. 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-month period ended December 30, 2018, the Company had one TDR with an outstanding balance of $114,000 that was modified within the previous twelve months and for which there was a payment default. During the three month period ended December 30, 2017, 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, and sells the guaranteed portion of the SBA loans with servicing rights 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 $131.8 million, $120.6 million and $77.7 million at December 31, 2018, September 30, 2018 and December 31, 2017, respectively. Contractually specified late fees and ancillary fees earned on SBA loans were $7,000 and $2,000 for the three-month periods ended December 31, 2018 and 2017, respectively. Net servicing income (contractually specified servicing fees offset by direct servicing expenses) related to SBA loans were $272,000 and $150,000 for the three-month periods ended December 31, 2018 and 2017, respectively. Net servicing income and costs are included in other noninterest income in the consolidated statements of income.

An analysis of SBA loan servicing rights for the three month periods ended December 31, 2018 and 2017 is as follows:

(In thousands)	Three Months Ended December 31, 2018
		2018			2017
Balance, beginning of period	$	2,405		$	1,389
Servicing rights resulting from transfers of loans		251			429
Amortization		(102	)		(72	)
Change in valuation allowance		-			-
Balance, end of period	$	2,554		$	1,746

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

The valuation allowance related to SBA loan servicing rights was $177,000 at December 31, 2018 and September 30, 2018. There was no valuation allowance related to SBA loan servicing rights at December 31, 2017.