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Note 5 - Loans and Allowance for Loan Losses

6 Months Ended

Jun. 30, 2020

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

Note 5: Loans and Allowance for Loan Losses

Categories of loans at June 30, 2020 and December 31, 2019 include:

	June 30,			December 31,
	2020			2019
Real estate - residential mortgage:
One to four family units	$	127,187,806		$	118,823,731
Multi-family		85,824,232			87,448,418
Real estate - construction		66,354,401			77,308,551
Real estate - commercial		306,700,011			300,619,387
Commercial loans		168,378,978			114,047,753
Consumer and other loans		29,028,801			30,666,185
Total loans		783,474,229			728,914,025
Less:
Allowance for loan losses		(8,787,917	)		(7,607,587	)
Deferred loan fees/costs, net		(2,328,311	)		(574,036	)
Net loans	$	772,358,001		$	720,732,402

Classes of loans by aging at June 30, 2020 and December 31, 2019 were as follows:

As of June 30, 2020
	30-59 Days Past Due		60-89 Days Past Due		90 Days and more Past Due		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days and Accruing
	(In Thousands)
Real estate - residential mortgage:
One to four family units	$	1,185	$	467	$	549	$	2,201	$	124,987	$	127,188	$	-
Multi-family		-		-		-		-		85,824		85,824		-
Real estate - construction		5,355		-		-		5,355		60,999		66,354		-
Real estate - commercial		162		-		-		162		306,538		306,700		-
Commercial loans		685		3,553		-		4,238		164,141		168,379		-
Consumer and other loans		101		1		47		149		28,880		29,029		-
Total	$	7,488	$	4,021	$	596	$	12,105	$	771,369	$	783,474	$	-

As of December 31, 2019
	30-59 Days Past Due		60-89 Days Past Due		90 Days and more Past Due		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days and Accruing
	(In Thousands)
Real estate - residential mortgage:
One to four family units	$	83	$	437	$	125	$	645	$	118,179	$	118,824	$	-
Multi-family		-		-		-		-		87,448		87,448		-
Real estate - construction		338		-		-		338		76,971		77,309		-
Real estate - commercial		-		-		43		43		300,576		300,619		-
Commercial loans		134		105		17		256		113,792		114,048		-
Consumer and other loans		48		26		-		74		30,592		30,666		-
Total	$	603	$	568	$	185	$	1,356	$	727,558	$	728,914	$	-

Nonaccruing loans are summarized as follows:

	June 30,		December 31,
	2020		2019
Real estate - residential mortgage:
One to four family units	$	2,443,808	$	2,398,379
Multi-family		-		-
Real estate - construction		4,442,818		3,738,410
Real estate - commercial		3,308,357		2,941,143
Commercial loans		867,255		855,761
Consumer and other loans		176,979		69,784
Total	$	11,239,217	$	10,003,477

The following tables present the activity in the allowance for loan losses based on portfolio segment for the three and six months ended June 30, 2020 and 2019:

Three months ended June 30, 2020	Construction			Commercial Real Estate		One to four family		Multi-family		Commercial			Consumer and Other			Unallocated			Total
	(In Thousands)
Allowance for loan losses:
Balance, beginning of period	$	1,629		$	2,577	$	1,154	$	755	$	1,349		$	449		$	136		$	8,049
Provision charged to expense		(60	)		421		385		39		(71	)		49			(13	)	$	750
Losses charged off		-			-		-		-		-			(51	)		-		$	(51	)
Recoveries		-			-		-		-		21			19			-		$	40
Balance, end of period	$	1,569		$	2,998	$	1,539	$	794	$	1,299		$	466		$	123		$	8,788

Six months ended June 30, 2020	Construction			Commercial Real Estate		One to four family		Multi-family		Commercial			Consumer and Other			Unallocated			Total
	(In Thousands)
Allowance for loan losses:
Balance, beginning of period	$	1,749		$	2,267	$	1,001	$	746	$	1,129		$	443		$	273		$	7,608
Provision charged to expense		(180	)		725		537		48		167			103			(150	)	$	1,250
Losses charged off		-			-		-		-		(32	)		(113	)		-		$	(145	)
Recoveries		-			6		1		-		35			33			-		$	75
Balance, end of period	$	1,569		$	2,998	$	1,539	$	794	$	1,299		$	466		$	123		$	8,788

Three months ended June 30, 2019	Construction		Commercial Real Estate		One to four family			Multi-family			Commercial			Consumer and Other			Unallocated			Total
	(In Thousands)
Allowance for loan losses:
Balance, beginning of period	$	1,936	$	2,137	$	1,386		$	694		$	974		$	368		$	352		$	7,847
Provision charged to expense		212		31		(168	)		(21	)		262			76			(292	)	$	100
Losses charged off		-		-		(271	)		-			(41	)		(61	)		-		$	(373	)
Recoveries		21		20		1			-			41			14			-		$	97
Balance, end of period	$	2,169	$	2,188	$	948		$	673		$	1,236		$	397		$	60		$	7,671

Six months ended June 30, 2019	Construction			Commercial Real Estate		One to four family			Multi-family		Commercial			Consumer and Other			Unallocated			Total
	(In Thousands)
Allowance for loan losses:
Balance, beginning of period	$	2,306		$	2,093	$	1,297		$	641	$	1,160		$	373		$	126		$	7,996
Provision charged to expense		(278	)		75		(81	)		32		301			117			(66	)	$	100
Losses charged off		-			-		(271	)		-		(275	)		(115	)		-		$	(661	)
Recoveries		141			20		3			-		50			22			-		$	236
Balance, end of period	$	2,169		$	2,188	$	948		$	673	$	1,236		$	397		$	60		$	7,671

The following tables present the recorded investment in loans based on portfolio segment and impairment method as of June 30, 2020 and December 31, 2019:

June 30, 2020	Construction		Commercial Real Estate		One to four family		Multi-family		Commercial		Consumer and Other		Unallocated		Total
Allowance for loan losses:	(In Thousands)
Ending balance: individually evaluated for impairment	$	631	$	96	$	257	$	-	$	319	$	16	$	-	$	1,319
Ending balance: collectively evaluated for impairment	$	938	$	2,902	$	1,282	$	794	$	978	$	450	$	123	$	7,467
Ending balance: loans acquired with deteriorated credit quality	$	-	$	-	$	-	$	-	$	2	$	-	$	-	$	2
Loans:
Ending balance: individually evaluated for impairment	$	4,443	$	1,026	$	2,444	$	-	$	710	$	268	$	-	$	8,891
Ending balance: collectively evaluated for impairment	$	61,911	$	303,250	$	124,744	$	85,824	$	167,358	$	28,761	$	-	$	771,848
Ending balance: loans acquired with deteriorated credit quality	$	-	$	2,424	$	-	$	-	$	311	$	-	$	-	$	2,735

As of December 31, 2019	Construction		Commercial Real Estate		One to four family		Multi-family		Commercial		Consumer and Other		Unallocated		Total
Allowance for loan losses:	(In Thousands)
Ending balance: individually evaluated for impairment	$	553	$	24	$	197	$	-	$	299	$	21	$	-	$	1,094
Ending balance: collectively evaluated for impairment	$	1,196	$	2,243	$	804	$	746	$	830	$	422	$	273	$	6,514
Ending balance: loans acquired with deteriorated credit quality	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Loans:
Ending balance: individually evaluated for impairment	$	4,742	$	650	$	2,613	$	-	$	908	$	220	$	-	$	9,133
Ending balance: collectively evaluated for impairment	$	72,567	$	297,318	$	116,211	$	87,448	$	112,956	$	30,446	$	-	$	716,946
Ending balance: loans acquired with deteriorated credit quality	$	-	$	2,651	$	-	$	-	$	184	$	-	$	-	$	2,835

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. 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 of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Bank’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

Included in the Company’s loan portfolio are certain loans acquired in accordance with ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. These loans were written down at acquisition to an amount estimated to be collectible. As a result, certain ratios regarding the Company’s loan portfolio and credit quality cannot be used to compare the Company to peer companies or to compare the Company’s current credit quality to prior periods. The ratios particularly affected by accounting under ASC 310-30 include the allowance for loan losses as a percentage of loans, nonaccrual loans, and performing assets, and nonaccrual loans and nonperforming loans as a percentage of total loans.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or 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 generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls 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.

Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans.

The following table summarizes the recorded investment in impaired loans at June 30, 2020 and December 31, 2019:

	June 30, 2020						December 31, 2019
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Balance		Unpaid Principal Balance		Specific Allowance
	(In Thousands)
Loans without a specific valuation allowance
Real estate - residential mortgage:
One to four family units	$	1,143	$	1,143	$	-	$	1,392	$	1,392	$	-
Multi-family		-		-		-		-		-		-
Real estate - construction		-		-		-		-		-		-
Real estate - commercial		3,358		3,358		-		3,199		3,199		-
Commercial loans		-		-		-		33		33		-
Consumer and other loans		111		111		-		70		70		-
Loans with a specific valuation allowance
Real estate - residential mortgage:
One to four family units	$	1,301	$	1,301	$	257	$	1,221	$	1,221	$	197
Multi-family		-		-		-		-		-		-
Real estate - construction		4,443		5,676		630		4,742		5,975		553
Real estate - commercial		249		249		96		162		162		24
Commercial loans		864		864		322		999		999		301
Consumer and other loans		157		157		16		150		150		21
Total
Real estate - residential mortgage:
One to four family units	$	2,444	$	2,444	$	257	$	2,613	$	2,613	$	197
Multi-family		-		-		-		-		-		-
Real estate - construction		4,443		5,676		630		4,742		5,975		553
Real estate - commercial		3,607		3,607		96		3,361		3,361		24
Commercial loans		864		864		322		1,032		1,032		301
Consumer and other loans		268		268		16		220		220		21
Total	$	11,626	$	12,859	$	1,321		11,968	$	13,201	$	1,096

The following table summarizes average impaired loans and related interest recognized on impaired loans for the six months ended June 30, 2020 and 2019:

	For the Six Months Ended				For the Six Months Ended
	June 30, 2020				June 30, 2019
	Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized
	(In Thousands)
Loans without a specific valuation allowance
Real estate - residential mortgage:
One to four family units	$	1,106	$	-	$	1,111	$	1
Multi-family		-		-		5,934		-
Real estate - construction		-		-		-		-
Real estate - commercial		3,006		-		3,440		4
Commercial loans		9		-		223		-
Consumer and other loans		105		7		229		-
Loans with a specific valuation allowance
Real estate - residential mortgage:
One to four family units	$	1,224	$	-	$	2,352	$	-
Multi-family		-		-		-		-
Real estate - construction		4,188		-		3,876		-
Real estate - commercial		236		-		717		-
Commercial loans		916		-		659		-
Consumer and other loans		156		-		106		-
Total
Real estate - residential mortgage:
One to four family units	$	2,330	$	-	$	3,463	$	1
Multi-family		-		-		5,934		-
Real estate - construction		4,188		-		3,876		-
Real estate - commercial		3,242		-		4,157		4
Commercial loans		925		-		882		-
Consumer and other loans		261		7		335		-
Total	$	10,946	$	7	$	18,647	$	5

At June 30, 2020, the Bank’s impaired loans shown in the table above included loans that were classified as troubled debt restructurings (“TDR”). The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession.

In assessing whether or not a borrower is experiencing financial difficulties, the Bank considers information currently available regarding the financial condition of the borrower. This information includes, but is not limited to, whether (i) the debtor is currently in payment default on any of its debt; (ii) a payment default is probable in the foreseeable future without the modification; (iii) the debtor has declared or is in the process of declaring bankruptcy and (iv) the debtor’s projected cash flow is sufficient to satisfy the contractual payments due under the original terms of the loan without a modification.

The Bank considers all aspects of the modification to loan terms to determine whether or not a concession has been granted to the borrower. Key factors considered by the Bank include the debtor’s ability to access funds at a market rate for debt with similar risk characteristics, the significance of the modification relative to unpaid principal balance or collateral value of the debt, and the significance of a delay in the timing of payments relative to the original contractual terms of the loan. The most common concessions granted by the Bank generally include one or more modifications to the terms of the debt, such as (i) a reduction in the interest rate for the remaining life of the debt, (ii) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (iii) a reduction on the face amount or maturity amount of the debt as stated in the original loan, (iv) a temporary period of interest-only payments, (v) a reduction in accrued interest, and (vi) an extension of amortization.

The following table presents the carrying balance of TDRs as of June 30, 2020 and December 31, 2019:

	June 30, 2020		December 31, 2019
Real estate - residential mortgage:
One to four family units	$	1,161,988	$	1,163,782
Multi-family		-		-
Real estate - construction		4,442,818		3,738,409
Real estate - commercial		896,454		161,491
Commercial loans		710,395		572,683
Total		7,211,655	$	5,636,365

The Bank has allocated $1,127,146 and $927,216 of specific reserves to customers whose loan terms have been modified as a TDR as of June 30, 2020 and December 31, 2019, respectively.

There were no TDRs for which there was a payment default within twelve months following the modification during the three months ending June 30, 2020 and 2019. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

As part of the on-going monitoring of the credit quality of the Bank’s loan portfolio, management tracks loans by an internal rating system. All loans are assigned an internal credit quality rating based on an analysis of the borrower’s financial condition. The criteria used to assign quality ratings to extensions of credit that exhibit potential problems or well-defined weaknesses are primarily based upon the degree of risk and the likelihood of orderly repayment, and their effect on the Bank’s safety and soundness. The following are the internally assigned ratings:

Pass: This rating represents loans that have strong asset quality and liquidity along with a multi-year track record of profitability.

Special mention: This rating represents loans that are currently protected but are potentially weak. The credit risk may be relatively minor, yet constitute an increased risk in light of the circumstances surrounding a specific loan.

Substandard: This rating represents loans that show signs of continuing negative financial trends and unprofitability and therefore, is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.

Doubtful: This rating represents loans that have all the weaknesses of substandard classified loans with the additional characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

Risk characteristics applicable to each segment of the loan portfolio are described as follows.

Real estate-Residential 1-4 family: The residential 1-4 family real estate loans are generally secured by owner-occupied 1-4 family residences. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers. Credit risk in these loans can be impacted by economic conditions within the Bank’s market areas that might impact either property values or a borrower’s personal income. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Real estate-Multi-Family: Loans secured by multi-family residential real estate generally involve a greater degree of credit risk than one- to four-family residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family residential real estate is typically dependent upon the successful operation of the related real estate property. If the cash flow from the project is reduced, the borrower's ability to repay the loan may be impaired. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Bank’s market areas.

Real estate-Construction: Construction and land development real estate loans are usually based upon estimates of costs and estimated value of the completed project and include independent appraisal reviews and a financial analysis of the developers and property owners. Sources of repayment of these loans may include permanent loans, sales of developed property or an interim loan commitment from the Bank until permanent financing is obtained. These loans are considered to be higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Bank’s market areas.

Real estate-Commercial: Commercial real estate loans typically involve larger principal amounts, and repayment of these loans is generally dependent on the successful operations of the property securing the loan or the business conducted on the property securing the loan. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Bank’s market areas.

Commercial: The commercial portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation. Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations.

Consumer: The consumer loan portfolio consists of various term and line of credit loans such as automobile loans and loans for other personal purposes. Repayment for these types of loans will come from a borrower’s income sources that are typically independent of the loan purpose. Credit risk is driven by consumer economic factors (such as unemployment and general economic conditions in the Bank’s market area) and the creditworthiness of a borrower.

The following tables provide information about the credit quality of the loan portfolio using the Bank’s internal rating system as of June 30, 2020 and December 31, 2019:

June 30, 2020	Construction		Commercial Real Estate		One to four family		Multi-family		Commercial		Consumer and Other		Total
	(In Thousands)
Rating:
Pass	$	61,834	$	295,826	$	122,677	$	85,824	$	154,901	$	28,761	$	749,823
Special Mention		-		625		1,035		-		8,541		-		10,201
Substandard		4,520		10,249		3,476		-		4,937		268		23,450
Doubtful		-		-		-		-		-		-		-
Total	$	66,354	$	306,700	$	127,188	$	85,824	$	168,379	$	29,029	$	783,474

December 31, 2019	Construction		Commercial Real Estate		One to four family		Multi-family		Commercial		Consumer and Other		Total
	(In Thousands)
Rating:
Pass	$	73,489	$	292,674	$	115,622	$	87,448	$	100,658	$	29,666	$	699,557
Special Mention		-		1,476		535		-		8,793		-		10,804
Substandard		3,820		6,469		2,667		-		4,597		1,000		18,553
Doubtful		-		-		-		-		-		-		-
Total	$	77,309	$	300,619	$	118,824	$	87,448	$	114,048	$	30,666	$	728,914

The above amounts include purchased credit impaired loans. At June 30, 2020, purchased credit impaired loans comprised of $2.7 million were rated “Substandard”.

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

The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the loan is well-secured and in process of collection. 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.

Commercial Loan Referral Income: In certain circumstances, the Company enters into variable-rate loan agreements (Assumable Rate Conversion “ARC” Master Servicing Agreements) with commercial loan customers, and the customer simultaneously enters into an interest swap agreement directly with a third-party (the “counterparty”). This allows the loan customer to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. The Company is required to enter into a transaction agreement as part of each loan. The agreement results in the assumption of credit and market risk equivalent by the Bank. The agreement states that in an event of default by the loan customer, the Bank must pay a termination amount to the extent it is positive. The termination value is defined by the Master Agreement, which is in essence the fair value of the derivative on the event date. The counterparty pays a fee to the Company for brokering the transaction and for servicing the loan/swap agreement between the customer and the counterparty. Fee income related to these agreements was $936,486 and $0 for the six months ended June 30, 2020 and 2019, respectively.