NOTE J – LOANS RECEIVABLE, NET AND RELATED ALLOWANCE FOR LOAN LOSSES

Loans receivable, net were comprised of the following:

	June 30,			September 30,
	2015			2014
	(Dollars in thousands)

One-to four-family residential	$	160,027		$	160,335
Commercial real estate		174,755			169,449
Construction		14,011			12,232
Home equity lines of credit		22,309			19,366
Commercial business		38,742			35,035
Other		10,350			10,396
Total loans receivable		420,194			406,813
Net deferred loan costs		185			217
Allowance for loan losses		(2,966	)		(2,835	)
Total loans receivable, net	$	417,413		$	404,195

The segments of the Bank'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: amortizing term loans, which are primarily first liens, and home equity lines of credit, which are generally second liens. The commercial real estate loan segment is further disaggregated into three classes: commercial real estate loans include loans secured by multifamily structures, owner-occupied commercial structures, and non-owner occupied nonresidential properties. The construction loan segment consists primarily of loans to 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 greater than 90 days 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 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 charged-off and those for which a specific allowance was not necessary at the dates presented:

					Impaired
					Loans with
	Impaired Loans with				No Specific
	Specific Allowance				Allowance		Total Impaired Loans
									Unpaid
	Recorded		Related		Recorded		Recorded		Principal
At June 30, 2015	Investment		Allowance		Investment		Investment		Balance
	(Dollars in thousands)

One-to four-family residential	$	—	$	—	$	3,208	$	3,208	$	3,286
Commercial real estate		—		—		5,608		5,608		6,776
Construction		—		—		1,682		1,682		2,458
Home equity lines of credit		—		—		844		844		1,144
Commercial business		1,600		147		156		1,756		1,756
Total impaired loans	$	1,600	$	147	$	11,498	$	13,098	$	15,420

					Impaired Loans
	Impaired Loans with				with No Specific
	Specific Allowance				Allowance		Total Impaired Loans
									Unpaid
	Recorded		Related		Recorded		Recorded		Principal
At September 30, 2014	Investment		Allowance		Investment		Investment		Balance
	(Dollars in thousands)

One-to four-family residential	$	1,733	$	42	$	6,990	$	8,723	$	10,830
Commercial real estate		—		—		5,046		5,046		6,205
Construction		442		332		1,836		2,278		3,160
Home equity lines of credit		—		—		829		829		987
Commercial business		11		11		331		342		1,133
Total impaired loans	$	2,186	$	385	$	15,032	$	17,218	$	22,315

The following table presents the average recorded investment in impaired loans for the periods indicated. There was no interest income recognized on impaired loans during the periods presented.

	Three Months		Nine Months
	Ended June 30, 2015		Ended June 30, 2015
	(Dollars in thousands)

One-to four-family residential	$	4,502	$	6,451
Commercial real estate		5,563		5,271
Construction		1,692		1,961
Home equity lines of credit		841		660
Commercial business		1,762		1,474
Average investment in impaired loans	$	14,358	$	15,817

	Three Months		Nine Months
	Ended June 30, 2014		Ended June 30, 2014
	(Dollars in thousands)

One-to four-family residential	$	13,585	$	13,921
Commercial real estate		5,271		5,415
Construction		2,574		2,885
Home equity lines of credit		1,144		1,085
Commercial business		738		413
Average investment in impaired loans	$	23,310	$	23,718

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 Bank 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 Bank'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 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 Bank's internal risk rating system at the dates presented:

			Special
	Pass		Mention		Substandard			Doubtful	Total

	(Dollars in thousands)
June 30, 2015
One-to four-family residential	$	156,439	$	15	$	3,573	$	—	$	160,027
Commercial real estate		169,481		222		3,946		1,106		174,755
Construction		8,222		—		5,789		—		14,011
Home equity lines of credit		20,141		—		2,168		—		22,309
Commercial business		37,020		—		1,722		—		38,742
Other		10,350		—		—		—		10,350
Total	$	401,653	$	237	$	17,198	$	1,106	$	420,194

			Special
	Pass		Mention		Substandard			Doubtful	Total

	(Dollars in thousands)
September 30, 2014
One-to four-family residential	$	153,878	$	—	$	6,457	$	—	$	160,335
Commercial real estate		158,501		6,179		3,663		1,106		169,449
Construction		6,110		—		6,122		—		12,232
Home equity lines of credit		17,209		—		2,157		—		19,366
Commercial business		34,725		—		310		—		35,035
Other		10,396		—		—		—		10,396
Total	$	380,819	$	6,179	$	18,709	$	1,106	$	406,813

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 at the dates 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, 2015
One-to four-family residential	$	157,708	$	—	$	—	$	2,319	$	2,319	$	2,319	$	160,027
Commercial real estate		172,718		—		—		2,037		2,037		2,037		174,755
Construction		12,319		—		—		1,692		1,692		1,692		14,011
Home equity lines of credit		21,629		—		—		680		680		680		22,309
Commercial business		37,052		—		—		1,690		1,690		1,690		38,742
Other		10,350		—		—		—		—		—		10,350
Total	$	411,776	$	—	$	—	$	8,418	$	8,418	$	8,418	$	420,194

				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)
September 30, 2014
One-to four-family residential	$	155,825	$	75	$	256	$	4,179	$	4,510	$	4,179	$	160,335
Commercial real estate		166,360		—		918		2,171		3,089		2,171		169,449
Construction		9,954		—		—		2,278		2,278		2,278		12,232
Home equity lines of credit		18,483		—		—		883		883		883		19,366
Commercial business		33,105		1,600		56		274		1,930		274		35,035
Other		10,396		—		—		—		—		—		10,396
Total	$	394,123	$	1,675	$	1,230	$	9,785	$	12,690	$	9,785	$	406,813

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 NPLs.

The Bank'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 a defined number of consecutive 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, 2015:

	One-to Four-									Home Equity
	Family			Commercial						Lines of			Commercial
	Residential			Real Estate			Construction			Credit			Business			Other			Unallocated			Total
	(Dollars in thousands)

Balance-September 30, 2014	$	402		$	826		$	784		$	62		$	643		$	9		$	109		$	2,835
Charge-offs		(12	)		(193	)		—			(147	)		—			(1	)		—			(353	)
Recoveries		—			—			37			—			—			—			—			37
Provision		84			199			(73	)		151			90			(2	)		(29	)		420
Balance-December 31, 2014	$	474		$	832		$	748		$	66		$	733		$	6		$	80		$	2,939
Charge-offs		(90	)		—			(342	)		—			(263	)		—			—			(695	)
Recoveries		400			—			—			—			—			—			—			400
Provision		(415	)		10			114			(11	)		434			—			38			170
Balance-March 31, 2015	$	369		$	842		$	520		$	55		$	904		$	6		$	118		$	2,814
Charge-offs		(34	)		(136	)		—			(13	)		(11	)		—			—			(194	)
Recoveries		—			—			—			—			—			—			—			—
Provision		46			229			(34	)		17			42			—			46			346
Balance-June 30, 2015	$	381		$	935		$	486		$	59		$	935		$	6		$	164		$	2,966

The following table summarizes the ALL by loan category and the related activity for the nine months ended June 30, 2014:

	One-to Four-									Home Equity
	Family			Commercial						Lines of			Commercial
	Residential			Real Estate			Construction			Credit			Business			Other			Unallocated			Total
	(Dollars in thousands)

Balance-September 30, 2013	$	844		$	852		$	604		$	125		$	452		$	9		$	127		$	3,013
Charge-offs		(108	)		—			(75	)		—			—			—			—			(183	)
Recoveries		9			—			—			—			2			—			—			11
Provision		254			(7	)		29			12			72			(9	)		8			359
Balance-December 31, 2013	$	999		$	845		$	558		$	137		$	526		$	—		$	135		$	3,200
Charge-offs		(83	)		—			(93	)		(5	)		—			—			—			(181	)
Recoveries		—			—			75			—			—			—			—			75
Provision		(347	)		(53	)		(38	)		(34	)		922			13			(82	)	$	381
Balance- March 31, 2014	$	569		$	792		$	502		$	98		$	1,448		$	13		$	53		$	3,475
Charge-offs		(186	)		—			—			(70	)		(804	)		—			—			(1,060	)
Recoveries		43			—			—			—			—			—			—			43
Provision		7			35			261			35			6			(4	)		2		$	342
Balance- June 30, 2014	$	433		$	827		$	763		$	63		$	650		$	9		$	55		$	2,800

The following table summarizes 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, 2015 and September 30, 2014:

	One-to Four-						Home Equity
	Family		Commercial				Lines of		Commercial
	Residential		Real Estate		Construction		Credit		Business		Other		Unallocated		Total
	(Dollars in thousands)
Allowance for Loan Losses:
Balance - June 30, 2015	$	381	$	935	$	486	$	59	$	935	$	6	$	164	$	2,966
Individually evaluated
for impairment		—		—		—		—		147		—		—		147
Collectively evaluated
for impairment		381		935		486		59		788		6		164		2,819

Loans receivable:
Balance - June 30, 2015		160,027		174,755		14,011		22,309		38,742		10,350				420,194
Individually evaluated
for impairment		3,208		5,608		1,682		844		1,756		—				13,098
Collectively evaluated
for impairment		156,819		169,147		12,329		21,465		36,986		10,350				407,096

	One-to Four-						Home Equity
	Family		Commercial				Lines of		Commercial
	Residential		Real Estate		Construction		Credit		Business		Other		Unallocated		Total
	(Dollars in thousands)
Allowance for Loan Losses:
Balance - September 30, 2014	$	402	$	826	$	784	$	62	$	643	$	9	$	109	$	2,835
Individually evaluated
for impairment		42		—		332		—		11		—		—		385
Collectively evaluated
for impairment		360		826		452		62		632		9		109		2,450

Loans receivable:
Balance - September 30, 2014	$	160,335	$	169,449	$	12,232	$	19,366	$	35,035	$	10,396			$	406,813
Individually evaluated
for impairment		8,723		5,046		2,278		829		342		—				17,218
Collectively evaluated
for impairment		151,612		164,403		9,954		18,537		34,693		10,396				389,595

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.

The Bank has adopted FASB ASU No. 2011-02 on the determination of whether a loan restructuring is considered to be a Troubled Debt Restructuring (“TDR”). 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.

There was one TDR during the three and nine months ended June 30, 2015. The following table summarizes the TDRs during the three and nine month period ended June 30, 2015 and 2014 that were classified as TDRs due to financial difficulty of the borrowers and/or lower than market interest rates.

	Three Months Ended June 30, 2015
	Number of Loans	Investment Before TDR Modification		Investment After TDR Modification
		(Dollars in thousands)
One-to four-family residential	1	$	524	$	563

Total	1	$	524	$	563

	Nine Months Ended June 30, 2015
	Number of Loans	Investment Before TDR Modification		Investment After TDR Modification
		(Dollars in thousands)
One-to four-family residential	1	$	524	$	563

Total	1	$	524	$	563

	Three Months Ended June 30, 2014
	Number of Loans	Investment Before TDR Modification		Investment After TDR Modification
		(Dollars in thousands)
One-to four-family residential	1	$	194	$	194

Total	1	$	194	$	194

	Nine Months Ended June 30, 2014
	Number of Loans	Investment Before TDR Modification		Investment After TDR Modification
		(Dollars in thousands)
One-to four-family residential	1	$	194	$	194

Total	1	$	194	$	194

A default on a troubled debt restructured 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. During the three and nine months ended June 30, 2015, no defaults occurred on troubled debt restructured loans that were modified as a TDR within the previous 12 months.