NOTE 3 – LOANS HELD FOR INVESTMENT, NET

The components of loans held for investment, net in the consolidated balance sheets were as follows:

	June 30, 2017						December 31, 2016
	Amount			Percent			Amount			Percent

Loans held for investment, net:
Commercial real estate	$	219,771,635			82.7	%	$	195,814,205			80.0	%
One- to four-family residential real estate		29,352,468			11.0	%		29,976,625			12.2	%
Commercial and industrial		11,628,480			4.4	%		9,876,020			4.0	%
Consumer and other		5,017,936			1.9	%		9,191,249			3.8	%
Total gross loans		265,770,519			100.0	%		244,858,099			100.0	%
Unamortized loan fees		(1,063,783	)					(952,717	)
Loans held for investment		264,706,736						243,905,382
Allowance for loan losses		(2,919,733	)					(2,506,033	)
Loans held for investment, net	$	261,787,003					$	241,399,349

At June 30, 2017 and December 31, 2016 commercial real estate loans include construction loans of $13.2 million and $7.9 million, respectively.

Allowance for Loan Losses and Recorded Investment in Loans – The following is a summary of the allowance for loan losses and recorded investment in loans as of June 30, 2017 and December 31, 2016:

As of June 30, 2017

Commercial Real
Estate

One- to Four-
Family Residential
Real Estate

Commercial and
Industrial

Consumer and
Other

Total

Allowance for loan losses

Ending balance: individually evaluated for impairment

Ending balance: collectively evaluated for impairment

1,884,249

599,595

408,868

27,021

2,919,733

Total

1,884,249

599,595

408,868

27,021

2,919,733

Gross loans

Ending balance: individually evaluated for impairment

6,817,669

1,630,232

2,099,837

183,067

10,730,805

Ending balance: collectively evaluated for impairment

212,953,966

27,722,236

9,528,643

4,834,869

255,039,714

Ending balance: loans acquired with deteriorated credit quality

Total

219,771,635

29,352,468

11,628,480

5,017,936

265,770,519

	As of December 31, 2016
	Commercial Real Estate		One- to Four- Family Residential Real Estate		Commercial and Industrial		Consumer and Other		Total
Allowance for loan losses
Ending balance: individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-
Ending balance: collectively evaluated for impairment		1,688,448		617,912		147,371		52,302		2,506,033

Total	$	1,688,448	$	617,912	$	147,371	$	52,302	$	2,506,033

Gross loans
Ending balance: individually evaluated for impairment	$	3,441,874	$	1,744,062	$	801,078	$	194,068	$	6,181,082
Ending balance: collectively evaluated for impairment		192,372,331		28,232,563		9,074,942		8,997,181		238,677,017
Ending balance: loans acquired with deteriorated credit quality		-		-		-		-		-
Total	$	195,814,205	$	29,976,625	$	9,876,020	$	9,191,249	$	244,858,099

The following is a summary of activities for the allowance for loan losses for the three and six months ended June 30, 2017 and 2016:

	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016

Beginning balance	$	2,763,483	$	2,052,365	$	2,506,033	$	1,894,196

Provision for loan losses		150,000		99,000		400,000		151,000

Charge-offs:
Commercial real estate		-		-		-		-
One- to four-family residential real estate		-		-		-		(10,756	)
Commercial and industrial		-		-		-		-
Consumer and other		-		-		-		-
Total charge-offs		-		-		-		(10,756	)

Recoveries:
Commercial real estate		-		-		1,200		116,125
One- to four-family residential real estate		6,250		1,200		12,500		2,000
Commercial and industrial		-		-				-
Consumer and other		-		-				-
Total recoveries		6,250		1,200		13,700		118,125
Net recoveries		6,250		1,200		13,700		107,369

Ending balance	$	2,919,733	$	2,152,565	$	2,919,733	$	2,152,565

Nonperforming Assets – The following tables present an aging analysis of the recorded investment of past due loans as of June 30, 2017 and December 31, 2016. Payment activity is reviewed by management on a monthly basis to determine the performance of each loan. Per Company policy, loans past due 90 days or more no longer accrue interest.

	Past Due										Total
					90 Days						Financing
	30 - 59 Days		60 - 89 Days		or More		Total		Current		Receivables

June 30, 2017
Commercial real estate	$	-	$	-	$	3,680,700	$	3,680,700	$	216,090,935	$	219,771,635
One- to four-family residential real estate		-		271,485		414,766		686,251		28,666,217		29,352,468
Commercial and industrial		-		-		1,568,907		1,568,907		10,059,573		11,628,480
Consumer and other		-		-				-		5,017,936		5,017,936

Totals	$	-	$	271,485	$	5,664,373	$	5,935,858	$	259,834,661	$	265,770,519

	Past Due										Total
					90 Days						Financing
	30 - 59 Days		60 - 89 Days		or More		Total		Current		Receivables

December 31, 2016
Commercial real estate	$	550,000	$	-	$	-	$	550,000	$	195,264,205	$	195,814,205
One- to four-family residential real estate		108,080		501,316		68,906		678,302		29,298,323		29,976,625
Commercial and industrial		1,139,634		-		461,021		1,600,655		8,275,365		9,876,020
Consumer and other		-		-		-		-		9,191,249		9,191,249

Totals	$	1,797,714	$	501,316	$	529,927	$	2,828,957	$	242,029,142	$	244,858,099

The following table sets forth nonperforming assets at June 30, 2017 and December 31, 2016:

	June 30,			December 31,
	2017			2016

Nonaccrual loans
Commercial real estate	$	3,680,700		$	3,718,686
One- to four-family residential real estate		618,138			648,880
Commercial and industrial		1,568,907			1,600,655
Consumer and other		-			-
Total nonaccrual loans		5,867,745			5,968,221

Other real estate (ORE)		-			-

Total nonperforming assets	$	5,867,745		$	5,968,221

Nonperforming assets to gross loans held for investment and ORE		2.21	%		2.44	%
Nonperforming assets to total assets		1.73	%		1.81	%

Credit Quality Indicators – The following table represents the credit exposure by internally assigned grades at June 30, 2017 and December 31, 2016. This grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements in accordance with the loan terms. The Bank’s internal credit risk grading system is based on management’s experiences with similarly graded loans. Credit risk grades are reassessed each quarter based on any recent developments potentially impacting the creditworthiness of the borrower, as well as other external statistics and factors, which may affect the risk characteristics of the respective loan.

	As of June 30, 2017
	Commercial Real Estate		One- to Four- Family Residential Real Estate		Commercial and Industrial		Consumer and Other		Total

Grade
Pass	$	212,953,966	$	27,722,236	$	9,528,643	$	4,834,869	$	255,039,714
Special mention		916,262		-		234,533		-		1,150,795
Substandard		5,351,407		1,630,232		1,571,106		183,067		8,735,812
Doubtful		550,000		-		294,198		-		844,198
Loss		-		-		-		-		-

Totals	$	219,771,635	$	29,352,468	$	11,628,480	$	5,017,936	$	265,770,519

	As of December 31, 2016
	Commercial Real Estate		One- to Four- Family Residential Real Estate		Commercial and Industrial		Consumer and Other		Total

Grade
Pass	$	187,069,284	$	28,232,563	$	7,697,960	$	8,997,181	$	231,996,988
Special mention		523,207		65,457		267,327		-		855,991
Substandard		8,221,714		1,678,605		1,614,733		194,068		11,709,120
Doubtful		-		-		296,000		-		296,000
Loss		-		-		-		-		-

Totals	$	195,814,205	$	29,976,625	$	9,876,020	$	9,191,249	$	244,858,099

The Bank’s internally assigned grades are as follows:

Pass – Strong credit with no existing or known potential weaknesses deserving of management’s close attention.

Special Mention – Potential weaknesses that deserve management’s close attention. Borrower and guarantor’s capacity to meet all financial obligations is marginally adequate or deteriorating.

Substandard – Inadequately protected by the paying capacity of the Borrower and/or collateral pledged. The borrower or guarantor is unwilling or unable to meet loan terms or loan covenants for the foreseeable future.

Doubtful – All the weakness inherent in one classified as substandard with the added characteristic that those weaknesses in place make the collection or liquidation in full, on the basis of current conditions, highly questionable and improbable.

Loss – Considered uncollectible or no longer a bankable asset. This classification does not mean that the asset has absolutely no recoverable value. In fact, a certain salvage value is inherent in these loans. Nevertheless, it is not practical or desirable to defer writing off a portion or whole of a perceived asset even though partial recovery may be collected in the future.

Impaired Loans – The following table includes the recorded investment and unpaid principal balances, net of charge-offs for impaired loans with the associated allowance amount, if applicable. Management determined the allocated allowance based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the remaining source of repayment for the loan is the operation or liquidation of the collateral. In those cases, the current fair value of the collateral, less selling costs was used to determine the allocated allowance recorded.

	As of June 30, 2017
			Principal				Average
	Recorded		Net of		Related		Recorded
	Investment		Charge-offs		Allowance		Investment

With no related allowance recorded:
Commercial real estate	$	3,680,700	$	3,680,700	$	-	$	3,723,960
One- to four-family residential real estate		618,138		618,138		-		623,907
Commercial and industrial		1,568,907		1,568,907		-		1,594,869
Consumer and other		-		-		-		-

With an allowance recorded:	$	-	$	-	$	-	$	-

Total:
Commercial real estate	$	3,680,700	$	3,680,700	$	-	$	3,723,960
One- to four-family residential real estate		618,138		618,138		-		623,907
Commercial and industrial		1,568,907		1,568,907		-		1,594,869
Consumer and other		-		-		-		-

	As of December 31, 2016
			Principal				Average
	Recorded		Net of		Related		Recorded
	Investment		Charge-offs		Allowance		Investment

With no related allowance recorded:
Commercial real estate	$	3,718,686	$	3,718,686	$	-	$	1,385,277
One- to four-family residential real estate		648,880		648,880		-		656,495
Commercial and industrial		1,600,655		1,600,655		-		1,075,536
Consumer and other		-		-		-		-

With an allowance recorded:	$	-	$	-	$	-	$	-

Total:
Commercial real estate	$	3,718,686	$	3,718,686	$	-	$	1,385,277
One- to four-family residential real estate		648,880		648,880		-		656,495
Commercial and industrial		1,600,655		1,600,655		-		1,075,536
Consumer and other		-		-		-		-

During the six months ended June 30, 2017 and 2016, no interest income was recognized on these loans as interest collected was credited to loan principal.

Certain loans within the Company’s loan and ORE portfolios are guaranteed by the Veterans Administration (VA). In the event of default by the borrower, the VA can elect to pay the guaranteed amount or take possession of the property. If the VA takes possession of the property, the Company is entitled to be reimbursed for the outstanding principal balance, accrued interest and certain other expenses. There were no commitments from the VA to take title to foreclosed VA properties at June 30, 2017 and December 31, 2016.

Troubled Debt Restructurings – Restructured loans are considered “troubled debt restructurings” if due to the borrower’s financial difficulties, the Bank has granted a concession that they would not otherwise consider. This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, rates, or a combination of the two. All troubled debt restructurings placed on nonaccrual status must show no less than six consecutive months of repayment performance by the borrower in accordance with contractual terms to return to accrual status. Once a loan has been identified as a troubled debt restructuring, it will continue to be reported as such until the loan is paid in full.

There were no troubled debt restructurings as of June 30, 2017 or December 31, 2016.

In the normal course of business, the Company may modify a loan for a credit worthy borrower where the modified loan is not considered a troubled debt restructuring. In these cases, the modified terms are consistent with loan terms available to credit worthy borrowers and within normal loan pricing. The modifications to such loans are done according to existing underwriting standards which include review of historical financial statements, including current interim information if available, an analysis of the causes of the borrower’s decline in performance, and projections intended to assess repayment ability going forward.