Note D - Loans Receivable and Allowance for Loan Losses

A selection of the loan and allowance for loan losses policies are as follows:

Loans Receivable

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred loan fees or costs on originated loans.

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

The accrual of interest on the loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Loans are typically charged off not later than 180 days past due. 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.

The performing one-to-four family residential, commercial real estate, and commercial loans are pledged, under a blanket lien, as collateral securing advances from the Federal Home Loan Bank of Dallas, (“FHLB”) at March 31, 2020 and December 31, 2019.

Loans receivable at March 31, 2020 and December 31, 2019 are summarized as follows:


(in thousands)	March 31, 2020		December 31, 2019

Real Estate:
Secured by one-to four family residential properties
Owner-occupied	$	55,043	$	53,158
Non-owner-occupied		15,101		15,257
Home Equity Lines of Credit		4,491		3,858
Commercial (Nonresidential) Properties		21,976		22,349
Land		2,390		2,200
Construction		4,848		4,259
Multi-family		2,069		2,086
Commercial		3,145		2,335
Consumer Loans		355		246
Total Loans		109,418		105,748

Less: Net Deferred Loan Fees		(336)		(349)
Loans in Process		(2,562)		(2,161)
Allowance for Loan Losses		(778)		(769)
Net Loans	$	105,742	$	102,469

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. 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 or observable market price) 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. Other adjustments may be made to the allowance for pools of loans after an assessment of internal and external influence on credit quality that are not fully reflected in the historical loss or risk rating data.

A loan is considered impaired when, based upon current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and 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 are considered 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.

The tables below provide a summary of activity in the allowance for loan losses by loan type as of and for the three months ended March 31, 2020 and the year ended December 31, 2019. The allocation of a portion of the allowance to one category does not preclude its availability to absorb losses in other categories.

The effects of the COVID-19 pandemic are not determinable at this time, but the effects to certain estimates, including the Allowance for Loan Losses and the fair value of assets and liabilities could be material.

Allowance for Credit Losses and Recorded Investment in Loans Receivable

For the Period Ended March 31, 2020

(in thousands)


	Real Estate
					One-to-Four
	Commercial		Land		Family		Construction		Multi-Family		Consumer		Commercial		Total

Allowance for Credit Losses:
Beginning Balance	$	96	$	18	$	516	$	20	$	6	$	26	$	87	$	769
Charge-offs		—		—		—		—		—		(1)		—		(1)
Recoveries		—		—		—		—		—		—		—		—
Provision		—		1		(13)		3		1		6		12		10
Ending Balance	$	96	$	19	$	502	$	23	$	7	$	31	$	99	$	778

Ending Balance:
Individually Evaluated for Impairment	$	—	$	1	$	112	$	—	$	—	$	—	$	—	$	113

Ending Balance:
Collectively Evaluated for Impairment	$	96	$	18	$	390	$	23	$	7	$	31	$	99	$	665

Loans Receivable:
Ending Balance	$	21,976	$	2,390	$	74,635	$	4,848	$	2,069	$	355	$	3,145	$	109,418

Ending Balance:
Individually Evaluated for Impairment	$	—	$	12	$	1,102	$	—	$	—	$	—	$	—	$	1,114

Ending Balance:
Collectively Evaluated for Impairment	$	21,976	$	2,378	$	73,533	$	4,848	$	2,069	$	355	$	3,145	$	108,304

Allowance for Credit Losses and Recorded Investment in Loans Receivable

For the Year Ended December 31, 2019

(in thousands)


	Real Estate
					One-to-Four
	Commercial		Land		Family		Construction		Multi-Family		Consumer		Commercial		Total

Allowance for Credit Losses:
Beginning Balance	$	113	$	23	$	519	$	16	$	5	$	9	$	83	$	768
Charge-offs		—		—		—		—		—		(18)		—		(18)
Recoveries		5		—		—		—		—		1		—		6
Provision		(22)		(5)		(3)		4		1		34		4		13
Ending Balance	$	96	$	18	$	516	$	20	$	6	$	26	$	87	$	769

Ending Balance:
Individually Evaluated for Impairment	$	—	$	—	$	85	$	—	$	—	$	—	$	—	$	85

Ending Balance:
Collectively Evaluated for Impairment	$	96	$	18	$	431	$	20	$	6	$	26	$	87	$	684

Loans Receivable:
Ending Balance	$	22,349	$	2,200	$	72,273	$	4,259	$	2,086	$	246	$	2,335	$	105,748

Ending Balance:
Individually Evaluated for Impairment	$	—	$	—	$	828	$	—	$	—	$	—	$	—	$	828

Ending Balance:
Collectively Evaluated for Impairment	$	22,349	$	2,200	$	71,445	$	4,259	$	2,086	$	246	$	2,335	$	104,920

Credit quality indicators as of March 31, 2020 and December 31, 2019:

Pass - A pass asset is properly approved, documented, collateralized, and performing. It does not reflect an abnormal amount of risk.

Special mention - A special mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Substandard - An asset classified as substandard has a well-defined weakness or weaknesses. A substandard asset is inadequately protected by the current net worth or paying capacity of the obligor or pledged collateral, if any. It is characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful - Assets classified as doubtful have all the weaknesses inherent in those classified as substandard. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently existing facts, conditions, and values.

Loss - Assets classified as loss are considered uncollectible or of such little value that the continuance of the loan or other asset on the books of the Company is not warranted. Some recovery of funds could be possible in the future, but the amount and probability of this recovery are not determinable thus providing little justification for the assets to remain on the books.

The following tables represent the Company’s credit exposure by credit quality indicator as of March 31, 2020 and December 31, 2019:

Credit Risk Profile by Internally Assigned Grade

(in thousands)


	March 31, 2020
	Real Estate
	Commercial				One-to-Four
	Real Estate		Land		Family		Construction		Multi-Family		Consumer		Commercial		Total
Pass	$	21,976	$	2,378	$	73,533	$	4,848	$	2,069	$	355	$	3,145	$	108,304
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		12		1,102		—		—		—		—		1,114
Doubtful		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—
	$	21,976	$	2,390	$	74,635	$	4,848	$	2,069	$	355	$	3,145	$	109,418


	December 31, 2019
	Real Estate
	Commercial				One-to-Four
	Real Estate		Land		Family		Construction		Multi-Family		Consumer		Commercial		Total
Pass	$	22,349	$	2,200	$	71,203	$	4,259	$	2,086	$	246	$	2,335	$	104,678
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		1,070		—		—		—		—		1,070
Doubtful		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—
	$	22,349	$	2,200	$	72,273	$	4,259	$	2,086	$	246	$	2,335	$	105,748

The following tables are an aging analysis of loans as of March 31, 2020 and December 31, 2019:

Aged Analysis of Past Due Loans Receivable

(in thousands)


	March 31, 2020
	Accruing
	30-89		90 Days								Total
	Days		and Over		Total				Nonaccrual		Loans
	Past Due		Past Due		Past Due		Current		Status		Receivable
Real Estate:
Residential	$	806	$	—	$	806	$	72,917	$	912	$	74,635
Commercial		—		—		—		21,976		—		21,976
Land		78		—		78		2,300		12		2,390
Construction		—		—		—		4,848		—		4,848
Multi-family		—		—		—		2,069		—		2,069
Consumer		—		—		—		355		—		355
Commercial		—		—		—		3,145		—		3,145
	$	884	$	—	$	884	$	107,610	$	924	$	109,418

Aged Analysis of Past Due Loans Receivable

(in thousands)


	December 31, 2019
	Accruing
	30-89		90 Days								Total
	Days		and Over		Total				Nonaccrual		Loans
	Past Due		Past Due		Past Due		Current		Status		Receivable
Real Estate:
Residential	$	2,366	$	—	$	2,366	$	69,079	$	828	$	72,273
Commercial		—		—		—		22,349		—		22,349
Land		34		—		34		2,166		—		2,200
Construction		—		—		—		4,259		—		4,259
Multi-family		—		—		—		2,086		—		2,086
Consumer		—		—		—		246		—		246
Commercial		—		—		—		2,335		—		2,335
	$	2,400	$	—	$	2,400	$	102,520	$	828	$	105,748

The following tables below present impaired loans disaggregated by class as of and for the three months ended March 31, 2020 and the year ended December 31, 2019:

Impaired Loans

(in thousands)


	As Of And For The Three Months Ended March 31, 2020
					Allowance
			Unpaid		for Loan		Average		Interest
	Recorded		Principal		Losses		Recorded		Income
	Investment		Balance		Allocated		Investment		Recognized
Loans with an allowance recorded:
Real estate
Commercial	$	—	$	—	$	—	$	—	$	—
Land		—		—		—		—		—
1-4 family residential		924		924		113		620		—
Multi-Family		—		—		—		—		—
Construction		—		—		—		—		—
Consumer and Commercial		—		—		—		—		—

Loans with no allowance recorded:
Real estate
Commercial		—		—		—		—		—
Land		—		—		—		—		—
1-4 family residential		—		—		—		—		—
Multi-Family		—		—		—		—		—
Construction		—		—		—		—		—
Consumer and Commercial		—		—		—		—		—

Totals	$	924	$	924	$	113	$	620	$	—

Impaired Loans

(in thousands)


	As Of And For The Year Ended December 31, 2019
					Allowance
			Unpaid		for Loan		Average		Interest
	Recorded		Principal		Losses		Recorded		Income
	Investment		Balance		Allocated		Investment		Recognized
Loans with an allowance recorded:
Real estate
Commercial	$	—	$	—	$	—	$	—	$	—
Land		—		—		—		—		—
1-4 family residential		828		828		85		769		—
Multi-Family		—		—		—		—		—
Construction		—		—		—		—		—
Consumer and Commercial		—		—		—		—		—

Loans with no allowance recorded:
Real estate
Commercial		—		—		—		—		—
Land		—		—		—		—		—
1-4 family residential		—		—		—		—		—
Multi-Family		—		—		—		—		—
Construction		—		—		—		—		—
Consumer and Commercial		—		—		—		—		—

Totals	$	828	$	828	$	85	$	769	$	—

Troubled Debt Restructuring

The Company’s troubled debt restructurings are generally due to a modification of terms allowing the customer to make interest-only payments for an amount of time, an extension of the loan term, and/or a reduction in interest rate to obtain a lower payment for the customer. The Company is not committed to lend additional funds to debtors whose loans have been modified.

Troubled Debt Restructuring

(in thousands)


			Pre-		Post-
			Modification		Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Loans		Investment		Investment
Modifications as of March 31, 2020:

Residential - modified amortization		—	$	—	$	—

Modifications as of December 31, 2019:

Residential - modified amortization		2	$	668	$	668

Prior loan modifications have been performing in compliance with their modified terms.