NOTE

– LOANS HELD FOR INVESTMENT, NET

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

	March 31, 2020						December 31, 2019
	Amount			Percent			Amount			Percent

Loans held for investment, net:
Commercial real estate	$	248,763,039			79.3	%	$	242,682,721			82.1	%
One- to four-family residential real estate		27,693,590			8.8			28,849,640			9.8
Commercial and industrial		34,081,604			10.9			20,075,236			6.8
Consumer and other		3,141,308			1.0			3,860,991			1.3
Total gross loans		313,679,541			100.0	%		295,468,588			100.0	%
Unamortized loan fees		(839,614	)					(807,869	)
Loans held for investment		312,839,927						294,660,719
Allowance for loan losses		(3,396,861	)					(2,921,931	)
Loans held for investment, net	$	309,443,066					$	291,738,788

March 31, 2020

and

December 31, 2019,

loans held for investment includes commercial construction loans of

$19.2

million and

$16.1

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

March 31, 2020

and

December 31, 2019:

	As of March 31, 2020
	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		2,856,106		239,647		263,483		37,625		3,396,861

Total	$	2,856,106	$	239,647	$	263,483	$	37,625	$	3,396,861

Gross loans
Ending balance: individually evaluated for impairment	$	2,642,676	$	766,952	$	-	$	-	$	3,409,628
Ending balance: collectively evaluated for impairment		246,120,363		26,926,638		34,081,604		3,141,308		310,269,913
Total	$	248,763,039	$	27,693,590	$	34,081,604	$	3,141,308	$	313,679,541

	As of December 31, 2019
	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		2,588,714		187,345		115,502		30,370		2,921,931

Total	$	2,588,714	$	187,345	$	115,502	$	30,370	$	2,921,931

Gross loans
Ending balance: individually evaluated for impairment	$	2,718,731	$	786,557	$	-	$	-	$	3,505,288
Ending balance: collectively evaluated for impairment		239,963,990		28,063,083		20,075,236		3,860,991		291,963,300
Total	$	242,682,721	$	28,849,640	$	20,075,236	$	3,860,991	$	295,468,588

The COVID-

pandemic is expected to materially affect our determination of an adequate allowance for loan losses going forward. Based upon the uncertainties related to COVID-

19,

the Company increased its

March 31, 2020

allowance for loan losses $

350,000

, or

%, and plans to continue to closely monitor the effects of the pandemic on the ability of its borrowers to repay their debt going forward. It is possible larger increases in the allowance for loan losses will be necessary in the future due to the COVID-

pandemic, or the after-effects of it.

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

three

months ended

March 31, 2020

and

2019:

	Commercial Real Estate		One- to Four-Family Residential Real Estate		Commercial and Industrial		Consumer and Other		Total

Balance December 31, 2019	$	2,588,714	$	187,345	$	115,502	$	30,370	$	2,921,931

Provision for loan losses		267,392		49,372		147,981		7,255		472,000

Charge-offs		-		-		-		-		-
Recoveries		-		2,930				-		2,930
Net (charge-offs) recoveries		-		2,930		-		-		2,930

Balance March 31, 2020	$	2,856,106	$	239,647	$	263,483	$	37,625	$	3,396,861

	Commercial Real Estate		One- to Four-Family Residential Real Estate			Commercial and Industrial		Consumer and Other			Total

Balance December 31, 2018	$	2,130,124	$	359,705		$	377,180	$	34,082		$	2,901,091

Provision for loan losses		211,173		(130,880	)		9,738		(2,531	)		87,500

Charge-offs		-		(8,686	)		-		-			(8,686	)
Recoveries		-		-			1,507		-			1,507
Net (charge-offs) recoveries		-		(8,686	)		1,507		-			(7,179	)

Balance March 31, 2019	$	2,341,297	$	220,139		$	388,425	$	31,551		$	2,981,412

Nonperforming Assets –

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

March 31, 2020

and

December 31, 2019.

Payment activity is reviewed by management on a monthly basis to determine the performance of each loan. Per Company policy, loans past due

days or more

longer accrue interest.

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

March 31, 2020
Commercial real estate	$	-	$	-	$	-	$	-	$	248,763,039	$	248,763,039
One- to four-family residential real estate		1,052,985		-		209,162		1,262,147		26,431,443		27,693,590
Commercial and industrial		-		-		-		-		34,081,604		34,081,604
Consumer and other		-		-		-		-		3,141,308		3,141,308

Totals	$	1,052,985	$	-	$	209,162	$	1,262,147	$	312,417,394	$	313,679,541

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

December 31, 2019
Commercial real estate	$	-	$	-	$	2,718,731	$	2,718,731	$	239,963,990	$	242,682,721
One- to four-family residential real estate		758,197		36,520		638,623		1,433,340		27,416,300	$	28,849,640
Commercial and industrial		-		-		-		-		20,075,236	$	20,075,236
Consumer and other		-		-		-		-		3,860,991	$	3,860,991

Totals	$	758,197	$	36,520	$	3,357,354	$	4,152,071	$	291,316,517	$	295,468,588

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

March 31, 2020

and

December 31, 2019:

	March 31,			December 31,
	2020			2019

Nonaccrual loans
Commercial real estate	$	2,642,676		$	2,718,731
One- to four-family residential real estate		766,952			786,557
Commercial and industrial		-			-
Consumer and other		-			-
Total nonaccrual loans		3,409,628			3,505,288
Other real estate (ORE)		-			-

Total nonperforming assets	$	3,409,628		$	3,505,288

Nonperforming assets to gross loans held for investment and ORE		1.09	%		1.19	%
Nonperforming assets to total assets		0.83	%		0.89	%

Nonaccrual loan balances guaranteed by the SBA are

$2.3

million or

68%

and

$2.3

million or

66%

of the nonaccrual loan balances at

March 31, 2020

and

December 31, 2019,

respectively.

Credit Quality Indicators –

The following tables represent the credit exposure by internally assigned grades at

March 31, 2020

and

December 31, 2019.

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 March 31, 2020
	Commercial Real Estate		One- to Four-Family Residential Real Estate		Commercial and Industrial		Consumer and Other		Total

Grade
Pass	$	243,791,555	$	25,855,307	$	33,836,430	$	3,141,308	$	306,624,600
Special mention		504,150		359,216		-		-		863,366
Substandard		4,467,334		1,479,067		245,174		-		6,191,575
Doubtful		-		-		-		-		-
Loss		-		-		-		-		-

Totals	$	248,763,039	$	27,693,590	$	34,081,604	$	3,141,308	$	313,679,541

	As of December 31, 2019
	Commercial Real Estate		One- to Four-Family Residential Real Estate		Commercial and Industrial		Consumer and Other		Total

Grade
Pass	$	237,546,684	$	26,969,204	$	19,774,797	$	3,860,991	$	288,151,676
Special mention		508,201		375,054		-		-		883,255
Substandard		4,627,836		1,505,382		300,439		-		6,433,657
Doubtful		-		-		-		-		-
Loss		-		-		-		-		-

Totals	$	242,682,721	$	28,849,640	$	20,075,236	$	3,860,991	$	295,468,588

The Bank’s internally assigned grades are as follows:

Pass

– Strong credit with

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

longer a bankable asset. This classification does

not

mean that the asset has absolutely

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 March 31, 2020
			Principal				Average
	Recorded		Net of		Related		Recorded
	Investment		Charge-offs		Allowance		Investment

With no related allowance recorded:
Commercial real estate	$	2,642,676	$	2,642,676	$	-	$	2,682,032
One- to four-family residential real estate		766,952		766,952		-		780,818
Commercial and industrial		-		-		-		-
Consumer and other		-		-		-		-
	$	3,409,628	$	3,409,628	$	-	$	3,462,850

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

Total:
Commercial real estate	$	2,642,676	$	2,642,676	$	-	$	2,682,032
One- to four-family residential real estate		766,952		766,952		-		780,818
Commercial and industrial		-		-		-		-
Consumer and other		-		-		-		-
	$	3,409,628	$	3,409,628	$	-	$	3,462,850

	As of December 31, 2019
			Principal				Average
	Recorded		Net of		Related		Recorded
	Investment		Charge-offs		Allowance		Investment

With no related allowance recorded:
Commercial real estate	$	2,718,731	$	2,718,731	$	-	$	2,738,545
One- to four-family residential real estate		786,557		786,557		-		791,476
Commercial and industrial		-		-		-		-
Consumer and other		-		-		-		-
	$	3,505,288	$	3,505,288	$	-	$	3,530,021

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

Total:
Commercial real estate	$	2,718,731	$	2,718,731	$	-	$	2,738,545
One- to four-family residential real estate		786,557		786,557		-		791,476
Commercial and industrial		-		-		-		-
Consumer and other		-		-		-		-
	$	3,505,288	$	3,505,288	$	-	$	3,530,021

During each of the

three

months ended

March 31, 2020

and

2019,

interest income was recognized on nonaccrual loans.

Certain loans within the Company’s loan portfolio 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

commitments from the VA to take title to properties collateralizing Company loans at

March 31, 2020

and

December 31, 2019.

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

less than

six

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.

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.

There was

one

troubled debt restructuring with a current payment status and principal balances of

$70,000

and

$71,000,

as of

March 31, 2020

and

December 31, 2019,

respectively.