Bancorp 34, Inc. - Quarter Report: 2018 March (Form 10-Q)

 

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X]	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2018

 

OR

 

[  ]	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from _______________ to ______________________

 

Commission File No. 001-37912

 

Bancorp 34, Inc.

(Exact name of registrant as specified in its charter)

 

Maryland	74-2819148
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)
500 East 10th Street, Alamogordo, New Mexico	88310
(Address of Principal Executive Offices)	(Zip Code)

         

(575) 437-9334

(Registrant’s telephone number)

 

                                         N/A                                         

(Former name or former address, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.

YES  X   NO      .

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES  X    NO     .

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer       ___	Accelerated filer	___
Non-accelerated filer         ___   (Do not check if a smaller reporting company)
	Smaller reporting company	X
	Emerging growth company	X

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES         NO   X  

 

Shares of the Registrant’s common stock, par value $0.01 per share, issued and outstanding as of April 30, 2018 were 3,404,065.

 

 

 

Bancorp 34, Inc.
FORM 10-Q

 

Index 

 

		Page
	Part I. Financial Information
Item 1.	Financial Statements
	Consolidated Balance Sheets as of March 31, 2018 (unaudited) and December 31, 2017	3
	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2018 and 2017 (unaudited)	4
	Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2018 and 2017 (unaudited)	5
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017 (unaudited)	6
	Notes to Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	38
Item 4.	Controls and Procedures	38
	Part II. Other Information
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3.	Defaults upon Senior Securities	38
Item 4.	Mine Safety Disclosures	38
Item 5.	Other Information	39
Item 6.	Exhibits	40
Signatures		41

 

 

 

 

		March 31, 2018				December 31, 2017
ASSETS
Cash and due from banks		$	4,762,315			$	4,988,178
Interest-bearing deposits with banks			7,580,000				4,885,000
Total cash and cash equivalents			12,342,315				9,873,178
Available-for-sale securities, at fair value			26,095,660				24,399,881
Loans held for sale			15,260,895				15,423,670
Loans held for investment			261,478,730				261,012,786
Allowance for loan losses			(3,122,170	)			(3,117,190	)
Loans held for investment, net			258,356,560				257,895,596
Premises and equipment, net			10,094,892				10,120,904
Stock in financial institutions, restricted, at cost			3,842,861				3,825,861
Accrued interest receivable			819,784				838,960
Deferred income taxes, net			2,193,360				2,191,526
Bank owned life insurance			10,204,220				10,135,672
Core deposit intangible, net			207,563				220,664
Prepaid and other assets			1,774,252				1,294,606
TOTAL ASSETS		$	341,192,362			$	336,220,518
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits
Demand deposits		$	42,295,037			$	37,502,593
Savings and NOW deposits			132,285,122				135,009,406
Time deposits			67,228,989				63,049,334
Total deposits			241,809,148				235,561,333
Federal Home Loan Bank advances			45,000,000				45,000,000
Escrows			422,543				296,847
Accrued interest and other liabilities			4,342,357				4,391,649
Total liabilities			291,574,048				285,249,829
Commitments and contingencies (note 4)			-				-
Stockholders’ equity
Preferred stock, $0.01 par value, 50,000,000 authorized, 0 issued and outstanding			-				-
Common stock, $0.01 par value, 100,000,000 authorized, 3,388,601 and 3,490,672 issued and outstanding.			33,886				34,907
Additional paid-in capital			25,372,465				26,849,822
Retained earnings			26,431,225				26,060,598
Accumulated other comprehensive loss, net of tax			(532,854	)			(274,266	)
Unearned employee stock ownership plan (ESOP) shares			(1,686,408	)			(1,700,372	)
Total stockholders’ equity			49,618,314				50,970,689
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	341,192,362			$	336,220,518

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		Three Months Ended March 31,
		2018				2017
Interest income
Interest and fees on loans		$	3,876,008			$	3,438,270
Interest on securities			148,581				130,466
Interest on other interest-earning assets			68,030				53,981
Total interest income			4,092,619				3,622,717
Interest expense
Interest on deposits			493,736				376,308
Interest on borrowings			149,430				103,075
Total interest expense			643,166				479,383
Net interest income			3,449,453				3,143,334
Provision for loan losses			22,000				250,000
Net interest income after provision for loan losses			3,427,453				2,893,334
Noninterest income
Gain on sale of loans			3,353,393				1,964,472
Service charges and fees			84,389				85,957
Bank owned life insurance income			88,597				42,813
Other			24,606				6,791
Total noninterest income			3,550,985				2,100,033
Noninterest expense
Salaries and benefits			4,229,977				3,299,346
Occupancy			505,951				423,758
Data processing fees			723,406				607,023
FDIC and other insurance expense			50,533				56,611
Professional fees			327,056				377,870
Advertising			156,026				141,881
Net other real estate expenses			-				80
Other			519,719				430,220
Total noninterest expense			6,512,668				5,336,789
Income (loss) before income taxes			465,770				(343,422	)
Provision (benefit) for income taxes			95,143				(145,672	)
NET INCOME (LOSS)			370,627				(197,750	)
Other comprehensive (loss) income
Unrealized (loss) gain on available-for-sale securities,
net of $88,680 and (5,153) tax, respectively			(258,588	)			8,512
COMPREHENSIVE INCOME (LOSS)		$	112,039			$	(189,238	)
Earnings per common share:
Basic		$	0.11			$	(0.06	)
Diluted		$	0.11			$	(0.06	)

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																	Accumulated
																	Other
									Additional								Comprehensive				Unearned				Total
	Common				Common				Paid-In				Retained				Income				ESOP				Stockholders'
	Shares				Stock				Capital				Earnings				(Loss)				Shares				Equity
BALANCE, DECEMBER 31, 2016	3,438,190				$	34,382			$	27,161,856			$	25,700,007			$	(363,437	)		$	(1,756,231	)		$	50,776,577
Net loss	-					-				-				(197,750	)			-				-				(197,750	)
Unrealized gain on available-for-sale securities, net of tax	-					-				-				-				8,512				-				8,512
Amortization of equity awards	-					-				4,430				-				-				13,966				18,396
BALANCE, MARCH 31, 2017	3,438,190				$	34,382			$	27,166,286			$	25,502,257			$	(354,925	)		$	(1,742,265	)		$	50,605,735
BALANCE, DECEMBER 31, 2017	3,490,672				$	34,907			$	26,849,822			$	26,060,598			$	(274,266	)		$	(1,700,372	)		$	50,970,689
Net income	-					-				-				370,627				-				-				370,627
Unrealized (loss) on available-for-sale securities, net of tax	-					-				-				-				(258,588	)			-				(258,588	)
Restricted stock awards	429					4				(4)				-				-				-				-
Amortization of equity awards	-					-				93,672				-				-				13,964				107,636
Share repurchase	(102,500)					(1,025	)			(1,571,025	)			-				-				-				(1,572,050	)
BALANCE, MARCH 31, 2018	3,388,601				$	33,886			$	25,372,465			$	26,431,225			$	(532,854	)		$	(1,686,408	)		$	49,618,314

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		Three Months Ended March 31,
		2018				2017
Cash flows from operating activities
Net income (loss)		$	370,627			$	(197,750	)
Adjustments to reconcile net (loss) income to net cash from operating activities:
Depreciation and amortization			175,954				162,936
Stock dividend on financial institution stock			(17,000	)			(10,900	)
Amortization of premiums and discounts on securities, net			77,246				123,681
Amortization of ESOP award			13,964				18,396
Amortization of stock-based compensation			93,672				-
Amortization of core deposit intangible			13,101				16,800
Gain on sale of loans			(3,353,393	)			(1,964,472	)
Proceeds from sale of loans held for sale			76,956,796				54,375,713
Funding of loans held for sale			(72,168,547	)			(45,534,685	)
Provision for loan losses			22,000				250,000
Net appreciation on bank-owned life insurance			(68,548	)			(30,239	)
Deferred income tax benefit			(1,834)				(41,019	)
Changes in operating assets and liabilities:
Accrued interest receivable			19,176				36,188
Prepaid and other assets			(390,966	)			48,321
Accrued interest and other liabilities			(49,292	)			(127,745	)
Net cash provided by operating activities			1,692,956				7,125,225
Cash flows from investing activities
Proceeds from principal payments on available-for-sale securities			1,173,524				1,679,986
Purchases of available-for-sale securities			(3,293,817	)			-
Net change in loans held for investment			(1,755,045	)			(16,690,284	)
Purchases of premises and equipment			(149,942	)			(201,344	)
Net cash used for investing activities			(4,025,280	)			(15,211,642	)
Cash flows from financing activities
Net change in deposits			6,247,815				5,644,998
Net change in escrows			125,696				66,287
Common stock repurchases			(1,572,050	)			-
Net cash provided by financing activities			4,801,461				5,711,285
Net increase (decrease) in cash and cash equivalents			2,469,137				(2,375,132	)
Cash and cash equivalents, beginning of period			9,873,178				16,411,344
Cash and cash equivalents, end of period		$	12,342,315			$	14,036,212
Supplemental disclosures:
Interest paid on deposits and advances		$	571,575			$	481,504
Income taxes paid		$	-			$	25,940
Loans transferred to loans held for sale		$	1,272,081			$	124,369

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NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

 

Bancorp 34, Inc. (“Bancorp 34” or the “Company”) is a Maryland corporation and savings and loan holding company which owns 100% of Bank 34 (the "Bank”).

 

The Bank provides a variety of banking services to individuals and businesses through its full-service branches in Alamogordo and Las Cruces, New Mexico, and Scottsdale and Peoria, Arizona. The Bank also operates ten mortgage loan production offices in El Paso, Texas, Phoenix, Arizona, Scottsdale, Arizona, Yuma, Arizona, Tubac, Arizona, Albuquerque, New Mexico, Lynnwood, Washington, Puyallup, Washington, West Linn, Oregon and Medford, Oregon.

 

A large portion of the Bank’s New Mexico loans are secured by real estate in Otero and Dona Ana Counties. The economy for these counties is heavily dependent on two U.S. Government military installations located in those counties. Accordingly, the ultimate collectability of the Bank’s New Mexico loans is susceptible to changes in U.S. Government military operations in southern New Mexico.

 

The primary deposit products are demand deposits, time deposits, NOW, savings and money market accounts. The primary lending products are real estate mortgage loans and commercial loans. The Bank is subject to competition from other financial institutions and regulated and non-regulated financial services providers, regulation by certain federal agencies and undergoes periodic examinations by regulatory authorities.

 

Rising and falling interest rate environments can have various impacts on the Bank’s net interest income, depending on the short-term interest rate gap that the Bank maintains. The Bank’s net interest income is also affected by prepayments of loans and early withdrawals of deposits.

 

Basis of Presentation – The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America ("GAAP"). In the opinion of management, the accompanying consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial condition, cash flows and results of operations at the dates and for the periods presented. The results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results of operations for the full fiscal year or for any other period. This information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

 

Basis of Consolidation – The consolidated financial statements include the accounts of Bancorp 34 and the Bank. All significant intercompany accounts and transactions have been eliminated.

 

Reclassifications – Certain reclassifications have been made to prior period’s financial information to conform to the current period presentation.

 

Use of Estimates – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Significant estimates include, but are not limited to, allowance for loan losses, useful lives used in depreciation and amortization, deferred income taxes and related valuation allowance, valuation of other real estate and core deposit intangibles.

 

 

Subsequent Events – Subsequent events have been evaluated through April 30, 2018 the date the unaudited consolidated financial statements were issued.

 

Summary of Recent Accounting Pronouncements:

 

Bancorp 34 is an emerging growth company and has elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards. The Company expects to lose its status as an emerging growth company on August 29, 2019, five years after the completion of the acquisition of Bank 1440.

 

Revenue Recognition - In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 implements a comprehensive new revenue recognition standard that will supersede substantially all existing revenue recognition guidance. The new standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2015-4 “Revenue from Contracts with Customers – Deferral of the Effective Date” deferred the effective date of ASU 2014-09 by one year. The Company’s revenue is comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income. The Company does not expect adoption of ASU 2014-09 will have a material impact on our consolidated financial statements and disclosures. We plan to adopt the revenue recognition guidance in the first quarter of 2019 with a cumulative effect adjustment to opening retained earnings, if management deems such adjustment significant. Our implementation efforts to date include identification of revenue streams within the scope of the guidance.

 

Financial Instruments – In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10). The amendment has a number of provisions including the requirements that public business entities use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, a separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e. securities or loans receivables), and eliminating the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendment is effective for the Company in the first quarter of 2019 and is not expected to have a significant impact on the consolidated financial statements.

 

Leases – In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842).” This standard requires entities that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The standard is effective for the Company in the first quarter of 2020. The guidance is required to be applied by the modified retrospective transition approach. Early adoption is permitted. We are currently assessing the impact of the adoption of this authoritative guidance on our consolidated financial statements.

 

Credit Losses - In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this update replace the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to create credit loss estimates. The new guidance is effective for the Company in the first quarter of 2020. The guidance is required to be applied by the modified retrospective approach. Early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently assessing the impact of the adoption of this authoritative guidance on our consolidated financial statements.

 

 

Premium on Callable Debt - In March 2017, the FASB issued ASU No. 2017-08, “Receivables–Nonrefundable Fees and Other Costs (Subtopic 310-20)” to shorten the amortization period for certain purchased callable debt securities held at a premium to the earliest call date. Currently, entities generally amortize the premium as a yield adjustment over the contractual life of the security. The guidance does not change the accounting for callable debt securities held at a discount. For public business entities, the guidance is effective for the Company in the first quarter of 2020. Early adoption is permitted, including in an interim period. ASU 2017-08 is not expected to have a significant impact on our consolidated financial statements.

 

Share-Based Payment Modification - In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Subtopic 718): Scope of Modification Accounting.” ASU 2017-09 clarifies when changes to terms or conditions of a share-based payment award must be accounted for as a modification. Under the new guidance, an entity will not apply modification accounting to a share-based payment award if all of the following are the same immediately before and after the change: (i) the fair value of the award, (ii) the vesting conditions of the award, and (iii) the classification of the award as either an equity or liability instrument. ASU 2017-09 was effective for the Company in the quarter ended March 31, 2018. The guidance requires companies to apply the requirements prospectively to awards modified on or after the adoption date. The adoption of ASU 2017-09 did not have a significant impact on our consolidated financial statements.

 

Reporting Tax Effects of Tax Cuts and Jobs Act - In February 2018, the FASB issued ASU No. 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” that helps organizations address certain stranded income tax effects in accumulated other comprehensive income ("AOCI") resulting from the 2017 Tax Cuts and Jobs Act. The ASU provides financial statement preparers with an option to reclassify stranded tax effects within AOCI to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. The ASU requires financial statement preparers to disclose a description of the accounting policy for releasing income tax effects from AOCI, whether they elect to reclassify the stranded income tax effects from the Tax Cuts and Jobs Act, and information about the other income tax effects that are reclassified. The amendments are effective for the Company in the first quarter of 2019. Early adoption is permitted. Organizations should apply the proposed amendments either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. ASU 2018-02 is not expected to have a significant impact on our consolidated financial statements.

 

 

 

NOTE 2 – AVAILABLE-FOR-SALE SECURITIES

 

Available-for-sale securities have been classified in the consolidated balance sheets according to management’s intent at March 31, 2018 and December 31, 2017. The carrying amount of such securities and their approximate fair values were as follows:

 

 

There were no sales of available-for-sale securities during the three months ended March 31, 2018 or 2017.

 

Amortized cost and fair value of securities by contractual maturity as of March 31, 2018 and December 31, 2017 are shown below. For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the actual contractual maturities of underlying collateral. Expected maturities may differ from contractual maturities because borrowers may call or prepay obligations.

 

The scheduled maturities of available-for-sale securities at March 31, 2018 and December 31, 2017 were as follows:

 

 

 

At March 31, 2018 and December 31, 2017, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

 

At March 31, 2018 and December 31, 2017, mortgage-backed securities included collateralized mortgage obligations of $10.8 million and $10.0 million, respectively, which are backed by single-family mortgage loans. The Company does not hold any securities backed by commercial real estate loans.

 

 

Gross Unrealized Losses and Fair Value – The following tables show the gross unrealized losses and fair values of securities by length of time that individual securities in each category have been in a continuous loss position.

 

 

 

 

 

At March 31, 2018 and December 31, 2017, all of the government agencies and mortgage-backed securities held by the Company were issued by U.S. Government-sponsored entities and agencies, primarily Fannie Mae and Freddie Mac, institutions which the government has affirmed its commitment to support. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at March 31, 2018.

 

Loans and securities with a carrying value of approximately $117.6 million at March 31, 2018 were pledged to secure FHLB advances. In addition, securities with a carrying value of approximately $4.5 million at March 31, 2018 were pledged to secure public deposits.

 

 

 

NOTE 3 – LOANS HELD FOR INVESTMENT, NET

 

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

 

 

At March 31, 2018 and December 31, 2017 loans held for investment includes construction loans of $13.7 million and $14.7 million, respectively.  Commercial real estate construction loans were $12.3 million and $13.4 million at March 31, 2018 and December 31, 2017, respectively.   One- to four-family residential real estate construction loans were $1.4 million and $1.3 million as of March 31, 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 March 31, 2018 and December 31, 2017:

 

 

 

 

The following is a summary of activities for the allowance for loan losses for the three months ended March 31, 2018 and 2017:

 

 

 

Nonperforming Assets – The following tables present an aging analysis of the recorded investment of past due loans as of March 31, 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.

 

 

 

 

 

The following table sets forth nonaccrual loans and other real estate at March 31, 2018 and December 31, 2017:

 

 

Two large loan relationships partially secured by real estate comprise $4.6 million, or 80.7%, of the $5.7 million in nonaccrual loans at March 31, 2018.  $3.6 million, or 63.2%, of the total March 31, 2018 nonaccrual loan balance is guaranteed by the Small Business Administration ("SBA").

 

 

Credit Quality Indicators – The following table represents the credit exposure by internally assigned grades at March 31, 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.

 

 

 

 

 

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.

 

 

 

 

 

During the three months ended March 31, 2018 and 2017, no interest income was recognized on nonaccrual loans as interest collected was credited to loan principal.

 

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 March 31, 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 March 31, 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.