Note 3 - Loans Held for Investment, Net

9 Months Ended

Sep. 30, 2018

Notes to Financial Statements

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

NOTE

3

– LOANS HELD FOR INVESTMENT, NET

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

	September 30, 2018						December 31, 2017
	Amount			Percent			Amount			Percent
Loans held for investment, net:
Commercial real estate	$	231,303,130			81.3	%	$	214,871,788			82.0	%
One- to four-family residential real estate		30,138,258			10.6			29,114,060			11.1
Commercial and industrial		16,560,992			5.8			12,296,308			4.7
Consumer and other		6,555,384			2.3			5,740,352			2.2
Total gross loans		284,557,764			100.0	%		262,022,508			100.0	%
Unamortized loan fees		(1,094,031	)					(1,009,722	)
Loans held for investment		283,463,733						261,012,786
Allowance for loan losses		(3,233,813	)					(3,117,190	)
Loans held for investment, net	$	280,229,920					$	257,895,596

At

September 30, 2018

and

December 31, 2017,

loans held for investment includes construction loans of

$18.5

million and

$16.4

million, respectively.  Commercial real estate construction loans were

$15.0

million and

$13.4

 million at

September 30, 2018

and

December 31, 2017,

respectively.   One- to

four

-family residential real estate construction loans (builder/speculative) were

$1.9

million and

$1.3

 million at

September 30, 2018

and

December 31, 2017,

respectively. Consumer construction loans (owner/borrower) were

$1.6

million and

$1.7

million at

September 30, 2018

and

December 31, 2017,

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

September 30, 2018

and

December 31, 2017:

	As of September 30, 2018
	Commercial Real Estate		One- to Four- Family Residential Real Estate		Commercial and Industrial		Other		Total
Allowance for loan losses
Ending balance: individually evaluated for impairment	$	215,000	$	-	$	-	$	-	$	215,000
Ending balance: collectively evaluated for impairment		2,036,429		380,114		559,494		42,776		3,018,813
Total	$	2,251,429	$	380,114	$	559,494	$	42,776	$	3,233,813
Gross loans
Ending balance: individually evaluated for impairment	$	3,571,208	$	663,580	$	1,109,689	$	-	$	5,344,477
Ending balance: collectively evaluated for impairment		227,731,922		29,474,678		15,451,303		6,555,384		279,213,287
Ending balance: loans acquired with deteriorated credit quality		-		-		-		-		-
Total	$	231,303,130	$	30,138,258	$	16,560,992	$	6,555,384	$	284,557,764

	As of December 31, 2017
	Commercial Real Estate		One- to Four- Family Residential Real Estate		Commercial and Industrial		Other		Total
Allowance for loan losses
Ending balance: individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-
Ending balance: collectively evaluated for impairment		2,055,911		567,290		462,406		31,583		3,117,190
Total	$	2,055,911	$	567,290	$	462,406	$	31,583	$	3,117,190
Gross loans
Ending balance: individually evaluated for impairment	$	3,483,078	$	679,184	$	1,274,710	$	-	$	5,436,972
Ending balance: collectively evaluated for impairment		211,388,710		28,434,876		11,021,598		5,740,352		256,585,536
Ending balance: loans acquired with deteriorated credit quality		-		-		-		-		-
Total	$	214,871,788	$	29,114,060	$	12,296,308	$	5,740,352	$	262,022,508

The following tables summarize activities for the allowance for loan losses for the

nine

months ended

September 30, 2018

and

2017

by quarter:

	Commercial Real Estate		One- to Four- Family Residential Real Estate			Commercial and Industrial		Consumer and Other		Total
Balance December 31, 2017	$	2,055,911	$	567,290		$	462,406	$	31,583	$	3,117,190
Provision for loan losses		10,374		(46,975	)		51,901		6,700		22,000
Charge-offs		-		(23,269	)		-		-		(23,269	)
Recoveries		-		6,249			-		-		6,249
Net charge-offs		-		(17,020	)		-		-		(17,020	)
Balance March 31, 2018	$	2,066,285	$	503,295		$	514,307	$	38,283	$	3,122,170
Provision for loan losses	$	77,026	$	(22,165	)	$	13,138	$	3,001	$	71,000
Charge-offs		-		-			-		-		-
Recoveries		-		6,250			-		-		6,250
Net recoveries		-		6,250			-		-		6,250
Balance June 30, 2018	$	2,143,311	$	487,380		$	527,445	$	41,284	$	3,199,420
			4
Provision for loan losses	$	108,118	$	(94,439)		$	(15,171)	$	1,492	$	-
Charge-offs		-		(12,827	)		-		-		(12,827	)
Recoveries		-		-			47,220		-		47,220
Net recoveries		-		(12,827	)		47,220		-		34,393
Balance September 30, 2018	$	2,251,429	$	380,114		$	559,494	$	42,776	$	3,233,813

	Commercial Real Estate		One- to Four- Family Residential Real Estate			Commercial and Industrial		Consumer and Other			Total
Balance December 31, 2016	$	1,688,448	$	617,912		$	147,371	$	52,302		$	2,506,033
Provision for loan losses		120,158		3,488			152,397		(26,043	)		250,000
Charge-offs		-		-			-		-			-
Recoveries		1,200		6,250			-		-			7,450
Net recoveries		1,200		6,250			-		-			7,450
Balance March 31, 2017	$	1,809,806	$	627,650		$	299,768	$	26,259		$	2,763,483
Provision for loan losses	$	74,443	$	(34,305	)	$	109,100	$	762		$	150,000
Charge-offs		-		-			-		-			-
Recoveries		-		6,250			-		-			6,250
Net recoveries		-		6,250			-		-			6,250
Balance June 30, 2017	$	1,884,249	$	599,595		$	408,868	$	27,021		$	2,919,733
Provision for loan losses	$	40,533	$	(41,718	)	$	151,058	$	127		$	150,000
Charge-offs		-		(8,850	)		-		-			(8,850	)
Recoveries		-		6,250			-		-			6,250
Net recoveries		-		(2,600	)		-		-			(2,600	)
Balance September 30, 2017	$	1,924,782	$	555,277		$	559,926	$	27,148		$	3,067,133

Nonperforming Assets –

The following tables present an aging analysis of the recorded investment of past due loans as of

September 30, 2018

and

December 31, 2017.

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
September 30, 2018
Commercial real estate	$	-	$	-	$	550,000	$	550,000	$	230,753,130	$	231,303,130
One- to four-family residential real estate		7,000		50,314		427,524		484,838		29,653,420		30,138,258
Commercial and industrial		-		-		1,109,689		1,109,689		15,451,303		16,560,992
Consumer and other		-		-		-		-		6,555,384		6,555,384
Totals	$	7,000	$	50,314	$	2,087,213	$	2,144,527	$	282,413,237	$	284,557,764

	Past Due										Total
					90 Days						Financing
	30 - 59 Days		60 - 89 Days		or More		Total		Current		Receivables
December 31, 2017
Commercial real estate	$	246,154	$	-	$	550,000	$	796,154	$	214,075,634	$	214,871,788
One- to four-family residential real estate		235,561		116,977		525,532		878,070		28,235,990		29,114,060
Commercial and industrial		-		-		1,274,710		1,274,710		11,021,598		12,296,308
Consumer and other		-		-		-		-		5,740,352		5,740,352
Totals	$	481,715	$	116,977	$	2,350,242	$	2,948,934	$	259,073,574	$	262,022,508

The following table sets forth nonaccrual loans and other real estate at

September 30, 2018

and

December 31, 2017:

	September 30,		December 31,
	2018		2017
Nonaccrual loans
Commercial real estate	$	3,571,208	$	3,483,078
One- to four-family residential real estate		663,580		679,184
Commercial and industrial		1,109,689		1,274,710
Consumer and other		-		-
Total nonaccrual loans		5,344,477		5,436,972
Other real estate (ORE)		-		-
Total nonperforming assets	$	5,344,477	$	5,436,972
Nonperforming assets to gross loans held for investment and ORE		1.88%		2.08%
Nonperforming assets to total assets		1.43%		1.62%

Two large loan relationships partially secured by real estate comprise

$4.4

million, or

82.8%,

of the

$5.3

million in nonaccrual loans at

September 30, 2018. 

$3.4

million, or

64.0%

of the total

September 30, 2018

nonaccrual loan balance, is guaranteed by the SBA.

Credit Quality Indicators –

The following table represents the credit exposure by internally assigned grades at

September 30, 2018

and

December 31, 2017.

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 September 30, 2018
	Commercial Real Estate		One- to Four- Family Residential Real Estate		Commercial and Industrial		Consumer and Other		Total
Grade
Pass	$	224,370,286	$	28,519,214	$	15,012,206	$	6,399,444	$	274,301,150
Special mention		1,845,517		-		-		-		1,845,517
Substandard		4,537,327		1,619,044		1,548,786		155,940		7,861,097
Doubtful		550,000		-		-		-		550,000
Loss		-		-		-		-		-
Totals	$	231,303,130	$	30,138,258	$	16,560,992	$	6,555,384	$	284,557,764

	As of December 31, 2017
	Commercial Real Estate		One- to Four- Family Residential Real Estate		Commercial and Industrial		Consumer and Other		Total
Grade
Pass	$	208,395,458	$	27,400,698	$	10,624,210	$	5,568,633	$	251,988,999
Special mention		911,571		43,382		-		-		954,953
Substandard		5,014,759		1,669,980		1,672,098		171,719		8,528,556
Doubtful		550,000		-		-		-		550,000
Loss		-		-		-		-		-
Totals	$	214,871,788	$	29,114,060	$	12,296,308	$	5,740,352	$	262,022,508

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 tables include 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 September 30, 2018
			Principal				Average
	Recorded		Net of		Related		Recorded
	Investment		Charge-offs		Allowance		Investment
With no related allowance recorded:
Commercial real estate	$	3,021,208	$	3,021,208	$	-	$	3,054,043
One- to four-family residential real estate		663,580		663,580		-		680,907
Commercial and industrial		1,109,689		1,109,689		-		1,129,837
Consumer and other		-		-		-		-
	$	4,794,477	$	4,794,477	$	-	$	4,864,787
With an allowance recorded:
Commercial real estate	$	550,000	$	550,000	$	215,000	$	550,000
Total:
Commercial real estate	$	3,571,208	$	3,571,208	$	215,000	$	3,604,043
One- to four-family residential real estate		663,580		663,580		-		680,907
Commercial and industrial		1,109,689		1,109,689		-		1,129,837
Consumer and other		-		-		-		-
	$	5,344,477	$	5,344,477	$	215,000	$	5,414,787

	As of December 31, 2017
			Principal				Average
	Recorded		Net of		Related		Recorded
	Investment		Charge-offs		Allowance		Investment
With no related allowance recorded:
Commercial real estate	$	3,483,078	$	3,483,078	$	-	$	3,521,421
One- to four-family residential real estate		679,184		679,184		-		684,632
Commercial and industrial		1,274,710		1,274,710		-		1,297,740
Consumer and other		-		-		-		-
	$	5,436,972	$	5,436,972	$	-	$	5,503,793
With an allowance recorded:	$	-	$	-	$	-	$	-
Total:
Commercial real estate	$	3,483,078	$	3,483,078	$	-	$	3,521,421
One- to four-family residential real estate		679,184		679,184		-		684,632
Commercial and industrial		1,274,710		1,274,710		-		1,297,740
Consumer and other		-		-		-		-
	$	5,436,972	$	5,436,972	$	-	$	5,503,793

During the

nine

months ended

September 30, 2018

and

2017,

$4,000

and

$2,700

of interest income, respectively, was recognized on nonaccrual loans.

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

September 30, 2018

and

December 31, 2017.

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

September 30, 2018

or

December 31, 2017.

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.