Note 4 - Loans Held for Investment, Net

6 Months Ended

Jun. 30, 2020

Notes to Financial Statements

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

NOTE

4

– LOANS HELD FOR INVESTMENT, NET

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

	June 30, 2020						December 31, 2019
	Amount			Percent			Amount			Percent
Loans held for investment, net:
Commercial real estate	$	257,876,733			73.1	%	$	242,682,721			82.1	%
One- to four-family residential real estate		24,354,087			6.9			28,849,640			9.8
Commercial and industrial		66,761,757			18.9			20,075,236			6.8
Consumer and other		3,726,966			1.1			3,860,991			1.3
Total gross loans		352,719,543			100.0	%		295,468,588			100.0	%
Unamortized loan fees, net of costs		(1,372,094	)					(807,869	)
Loans held for investment		351,347,449						294,660,719
Allowance for loan losses		(3,975,620	)					(2,921,931	)
Loans held for investment, net	$	347,371,829					$	291,738,788

At

June 30, 2020

and

December 31, 2019,

loans held for investment includes commercial construction loans of

$23.5

 million and

$16.1

million and Paycheck Protection Program ("PPP") loans of

$36.1

million and -

0

-, 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, 2020

and

December 31, 2019:

	As of June 30, 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		3,371,097		250,674		307,805		46,044		3,975,620
Total	$	3,371,097	$	250,674	$	307,805	$	46,044	$	3,975,620
Gross loans
Ending balance: individually evaluated for impairment	$	2,578,003	$	823,445	$	-	$	-	$	3,401,448
Ending balance: collectively evaluated for impairment		255,298,730		23,530,642		66,761,757		3,726,966		349,318,095
Total	$	257,876,733	$	24,354,087	$	66,761,757	$	3,726,966	$	352,719,543

	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-

19

pandemic has, and is expected to going forward, materially affect our determination of an adequate allowance for loan losses ("ALLL").  In addition to its normal ALLL provision determined based upon loan growth and other risk factor changes, the Company increased its allowance for loan losses an additional

$900,000,

or

31%

compared to the

December 31, 2019

ALLL balance for uncertainties related to COVID-

19

pandemic and the recession.  The Company 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-

19

pandemic and recession, or the after-effects of it. 

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

six

 months ended

June 30, 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
Provision for loan losses		514,991		9,268		44,322		8,419		577,000
Change-offs		-		-		-		-		-
Recoveries		-		1,759		-		-		1,759
Net (charge-offs) recoveries		-		1,759		-		-		1,759
Balance June 30, 2020	$	3,371,097	$	250,674	$	307,805	$	46,044	$	3,975,620

	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
Provision for loan losses		85,605		(2,388	)		9,914		(8,131	)		85,000
Change-offs		-		-			-		-			-
Recoveries		-		1,879			-		-			1,879
Net (charge-offs) recoveries		-		1,879			-		-			1,879
Balance June 30, 2019	$	2,426,902	$	219,630		$	398,339	$	23,420		$	3,068,291

Nonperforming Assets –

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

June 30, 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

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, 2020
Commercial real estate	$	-	$	-	$	-	$	-	$	257,876,733	$	257,876,733
One- to four-family residential real estate		-		395,110		290,018		685,128		23,668,959		24,354,087
Commercial and industrial		-		-		-		-		66,761,757		66,761,757
Consumer and other		-		-		-		-		3,726,966		3,726,966
Totals	$	-	$	395,110	$	290,018	$	685,128	$	352,034,415	$	352,719,543

	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

June 30, 2020

and

December 31, 2019:

	June 30,			December 31,
	2020			2019
Nonaccrual loans
Commercial real estate	$	2,578,003		$	2,718,731
One- to four-family residential real estate		754,037			786,557
Commercial and industrial		-			-
Consumer and other		-			-
Total nonaccrual loans		3,332,040			3,505,288
Other real estate (ORE)		-			-
Total nonperforming assets	$	3,332,040		$	3,505,288
Nonperforming assets to gross loans held for investment and ORE		0.94	%		1.19	%
Nonperforming assets to total assets		0.73	%		0.89	%

Nonaccrual loan balances guaranteed by the SBA are

$2.3

million, or

69%,

and

$2.3

million, or

66%,

of the nonaccrual loan balances at

June 30, 2020

and

December 31, 2019,

respectively.

Credit Quality Indicators –

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

June 30, 

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 June 30, 2020
	Commercial Real Estate		One- to Four- Family Residential Real Estate		Commercial and Industrial		Consumer and Other		Total
Grade
Pass	$	253,050,106	$	22,606,006	$	66,528,216	$	3,726,966	$	345,911,294
Special mention		459,260		288,279		-		-		747,539
Substandard		4,367,367		1,459,802		233,541		-		6,060,710
Doubtful		-		-		-		-		-
Loss		-		-		-		-		-
Totals	$	257,876,733	$	24,354,087	$	66,761,757	$	3,726,966	$	352,719,543

	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

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 June 30, 2020
			Principal				Average
	Recorded		Net of		Related		Recorded
	Investment		Charge-offs		Allowance		Investment
With no related allowance recorded:
Commercial real estate	$	2,578,003	$	2,578,003	$	-	$	2,620,918
One- to four-family residential real estate		823,445		823,445		-		829,053
Commercial and industrial		-		-		-		-
Consumer and other		-		-		-		-
	$	3,401,448	$	3,401,448	$	-	$	3,449,971
With an allowance recorded:	$	-	$	-	$	-	$	-
Total:
Commercial real estate	$	2,578,003	$	2,578,003	$	-	$	2,620,918
One- to four-family residential real estate		823,445		823,445		-		829,053
Commercial and industrial		-		-		-		-
Consumer and other		-		-		-		-
	$	3,401,448	$	3,401,448	$	-	$	3,449,971

	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

six

 months ended

June 30, 2020

and

2019,

no

 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

no

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

June 30, 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

no

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 balance of

$69,000

 and

$71,000,

as of

June 30, 2020

and

December 31, 2019,

respectively.