Note 5 - Loans and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

Note

5:

Loans and Allowance for Loan Losses

Categories of loans at

September 30, 2019

and

December 31, 2018

include:

	September 30,			December 31,
	2019			2018
Real estate - residential mortgage:
One to four family units	$	121,690,131		$	132,410,810
Multi-family		93,628,789			90,548,265
Real estate - construction		88,175,253			88,553,995
Real estate - commercial		308,270,953			322,921,323
Commercial loans		108,738,413			119,369,484
Consumer and other loans		31,721,831			33,091,017
Total loans		752,225,370			786,894,894
Less:
Allowance for loan losses		(7,557,311	)		(7,995,569	)
Deferred loan fees/costs, net		(645,203	)		(600,719	)
Net loans	$	744,022,856		$	778,298,606

Classes of loans by aging at

September 30, 2019

and

December 31, 2018

were as follows:

As of September 30, 2019
	30-59 Days Past Due		60-89 Days Past Due		90 Days and more Past Due		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days and Accruing
	(In Thousands)
Real estate - residential mortgage:
One to four family units	$	290	$	246	$	157	$	693	$	120,997	$	121,690	$	-
Multi-family		5,930		-		-		5,930		87,699		93,629		-
Real estate - construction		581		-		-		581		87,594		88,175		-
Real estate - commercial		853		-		-		853		307,418		308,271		-
Commercial loans		186		5		-		191		108,547		108,738		-
Consumer and other loans		-		18		-		18		31,704		31,722		-
Total	$	7,840	$	269	$	157	$	8,266	$	743,959	$	752,225	$	-

As of December 31, 2018
	30-59 Days Past Due		60-89 Days Past Due		90 Days and more Past Due		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days and Accruing
	(In Thousands)
Real estate - residential mortgage:
One to four family units	$	177	$	329	$	2,164	$	2,670	$	129,741	$	132,411	$	-
Multi-family		5,952		-		-		5,952		84,596		90,548		-
Real estate - construction		-		-		-		-		88,554		88,554		-
Real estate - commercial		1,000		81		-		1,081		321,840		322,921		-
Commercial loans		228		433		71		732		118,638		119,370		-
Consumer and other loans		107		12		-		119		32,972		33,091		-
Total	$	7,464	$	855	$	2,235	$	10,554	$	776,341	$	786,895	$	-

Nonaccruing loans are summarized as follows:

	September 30,		December 31,
	2019		2018
Real estate - residential mortgage:
One to four family units	$	2,166,284	$	4,136,342
Multi-family		-		-
Real estate - construction		3,815,409		4,088,409
Real estate - commercial		2,956,289		3,592,476
Commercial loans		768,846		1,262,910
Consumer and other loans		73,189		1,542
Total	$	9,780,017	$	13,081,679

The following tables present the activity in the allowance for loan losses based on portfolio segment for the

three

and

nine

months ended

September 30, 2019

and

2018:

Three months ended September 30, 2019	Construction			Commercial Real Estate			One to four family		Multi-family		Commercial			Consumer and Other			Unallocated		Total
	(In Thousands)
Allowance for loan losses:
Balance, beginning of period	$	2,169		$	2,188		$	948	$	673	$	1,236		$	397		$	60	$	7,671
Provision charged to expense		(245	)		242			42		50		(125	)		99			37	$	100
Losses charged off		-			(122	)		-		-		(106	)		(85	)		-	$	(313	)
Recoveries		28			1			1		-		55			14			-	$	99
Balance, end of period	$	1,952		$	2,309		$	991	$	723	$	1,060		$	425		$	97	$	7,557

Nine months ended September 30, 2019	Construction			Commercial Real Estate			One to four family			Multi-family		Commercial			Consumer and Other			Unallocated			Total
	(In Thousands)
Allowance for loan losses:
Balance, beginning of period	$	2,306		$	2,093		$	1,297		$	641	$	1,160		$	373		$	126		$	7,996
Provision charged to expense		(523	)		317			(41	)		82		175			219			(29	)	$	200
Losses charged off		-			(122	)		(271	)		-		(381	)		(199	)		-		$	(973	)
Recoveries		169			21			6			-		106			32			-		$	334
Balance, end of period	$	1,952		$	2,309		$	991		$	723	$	1,060		$	425		$	97		$	7,557

Three months ended September 30, 2018	Construction			Commercial Real Estate		One to four family			Multi-family		Commercial			Consumer and Other			Unallocated		Total
	(In Thousands)
Allowance for loan losses:
Balance, beginning of period	$	2,484		$	1,787	$	1,237		$	553	$	1,085		$	367		$	60	$	7,573
Provision charged to expense		(219	)		158		96			97		(44	)		65			47	$	200
Losses charged off		-			-		(3	)		-		(14	)		(74	)		-	$	(91	)
Recoveries		36			-		1			-		4			9			-	$	50
Balance, end of period	$	2,301		$	1,945	$	1,331		$	650	$	1,031		$	367		$	107	$	7,732

Nine months ended September 30, 2018	Construction			Commercial Real Estate		One to four family			Multi-family		Commercial			Consumer and Other			Unallocated			Total
	(In Thousands)
Allowance for loan losses:
Balance, beginning of period	$	2,244		$	1,789	$	946		$	464	$	1,031		$	454		$	179		$	7,107
Provision charged to expense		(13	)		155		386			186		98			185			(72	)	$	925
Losses charged off		-			-		(3	)		-		(110	)		(301	)		-		$	(414	)
Recoveries		70			1		2			-		12			29			-		$	114
Balance, end of period	$	2,301		$	1,945	$	1,331		$	650	$	1,031		$	367		$	107		$	7,732

The following tables present the recorded investment in loans based on portfolio segment and impairment method as of

September 30, 2019

and

December 31, 2018:

September 30, 2019	Construction		Commercial Real Estate		One to four family		Multi-family		Commercial		Consumer and Other		Unallocated		Total
	(In Thousands)
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	554	$	24	$	202	$	-	$	214	$	20	$	-	$	1,014
Ending balance: collectively evaluated for impairment	$	1,398	$	2,285	$	789	$	723	$	846	$	402	$	97	$	6,540
Ending balance: loans acquired with deteriorated credit quality	$	-	$	-	$	-	$	-	$	-	$	3	$	-	$	3
Loans:
Ending balance: individually evaluated for impairment	$	3,816	$	412	$	2,166	$	5,930	$	599	$	185	$	-	$	13,108
Ending balance: collectively evaluated for impairment	$	84,359	$	305,188	$	119,524	$	87,699	$	108,072	$	31,247	$	-	$	736,089
Ending balance: loans acquired with deteriorated credit quality	$	-	$	2,671	$	-	$	-	$	67	$	290	$	-	$	3,028

December 31, 2018	Construction		Commercial Real Estate		One to four family		Multi-family		Commercial		Consumer and Other		Unallocated		Total
	(In Thousands)
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	552	$	106	$	573	$	-	$	363	$	18	$	-	$	1,612
Ending balance: collectively evaluated for impairment	$	1,754	$	1,987	$	724	$	641	$	797	$	355	$	126	$	6,384
Ending balance: loans acquired with deteriorated credit quality	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Loans:
Ending balance: individually evaluated for impairment	$	4,088	$	1,588	$	4,520	$	5,952	$	1,062	$	169	$	-	$	17,379
Ending balance: collectively evaluated for impairment	$	84,507	$	317,488	$	128,258	$	84,663	$	118,459	$	32,968	$	-	$	766,343
Ending balance: loans acquired with deteriorated credit quality	$	-	$	2,782	$	-	$	-	$	216	$	175	$	-	$	3,173

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that

may

affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows or collateral value of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical charge-off experience and expected loss given default derived from the Bank’s internal risk rating process. Other adjustments

may

be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are

not

fully reflected in the historical loss or risk rating data.

Included in the Company’s loan portfolio are certain loans acquired in accordance with ASC

310

-

30,

Loans and Debt Securities Acquired with Deteriorated Credit Quality. These loans were written down at acquisition to an amount estimated to be collectible. As a result, certain ratios regarding the Company’s loan portfolio and credit quality cannot be used to compare the Company to peer companies or to compare the Company’s current credit quality to prior periods. The ratios particularly affected by accounting under ASC

310

-

30

include the allowance for loan losses as a percentage of loans, nonaccrual loans, and performing assets, and nonaccrual loans and nonperforming loans as a percentage of total loans.

A loan is considered impaired when, based on current information and events, it is probable that the Bank 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 determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are

not

classified as impaired. 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. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans.    

The following table summarizes the recorded investment in impaired loans at

September 30, 2019

and

December 31, 2018:

	September 30, 2019						December 31, 2018
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Recorded Balance		Unpaid Principal Balance		Specific Allowance
	(In Thousands)
Loans without a specific valuation allowance
Real estate - residential mortgage:
One to four family units	$	943	$	943	$	-	$	2	$	2	$	-
Multi-family		5,930		5,930		-		5,952		5,952		-
Real estate - construction		-		-		-		-		-		-
Real estate - commercial		2,921		2,921		-		3,138		3,138		-
Commercial loans		25		25		-		216		216		-
Consumer and other loans		363		363		-		225		225		-
Loans with a specific valuation allowance
Real estate - residential mortgage:
One to four family units	$	1,224	$	1,224	$	202	$	4,518	$	4,518	$	573
Multi-family		-		-		-		-		-		-
Real estate - construction		3,815		5,048		554		4,088		5,321		552
Real estate - commercial		162		162		24		1,232		1,317		106
Commercial loans		641		641		214		1,062		1,062		363
Consumer and other loans		112		112		23		119		119		18
Total
Real estate - residential mortgage:
One to four family units	$	2,167	$	2,167	$	202	$	4,520	$	4,520	$	573
Multi-family		5,930		5,930		-		5,952		5,952		-
Real estate - construction		3,815		5,048		554		4,088		5,321		552
Real estate - commercial		3,083		3,083		24		4,370		4,455		106
Commercial loans		666		666		214		1,278		1,278		363
Consumer and other loans		475		475		23		344		344		18
Total	$	16,136	$	17,369	$	1,017	$	20,552	$	21,870	$	1,612

The following table summarizes average impaired loans and related interest recognized on impaired loans for the

nine

months ended

September 30, 2019

and

2018:

	For the Nine Months Ended				For the Nine Months Ended
	September 30, 2019				September 30, 2018
	Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized
	(In Thousands)
Loans without a specific valuation allowance
Real estate - residential mortgage:
One to four family units	$	1,046	$	1	$	1,649	$	-
Multi-family		5,933		-		1,006		25
Real estate - construction		-		-		1,525		-
Real estate - commercial		3,353		4		2,383		46
Commercial loans		161		-		658		-
Consumer and other loans		268		-		37		-
Loans with a specific valuation allowance
Real estate - residential mortgage:
One to four family units	$	1,970	$	-	$	2,671	$	-
Multi-family		-		-		666		-
Real estate - construction		3,866		-		2,774		-
Real estate - commercial		657		-		81		-
Commercial loans		702		-		457		-
Consumer and other loans		119		-		116		-
Total
Real estate - residential mortgage:
One to four family units	$	3,016	$	1	$	4,320	$	-
Multi-family		5,933		-		1,672		25
Real estate - construction		3,866		-		4,299		-
Real estate - commercial		4,010		4		2,464		46
Commercial loans		863		-		1,115		-
Consumer and other loans		387		-		153		-
Total	$	18,075	$	5	$	14,023	$	71

At

September 30, 2019,

the Bank’s impaired loans shown in the table above included loans that were classified as troubled debt restructurings (“TDR”). The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession.

In assessing whether or

not

a borrower is experiencing financial difficulties, the Bank considers information currently available regarding the financial condition of the borrower. This information includes, but is

not

limited to, whether (i) the debtor is currently in payment default on any of its debt; (ii) a payment default is probable in the foreseeable future without the modification; (iii) the debtor has declared or is in the process of declaring bankruptcy and (iv) the debtor’s projected cash flow is sufficient to satisfy the contractual payments due under the original terms of the loan without a modification.

The Bank considers all aspects of the modification to loan terms to determine whether or

not

a concession has been granted to the borrower. Key factors considered by the Bank include the debtor’s ability to access funds at a market rate for debt with similar risk characteristics, the significance of the modification relative to unpaid principal balance or collateral value of the debt, and the significance of a delay in the timing of payments relative to the original contractual terms of the loan. The most common concessions granted by the Bank generally include

one

or more modifications to the terms of the debt, such as (i) a reduction in the interest rate for the remaining life of the debt, (ii) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (iii) a reduction on the face amount or maturity amount of the debt as stated in the original loan, (iv) a temporary period of interest-only payments, (v) a reduction in accrued interest, and (vi) an extension of amortization.

The following table presents the carrying balance of TDRs as of

September 30, 2019

and

December 31, 2018:

	September 30, 2019		December 31, 2018
Real estate - residential mortgage:
One to four family units	$	1,175,382	$	1,208,596
Multi-family		-		-
Real estate - construction		3,815,409		4,088,409
Real estate - commercial		5,358,591		5,508,444
Commercial loans		599,030		504,481
Consumer and other loans		-		-
Total	$	10,948,412	$	11,309,930

The Bank has allocated

$939,647

and

$901,086

of specific reserves to customers whose loan terms have been modified in TDR as of

September 30, 2019

and

December 31, 2018,

respectively.

There were

no

TDRs for which there was a payment default within

twelve

months following the modification during the

three

months ending

September 30, 2019

and

2018.

A loan is considered to be in payment default once it is

90

days contractually past due under the modified terms.

As part of the on-going monitoring of the credit quality of the Bank’s loan portfolio, management tracks loans by an internal rating system. All loans are assigned an internal credit quality rating based on an analysis of the borrower’s financial condition. The criteria used to assign quality ratings to extensions of credit that exhibit potential problems or well-defined weaknesses are primarily based upon the degree of risk and the likelihood of orderly repayment, and their effect on the Bank’s safety and soundness. The following are the internally assigned ratings:

Pass: This rating represents loans that have strong asset quality and liquidity along with a multi-year track record of profitability.

Special mention: This rating represents loans that are currently protected but are potentially weak. The credit risk

may

be relatively minor, yet constitute an increased risk in light of the circumstances surrounding a specific loan.

Substandard: This rating represents loans that show signs of continuing negative financial trends and unprofitability and therefore, is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.

Doubtful: This rating represents loans that have all the weaknesses of substandard classified loans with the additional characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

Risk characteristics applicable to each segment of the loan portfolio are described as follows.

Real estate-Residential

1

-

4

family: The residential

1

-

4

family real estate loans are generally secured by owner-occupied

1

-

4

family residences. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers. Credit risk in these loans can be impacted by economic conditions within the Bank’s market areas that might impact either property values or a borrower’s personal income. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Real estate-Construction: Construction and land development real estate loans are usually based upon estimates of costs and estimated value of the completed project and include independent appraisal reviews and a financial analysis of the developers and property owners. Sources of repayment of these loans

may

include permanent loans, sales of developed property or an interim loan commitment from the Bank until permanent financing is obtained. These loans are considered to be higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. Credit risk in these loans

may

be impacted by the creditworthiness of a borrower, property values and the local economies in the Bank’s market areas.

Real estate-Commercial: Commercial real estate loans typically involve larger principal amounts, and repayment of these loans is generally dependent on the successful operations of the property securing the loan or the business conducted on the property securing the loan. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Credit risk in these loans

may

be impacted by the creditworthiness of a borrower, property values and the local economies in the Bank’s market areas.

Commercial: The commercial portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation. Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations.

Consumer: The consumer loan portfolio consists of various term and line of credit loans such as automobile loans and loans for other personal purposes. Repayment for these types of loans will come from a borrower’s income sources that are typically independent of the loan purpose. Credit risk is driven by consumer economic factors (such as unemployment and general economic conditions in the Bank’s market area) and the creditworthiness of a borrower.

The following tables provide information about the credit quality of the loan portfolio using the Bank’s internal rating system as of

September 30, 2019

and

December 31, 2018:

September 30, 2019	Construction		Commercial Real Estate		One to four family		Multi-family		Commercial		Consumer and Other		Total
	(In Thousands)
Rating:
Pass	$	84,275	$	297,358	$	118,700	$	87,699	$	103,864	$	30,560	$	722,456
Special Mention		-		6,699		553		-		2,427		-		9,679
Substandard		3,900		4,214		2,437		5,930		2,447		1,162		20,090
Doubtful		-		-		-		-		-		-		-
Total	$	88,175	$	308,271	$	121,690	$	93,629	$	108,738	$	31,722	$	752,225

December 31, 2018	Construction		Commercial Real Estate		One to four family		Multi-family		Commercial		Consumer and Other		Total
	(In Thousands)
Rating:
Pass	$	84,375	$	310,486	$	126,586	$	84,596	$	114,525	$	32,686	$	753,254
Special Mention		-		5,524		372		-		3,031		-		8,927
Substandard		4,179		6,911		5,453		5,952		1,814		405		24,714
Doubtful		-		-		-		-		-		-		-
Total	$	88,554	$	322,921	$	132,411	$	90,548	$	119,370	$	33,091	$	786,895

The above amounts include purchased credit impaired loans. At

September 30, 2019,

purchased credit impaired loans comprised of

$3.0

million were rated “Substandard”.

For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees net of certain direct origination costs, are deferred and amortized as a level yield adjustment over the respective term of the loan.

The accrual of interest on loans is discontinued at the time the loan is

90

days past due unless the loan is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but

not

collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.