Loans Receivable and Related Allowance for Loan Losses

6 Months Ended

Mar. 31, 2020

Loans Receivable and Related Allowance for Loan Losses

Note 8 - Loans Receivable and Related Allowance for Loan Losses

Loans receivable in the Company’s portfolio consisted of the following at the dates indicated below:

	March 31, 2020			September 30, 2019
	(In thousands)
Residential mortgage	$	240,633		$	220,011
Construction and Development:
Residential and commercial		52,313			40,346
Land		3,579			3,420
Total Construction and Development		55,892			43,766
Commercial:
Commercial real estate		511,467			543,452
Farmland		7,537			7,563
Multi-family		59,978			62,884
Commercial and industrial		96,574			99,747
Other		7,604			4,450
Total Commercial		683,160			718,096
Consumer:
Home equity lines of credit		18,441			19,506
Second mortgages		12,393			13,737
Other		2,112			2,030
Total Consumer		32,946			35,273
Total loans		1,012,631			1,017,146
Deferred loan fees and costs, net		832			663
Allowance for loan losses		(10,556	)		(10,095	)
Total loans receivable, net	$	1,002,907		$	1,007,714

The following tables summarize the primary classes of the allowance for loan losses (“ALLL”), segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment, as of March 31, 2020 and September 30, 2019. Activity in the ALLL is presented for the three and six months ended March 31, 2020 and 2019 and the fiscal year ended September 30, 2019:

					Construction and Development						Commercial												Consumer
		Residential Mortgage			Residential and Commercial			Land			Commercial Real Estate			Farmland			Multi- Family		Commercial and Industrial		Other		Home Equity Lines of Credit			Second Mortgages			Other			Unallocated			Total
Allowance for loan losses:		(In thousands)
Three Months Ended March 31, 2020
Beginning Balance		$	1,282		$	585		$	18		$	6,194		$	38		$	196	$	464	$	33	$	101		$	235		$	23		$	793		$	9,962
Charge-offs			-			-			-			-			-			-		-		-		(62	)		(1	)		-			-			(63	)
Recoveries			23			-			-			1			-			-		1		-		-			6			1			-			32
Provisions			187			(231	)		6			1,087			4			248		51		2		88			(28	)		(3	)		(786	)		625
Ending balance		$	1,492		$	354		$	24		$	7,282		$	42		$	444	$	516	$	35	$	127		$	212		$	21		$	7		$	10,556


					Construction and Development						Commercial												Consumer
		Residential Mortgage			Residential and Commercial			Land			Commercial Real Estate			Farmland			Multi- Family		Commercial and Industrial		Other		Home Equity Lines of Credit			Second Mortgages			Other			Unallocated			Total
Allowance for loan losses:	(In thousands)
Three Months Ended March 31, 2019
Beginning Balance		$	1,164		$	439		$	45		$	5,344		$	64		$	274	$	432	$	30	$	79		$	391		$	44		$	941		$	9,247
Charge-offs			-			-			-			(153	)		-			-		-		-		-			(1	)		(36	)		-			(190	)
Recoveries			79			-			-			1			-			-		1		-		1			6			1			-			89
Provisions			(113	)		162			(12	)		575			(2	)		145		19		3		21			(37	)		15			94			870
Ending balance		$	1,130		$	601		$	33		$	5,767		$	62		$	419	$	452	$	33	$	101		$	359		$	24		$	1,035		$	10,016

			Construction and Development					Commercial													Consumer
	Residential Mortgage		Residential and Commercial			Land		Commercial Real Estate			Farmland			Multi- Family		Commercial and Industrial			Other		Home Equity Lines of Credit			Second Mortgages			Other			Unallocated			Total
Allowance for loan losses:	(In thousands)
Six Months Ended March 31, 2020
Beginning Balance	$	1,364	$	523		$	20	$	5,903		$	49		$	369	$	615		$	21	$	122		$	267		$	23		$	819		$	10,095
Charge-offs		-		-			-		(2,288	)		-			-		-			-		(62	)		(3	)		-			-			(2,353	)
Recoveries		23		-			-		2			-			-		1			-		-			12			1			-			39
Provisions		105		(169	)		4		3,665			(7	)		75		(100	)		14		67			(64	)		(3	)		(812	)		2,775
Ending balance	$	1,492	$	354		$	24	$	7,282		$	42		$	444	$	516		$	35	$	127		$	212		$	21		$	7		$	10,556
Ending balance: individually evaluated for impairment	$	3	$	-		$	-	$	110		$	-		$	-	$	-		$	-	$	-		$	90		$	-		$	-		$	203
Ending balance: collectively evaluated for impairment	$	1,489	$	354		$	24	$	7,172		$	42		$	444	$	516		$	35	$	127		$	122		$	21		$	7		$	10,353
Loans receivable:
Ending balance	$	240,633	$	52,313		$	3,579	$	511,467		$	7,537		$	59,978	$	96,574		$	7,604	$	18,441		$	12,393		$	2,112					$	1,012,631
Ending balance: individually evaluated for impairment	$	3,469	$	-		$	-	$	18,193		$	-		$	-	$	-		$	-	$	29		$	841		$	-					$	22,532
Ending balance: collectively evaluated for impairment	$	237,164	$	52,313		$	3,579	$	493,274		$	7,537		$	59,978	$	96,574		$	7,604	$	18,412		$	11,552		$	2,112					$	990,099

				Construction and Development					Commercial												Consumer
	Residential Mortgage			Residential and Commercial		Land			Commercial Real Estate			Farmland			Multi- Family		Commercial and Industrial		Other		Home Equity Lines of Credit		Second Mortgages			Other			Unallocated			Total
Allowance for loan losses:	(In thousands)
Six Months Ended March 31, 2019
Beginning Balance	$	1,062		$	393	$	49		$	5,031		$	66		$	232	$	443	$	24	$	82	$	326		$	51		$	1,262		$	9,021
Charge-offs		(17	)		-		-			(1,376	)		-			-		-		-		-		(1	)		(37	)		-			(1,431	)
Recoveries		79			-		-			4			-			-		3		-		1		14			2			-			103
Provisions		6			208		(16	)		2,108			(4	)		187		6		9		18		20			8			(227	)		2,323
Ending balance	$	1,130		$	601	$	33		$	5,767		$	62		$	419	$	452	$	33	$	101	$	359		$	24		$	1,035		$	10,016
Ending balance: individually evaluated for impairment	$	-		$	-	$	-		$	95		$	-		$	-	$	-	$	-	$	-	$	175		$	1		$	-		$	271
Ending balance: collectively evaluated for impairment	$	1,130		$	601	$	33		$	5,672		$	62		$	419	$	452	$	33	$	101	$	184		$	23		$	1,035		$	9,745
Loans receivable:
Ending balance	$	202,655		$	44,014	$	5,696		$	550,933		$	12,041		$	64,328	$	82,731	$	8,111	$	18,466	$	15,773		$	1,904					$	1,006,652
Ending balance: individually evaluated for impairment	$	3,592		$	-	$	67		$	10,155		$	-		$	-	$	-	$	-	$	32	$	685		$	1					$	14,532
Ending balance: collectively evaluated for impairment	$	199,063		$	44,014	$	5,629		$	540,778		$	12,041		$	64,328	$	82,731	$	8,111	$	18,434	$	15,088		$	1,903					$	992,120

					Construction and Development					Commercial													Consumer
		Residential Mortgage			Residential and Commercial		Land			Commercial Real Estate			Farmland			Multi- Family		Commercial and Industrial		Other			Home Equity Lines of Credit		Second Mortgages			Other			Unallocated			Total
Allowance for loan losses:	(In thousands)
Year Ended September 30, 2019
Beginning Balance		$	1,062		$	393	$	49		$	5,031		$	66		$	232	$	443	$	24		$	82	$	326		$	51		$	1,262		$	9,021
Charge-offs			(17	)		-		-			(1,418	)		-			-		-		-			-		(45	)		(37	)		-			(1,517	)
Recoveries			79			-		-			23			-			-		4		-			1		94			11			-			212
Provisions			240			130		(29	)		2,267			(17	)		137		168		(3	)		39		(108	)		(2	)		(443	)		2,379
Ending balance		$	1,364		$	523	$	20		$	5,903		$	49		$	369	$	615	$	21		$	122	$	267		$	23		$	819		$	10,095
Ending balance: individually evaluated for impairment		$	-		$	-	$	-		$	57		$	-		$	-	$	-	$	-		$	-	$	100		$	-		$	-		$	157
Ending balance: collectively evaluated for impairment		$	1,364		$	523	$	20		$	5,846		$	49		$	369	$	615	$	21		$	122	$	167		$	23		$	819		$	9,938
Loans receivable:
Ending balance		$	220,011		$	40,346	$	3,420		$	543,452		$	7,563		$	62,884	$	99,747	$	4,450		$	19,506	$	13,737		$	2,030					$	1,017,146
Ending balance: individually evaluated for impairment		$	3,526		$	-	$	-		$	9,707		$	-		$	-	$	-	$	-		$	30	$	728		$	-					$	13,991
Ending balance: collectively evaluated for impairment		$	216,485		$	40,346	$	3,420		$	533,745		$	7,563		$	62,884	$	99,747	$	4,450		$	19,476	$	13,009		$	2,030					$	1,003,155

In assessing the adequacy of the ALLL, it is recognized that the process, methodology and underlying assumptions require a significant degree of judgment. The estimation of loan losses is not precise; the range of factors considered is wide and is significantly dependent upon management’s judgment, including the outlook and potential changes in the economic environment. Any unallocated portion of the ALLL in conjunction with the quarterly review and changes to the qualitative factors to adjust for the risk due to current economic conditions reflects management’s estimate of probable inherent but undetected losses within the portfolio due to uncertainties in economic conditions, regulatory requirements, delays in obtaining information, including unfavorable information about a borrower’s financial condition, the difficulty in identifying triggering events that correlate perfectly to subsequent loss rates, and risk factors that have not yet manifested themselves in loss allocation factors.

The impact of COVID-19 on companies is evolving rapidly and its future effects are uncertain. Although several of the Company’s asset quality metrics have not significantly been adversely affected during the second fiscal quarter of 2020, management determined it is prudent to increase its loan loss reserves through the adjustment in its qualitative factors, such as changes in current business and economic conditions, nature and volume, concentration of credit and the value of the underlying collateral. All of these factors are likely to be affected by the COVID-19 pandemic.

As previously disclosed in the Company’s 10-Q/A filed on April 16, 2020, subsequent to the Company’s submission on February 10, 2020 of the original Form 10-Q for the quarter ended December 31, 2019, additional information was received concerning a certain $9.1 million collateral dependent commercial loan relationship (the “Loan”), which was classified as an accruing TDR as of December 31, 2019. In determining the ALLL and impairment on the Loan as of December 31, 2019, the Company followed guidance under ASC 310-10-35. When measuring impairment on an individual basis under ASC 310-10-35, the Company considered the fair value of the Loan’s collateral, given that, based on available information, the Loan was collateral dependent. Accordingly, the Company charged-off $2.3 million of the Loan, placed the Loan on non-accrual status, recorded an additional $2.2 million provision for loan losses for the three months ended December 31, 2019 and reversed approximately $24,000 of interest income (related to the December 31, 2019 principal and interest payment), crediting it to principal.

In addition, one commercial real estate loan in the amount of $10.6 million previously classified as management’s attention, moved to substandard impaired and remained accruing during the second fiscal quarter 2020. Subsequent to March 31, 2020 management has restructured this loans and reclassified it as performing TDR.

The increase in impaired loans with no specific allowance is primarily due to two commercial real estate loans noted above. The following table presents impaired loans in portfolio by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary, as of March 31, 2020 and September 30, 2019:

	Impaired Loans with Specific Allowance				Impaired Loans with No Specific Allowance		Total Impaired Loans
	Recorded Investment		Related Allowance		Recorded Investment		Recorded Investment		Unpaid Principal Balance
	(In thousands)
March 31, 2020
Residential mortgage	$	196	$	3	$	3,273	$	3,469	$	3,653
Commercial:
Commercial real estate		293		110		17,900		18,193		20,505
Consumer:
Home equity lines of credit		-		-		29		29		31
Second mortgages		105		90		736		841		904
Total impaired loans	$	594	$	203	$	21,938	$	22,532	$	25,093
September 30, 2019
Residential mortgage	$	-	$	-	$	3,526	$	3,526	$	3,713
Commercial:
Commercial real estate		9,176		57		531		9,707		9,707
Consumer:
Home equity lines of credit		-		-		30		30		32
Second mortgages		123		100		605		728		790
Total impaired loans	$	9,299	$	157	$	4,692	$	13,991	$	14,242

The following table presents the average recorded investment in impaired loans in portfolio and related interest income recognized for the three and six months ended March 31, 2020 and 2019:

	Three Months Ended March 31, 2020				Six Months Ended March 31, 2020
	Average Impaired Loans		Interest Income Recognized on Impaired Loans		Average Impaired Loans		Interest Income Recognized on Impaired Loans
	(In thousands)
Residential mortgage	$	3,481	$	25	$	3,507	$	47
Commercial:
Commercial real estate		11,222		5		10,153		20
Consumer:
Home equity lines of credit		29		-		29		-
Second mortgages		879		3		862		12
Total	$	15,611	$	33	$	14,551	$	79

	Three Months Ended March 31, 2019				Six Months Ended March 31, 2019
	Average Impaired Loans		Interest Income Recognized on Impaired Loans		Average Impaired Loans		Interest Income Recognized on Impaired Loans
	(In thousands)
Residential mortgage	$	3,605	$	21	$	3,584	$	48
Construction and Development:
Land		69		1		71		2
Commercial:
Commercial real estate		10,222		75		12,646		151
Consumer:
Home equity lines of credit		32		-		39		-
Second mortgages		663		3		644		5
Other		1		-		13		-
Total	$	14,592	$	100	$	16,997	$	206

The following table presents the classes of the loan portfolio summarized by loans considered to be rated as pass and the categories of special mention, substandard and doubtful within the Company’s internal risk rating system as of March 31, 2020 and September 30, 2019:

	Pass		Special Mention		Substandard		Doubtful		Total
	(In thousands)
March 31, 2020:
Residential mortgage	$	237,063	$	-	$	3,570	$	-	$	240,633
Construction and Development:
Residential and commercial		52,313		-		-		-		52,313
Land		3,579		-		-		-		3,579
Commercial:
Commercial real estate		468,266		25,008		18,193		-		511,467
Farmland		7,537		-		-		-		7,537
Multi-family		50,399		9,579		-		-		59,978
Commercial and industrial		96,450		-		124		-		96,574
Other		7,604		-		-		-		7,604
Consumer:
Home equity lines of credit		18,324		-		117		-		18,441
Second mortgages		11,287		82		1,024		-		12,393
Other		2,111		-		1		-		2,112
Total	$	954,933	$	34,669	$	23,029	$	-	$	1,012,631

	Pass		Special Mention		Substandard		Doubtful		Total
	(In thousands)
September 30, 2019:
Residential mortgage	$	216,376	$	-	$	3,635	$	-	$	220,011
Construction and Development:
Residential and commercial		40,346		-		-		-		40,346
Land		3,420		-		-		-		3,420
Commercial:
Commercial real estate		518,848		14,601		10,003		-		543,452
Farmland		7,563		-		-		-		7,563
Multi-family		62,483		401		-		-		62,884
Commercial and industrial		99,613		-		134		-		99,747
Other		4,450		-		-		-		4,450
Consumer:
Home equity lines of credit		19,385		-		121		-		19,506
Second mortgages		12,727		85		925		-		13,737
Other		2,030		-		-		-		2,030
Total	$	987,241	$	15,087	$	14,818	$	-	$	1,017,146

The following table presents loans that are no longer accruing interest by portfolio class:

	March 31, 2020		September 30, 2019
	(In thousands)
Non-accrual loans:
Residential mortgage	$	1,687	$	1,532
Commercial:
Commercial real estate		6,743		-
Consumer:
Home equity lines of credit		29		30
Second mortgages		196		259
Total non-accrual loans	$	8,655	$	1,821

As noted above, the Company charged-off $2.3 million of a $9.1 million commercial real estate loan, and placed the loan on non-accrual status. Under the Bank’s loan policy, once a loan has been placed on non-accrual status, we do not resume interest accruals until the loan has been brought current and has maintained a current payment status for not less than six consecutive months. Interest income that would have been recognized on non-accrual loans had they been current in accordance with their original terms was approximately $3,000 and $4,000 for the three and six months ended March 31, 2020, respectively, and approximately $10,000 and $20,000 for the three and six months ended March 31, 2019, respectively. At March 31, 2020 and September 30, 2019, there were approximately $168,000 and $502,000, respectively, of loans past due 90 days or more and still accruing interest.

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by whether a loan payment is “current;” that is, it is received from a borrower by the scheduled due date, or the length of time a scheduled payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories as of March 31, 2020 and September 30, 2019:

	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days and More Past Due		Total Past Due		Total Loans Receivable		Loans Receivable > 90 Days and Accruing
	(In thousands)
March 31, 2020:
Residential mortgage	$	235,514	$	3,136	$	1,399	$	584		5,119	$	240,633	$	-
Construction and Development:
Residential and commercial		52,313		-		-		-		-		52,313		-
Land		3,579		-		-		-		-		3,579		-
Commercial:
Commercial real estate		510,825		475		-		167		642		511,467		167
Farmland		7,537		-		-		-		-		7,537		-
Multi-family		59,978		-		-		-		-		59,978		-
Commercial and industrial		96,574		-		-		-		-		96,574		-
Other		7,604		-		-		-		-		7,604		-
Consumer:
Home equity lines of credit		18,412		-		-		29		29		18,441		-
Second mortgages		11,739		334		196		124		654		12,393		-
Other		2,099		11		1		1		13		2,112		1
Total	$	1,006,174	$	3,956	$	1,596	$	905	$	6,457	$	1,012,631	$	168

	Current		30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Total Loans Receivable		Loans Receivable > 90 Days and Accruing
	(In thousands)
September 30, 2019:
Residential mortgage	$	219,062	$	62	$	381	$	506	$	949	$	220,011	$	207
Construction and Development:
Residential and commercial		40,346		-		-		-		-		40,346		-
Land		3,420		-		-		-		-		3,420		-
Commercial:
Commercial real estate		543,157		-		-		295		295		543,452		295
Farmland		7,563		-		-		-		-		7,563		-
Multi-family		62,884		-		-		-		-		62,884		-
Commercial and industrial		99,247		500		-		-		500		99,747		-
Other		4,450		-		-		-		-		4,450		-
Consumer:
Home equity lines of credit		19,506		-		-		-		-		19,506		-
Second mortgages		13,102		379		112		144		635		13,737		-
Other		2,030		-		-		-		-		2,030		-
Total	$	1,014,767	$	941	$	493	$	945	$	2,379	$	1,017,146	$	502

Restructured loans deemed to be TDRs are typically the result of an extension of the loan maturity date or a reduction of the interest rate of the loan to a rate that is below market, a combination of rate and maturity extension, or by other means, including covenant modifications, forbearance and other concessions. However, the Bank generally restructures loans by modifying the payment structure to require payments of interest only for a specified period or by reducing the actual interest rate. Once a loan becomes a TDR, it will continue to be reported as a TDR during the term of the restructure.

The Company had twenty-five and twenty-four loans classified as TDRs at March 31, 2020 and September 30, 2019, respectively, with an aggregate outstanding balance of $11.2 million and $13.3 million, respectively. At March 31, 2020, these loans were also classified as impaired. Nineteen of the TDR loans continue to perform under the restructured terms through March 31, 2020 and we continued to accrue interest on such loans through such date.

Loans that have been classified as TDRs have modified payment terms and in some cases interest rate from the original agreements and allowed the borrowers, who were experiencing financial difficulty, to make interest only payments for a period of time in order to relieve some of their overall cash flow burden. Some loan modifications classified as TDRs may not ultimately result in the full collection of principal and interest, as modified, and could result in potential incremental losses. These potential incremental losses have been factored into our overall estimate of the ALLL. The level of any defaults will likely be affected by future economic conditions. A default on a TDR loan for purposes of this disclosure occurs when the borrower is 90 days past due or a foreclosure or repossession of the applicable collateral has occurred.

TDRs may arise in cases which, due to financial difficulties experienced by the borrower, the Company obtains through physical possession one or more collateral assets in satisfaction of all or part of an existing credit. Once possession is obtained, the Company reclassifies the appropriate portion of the remaining balance of the credit from loans to other real estate owned (“OREO”), which is included within other assets in the Consolidated Statements of Financial Condition. For any residential real estate property collateralizing a consumer mortgage loan, the Company is considered to possess the related collateral only if legal title is obtained upon completion of foreclosure, or the borrower conveys all interest in the residential real estate property to the Company through completion of a deed in lieu of foreclosure or similar legal agreement. Excluding OREO, the Company had $172,000 and $111,000 of residential real estate properties in the process of foreclosure at March 31, 2020 and September 30, 2019, respectively. The following table presents total TDRs as of March 31, 2020 and September 30, 2019:

	Total Troubled Debt Restructurings				Troubled Debt Restructured Loans That Have Defaulted on Modified Terms Within The Past 12 Months
	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
	(Dollars in thousands)
March 31, 2020:
Residential mortgage		17	$	3,500		5	$	1,246
Commercial:
Commercial real estate		4		7,559		1		6,743
Consumer:
Second mortgages		4		173		-		-
Total		25	$	11,232	$	6	$	7,989
September 30, 2019:
Residential mortgage		17	$	3,372		4	$	1,090
Commercial:
Commercial real estate		3		9,707		-		-
Consumer:
Second mortgages		4		181		-		-
Total		24	$	13,260		4	$	1,090

The following table reports the performing status of all TDR loans. The performing status is determined by a loan’s compliance with the modified terms:

	March 31, 2020				September 30, 2019
	Performing		Non-Performing		Performing		Non-Performing
	(In thousands)
Residential mortgage	$	2,254	$	1,246	$	2,282	$	1,090
Commercial:
Commercial real estate		816		6,743		9,707		-
Consumer:
Second mortgages		173		-		181		-
Total	$	3,243	$	7,989	$	12,170	$	1,090

There were no new TDRs for the three months ended March 31, 2020 and 2019. The following table shows the new TDRs for the six months ended March 31, 2020 and 2019:

	For the Six Months Ended March 31,
	2020						2019
	Number of Contracts		Pre- Modifications Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts		Pre- Modifications Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
	(Dollars in thousands)
Troubled Debt Restructurings:
Residential mortgage		1	$	207	$	207		4	$	732	$	719
Commercial:
Commercial real estate		1	$	295	$	293		-	$	-	$	-
Consumer:
Second mortgages		-	$	-	$	-		1	$	80	$	78
Total troubled debt restructurings		2	$	502	$	500		5	$	812	$	797