Bancorp 34, Inc. - Quarter Report: 2019 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, 2019

 

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 every Interactive Data File required to be submitted 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 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         ___
	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 28, 2019 were 3,356,155.

 

 

 

Bancorp 34, Inc.
FORM 10-Q

 

Index 

 

		Page
	Part I. Financial Information
Item 1.	Financial Statements
	Consolidated Balance Sheets as of March 31, 2019 (unaudited) and December 31, 2018	4
	Consolidated Statements of Comprehensive Income for the Three Months ended March 31, 2019 and 2018 (unaudited)	5
	Consolidated Statements of Changes in Stockholders’ Equity for the Three Months ended March 31, 2019 (unaudited) and Year Ended December 31, 2018	6
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 (unaudited)	7
	Notes to Consolidated Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
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, 2019				December 31, 2018
ASSETS
Cash and due from banks		$	4,718,880			$	6,374,457
Interest-bearing deposits with banks			6,855,000				5,400,000
Total cash and cash equivalents			11,573,880				11,774,457
Available-for-sale securities, at fair value			32,570,879				33,428,658
Loans held for sale, at fair value			14,614,579				26,884,014
Loans held for investment			289,856,142				285,691,372
Allowance for loan losses			(2,981,412	)			(2,901,091	)
Loans held for investment, net			286,874,730				282,790,281
Premises and equipment, net			9,464,710				9,615,626
Stock in financial institutions, restricted, at cost			3,937,361				3,910,361
Accrued interest receivable			963,269				875,040
Deferred income taxes, net			2,103,654				2,196,928
Bank owned life insurance			10,641,381				10,573,069
Core deposit intangible, net			161,893				172,108
Prepaid and other assets			1,088,406				1,057,365
TOTAL ASSETS		$	373,994,742			$	383,277,907
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits
Demand deposits		$	43,655,695			$	45,350,477
Savings and NOW deposits			146,259,640				142,349,920
Time deposits			77,969,777				77,538,576
Total deposits			267,885,112				265,238,973
Federal Home Loan Bank advances			50,000,000				67,000,000
Escrows			424,049				378,592
Accrued interest and other liabilities			9,131,724				4,237,608
Total liabilities			327,440,885				336,855,173
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, 3,356,155 and 3,374,565 issued and outstanding.			33,561				33,746
Additional paid-in capital			25,309,067				25,500,873
Retained earnings			22,969,985				22,928,777
Accumulated other comprehensive loss, net of tax			(132,301	)			(396,148	)
Unearned employee stock ownership plan (ESOP) shares			(1,626,455	)			(1,644,514	)
Total stockholders’ equity			46,553,857				46,422,734
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	373,994,742			$	383,277,907

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		Three Months Ended March 31,
		2019				2018
Interest income
Interest and fees on loans		$	4,332,096			$	3,876,008
Interest on securities			223,807				148,581
Interest on other interest-earning assets			121,988				68,030
Total interest income			4,677,891				4,092,619
Interest expense
Interest on deposits			861,269				493,736
Interest on borrowings			371,756				149,430
Total interest expense			1,233,025				643,166
Net interest income			3,444,866				3,449,453
Provision for loan losses			87,500				22,000
Net interest income after provision for loan losses			3,357,366				3,427,453
Noninterest income
Gain on sale of loans			2,744,581				3,353,393
Service charges and fees			95,199				84,389
Bank owned life insurance income			91,261				88,597
Other			11,157				24,606
Total noninterest income			2,942,198				3,550,985
Noninterest expense
Salaries and benefits			4,148,518				4,229,977
Occupancy			499,462				505,951
Data processing fees			786,591				723,406
FDIC and other insurance expense			85,603				50,533
Professional fees			238,138				354,604
Advertising			114,389				156,026
Other			379,646				492,171
Total noninterest expense			6,252,347				6,512,668
Income before provision for income taxes			47,217				465,770
Provision for income taxes			6,009				95,143
NET INCOME			41,208				370,627
Other comprehensive income
Unrealized (loss) gain on available-for-sale securities			353,919				(347,268	)
Tax effect of unrealized (loss) gain on available-for-sale securities			(90,072	)			88,680
Unrealized (loss) gain on available-for-sale securities, net of tax			263,847				(258,588	)
COMPREHENSIVE INCOME		$	305,055			$	112,039
Earnings per common share:
Basic		$	0.01			$	0.11
Diluted		$	0.01			$	0.11

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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, 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 gain on available-for-sale securities, net			-				-				-				-				(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
BALANCE, DECEMBER 31, 2018			3,374,565			$	33,746			$	25,500,873			$	22,928,777			$	(396,148	)		$	(1,644,514	)		$	46,422,734
Net income			-			$	-			$	-			$	41,208			$	-			$	-			$	41,208
Unrealized gain on available-for-sale securities, net			-				-				-				-				263,847				-				263,847
Amortization of equity awards			-				-				85,680				-				-				18,059				103,739
Share repurchase			(18,410	)			(185	)			(277,486	)			-				-				-				(277,671	)
BALANCE, MARCH 31, 2019			3,356,155			$	33,561			$	25,309,067			$	22,969,985			$	(132,301	)		$	(1,626,455	)		$	46,553,857

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		Three Months Ended March 31,
		2019				2018
Cash flows from operating activities
Net income		$	41,208			$	370,627
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization			162,472				175,954
Stock dividend on financial institution stock			(27,000	)			(17,000	)
Amortization of premiums and discounts on securities, net			27,718				77,246
Amortization of ESOP awards			18,059				13,964
Amortization of stock-based compensation			85,680				93,672
Amortization of core deposit intangible			10,215				13,101
Gain on sale of loans			(2,744,581	)			(3,353,393	)
Proceeds from sale of loans held for sale			76,550,254				76,956,796
Funding of loans held for sale			(61,105,134	)			(72,168,547	)
Provision for loan losses			87,500				22,000
Net appreciation on bank-owned life insurance			(68,312	)			(68,548	)
Deferred income tax (benefit) expense			-				(1,834	)
Changes in operating assets and liabilities:
Accrued interest receivable			(88,229	)			19,176
Prepaid and other assets			(27,839	)			(390,966	)
Accrued interest and other liabilities			4,894,116				(49,292	)
Net cash from operating activities			17,816,127				1,692,956
Cash flows from investing activities
Proceeds from principal payments on available-for-sale securities			1,183,980				1,173,524
Purchases of available-for-sale securities			-				(3,293,817	)
Net change in loans held for investment			(4,603,053	)			(1,755,045	)
Purchases of premises and equipment			(11,556	)			(149,942	)
Net cash from investing activities			(3,430,629	)			(4,025,280	)
Cash flows from financing activities
Net change in deposits			2,646,139				6,247,815
Net change in escrows			45,457				125,696
Proceeds from Federal Home Loan Bank advances			5,000,000				30,000,000
Repayments of Federal Home Loan Bank advances			(22,000,000	)			(30,000,000	)
Common stock repurchases			(277,671	)			(1,572,050	)
Net cash from financing activities			(14,586,075	)			4,801,461
Net change in cash and cash equivalents			(200,577	)			2,469,137
Cash and cash equivalents, beginning of period			11,774,457				9,873,178
Cash and cash equivalents, end of period		$	11,573,880			$	12,342,315
Supplemental disclosures:
Interest on deposits and advances paid			1,171,513				571,575
Loans transferred to loans held for sale			431,104				1,272,081

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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 the common stock 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, Scottsdale, Arizona, Gilbert, 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 unaudited 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, 2019 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, 2018.

 

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.

 

Emerging Growth Company Status - Bancorp 34 is an emerging growth company under the JOBS Act and expects to lose its status as an emerging growth company at the end of 2019.  Bancorp 34 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.

 

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, other-than-temporary impairment of securities, useful lives used in depreciation and amortization, deferred income taxes, valuation of other real estate and core deposit intangibles.

 

Subsequent Events – Subsequent events have been evaluated through 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 at the end of 2019.

 

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 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective.  ASU 2014-09 would have been initially effective for the Company's reporting period beginning January 1, 2018. However, in August of 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers - Deferral of the Effective Date, which deferred the effective date by one year. For financial reporting purposes, the standard allows for either a full retrospective or modified retrospective adoption. The FASB has also issued additional updates to provide further clarification to specific implementation issues associated with ASU 2014-09. These updates include ASU 2016-08, Principal versus Agent Considerations, ASU 2016-10, Identifying Performance Obligations and Licensing, ASU 2016-12, Narrow-Scope Improvements and Practical Expedients, and ASU 2016-20, Technical Corrections and Improvements to Topic 606. We adopted the standard on January 1, 2019, using the modified retrospective method, which resulted in no cumulative effect and no other adjustment or significant impact to the timing of revenue recognition.

 

Under Topic 606, we must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) we satisfy the performance obligations. Our primary sources of revenue are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of Topic 606. We have evaluated the nature of our contracts with customers and determined that further disaggregation of revenue from contracts with customers into categories beyond what is presented in the Consolidated Statements of Income was not necessary. For revenue sources that are within the scope of Topic 606, we fully satisfy our performance obligations and recognize revenue in the period it is earned as services are rendered. Transaction prices are typically fixed, charged on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with our customers.

 

All of our revenue from contracts with customers in the scope of ASC 606 is recognized in Non-Interest Income. Sources of revenue from contracts with customers that are in the scope of ASC 606 include the following:

 

* Service Charges on Deposit accounts - We earn monthly account fees and transaction-based fees from our customers for services rendered on deposit accounts. Fees charged to deposit accounts on a monthly basis are recognized as the performance obligation is satisfied at the end of the service period.

 

* Transaction-based fees are based on specific services provided to our customer. The performance obligation is completed as the transaction occurs and the fees are recognized at the time each specific service is provided to the customer.

 

* ATM and Point of Sale fees – We earn fees when debit cards we issued are used in transactions through card processing networks. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the cardholders’ account. The fees are recognized monthly.

 

 

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 fiscal years and interim periods within those fiscal years beginning after December 15, 2018 for public companies, but the Company will have until the first quarter of 2020 to adopt due to its emerging growth company status. 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 and collecting the data necessary for that assessment and adoption.

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 public companies that are U.S. Securities and Exchange Commission filers for fiscal years beginning after December 15, 2019 including interim periods within those fiscal years. For all other public companies, the amendments are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. For all other companies, including emerging growth companies, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. 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 fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. 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.

 

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 all organizations for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. 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. We adopted ASU 2018-02 effective December 2018 and reclassified the stranded tax effects from AOCI to retained earnings. Adoption did not 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, 2019 and December 31, 2018. The amortized cost 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, 2019 or 2018.

 

Amortized cost and fair value of securities by contractual maturity as of March 31, 2019 and December 31, 2018 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, 2019 and December 31, 2018 were as follows:

 

 

 

At March 31, 2019 and December 31, 2018, 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, 2019 and December 31, 2018, mortgage-backed securities included collateralized mortgage obligations of $13.4 million and $13.8 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, 2019 and December 31, 2018, 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, 2019.

 

Loans and securities with a carrying value of approximately $155.2 million at March 31, 2019 were pledged to secure Federal Home Loan Bank (“FHLB”) advances. In addition, securities with a carrying value of approximately $3.7 million at March 31, 2019 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, 2019 and December 31, 2018, loans held for investment includes construction loans of $21.8 million and $20.8 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, 2019 and December 31, 2018:

 

 

 

 

The following tables summarize activities for the allowance for loan losses for the three months ended March 31, 2019 and 2018:

 

 

 

Nonperforming Assets – The following tables present an aging analysis of the recorded investment of past due loans as of March 31, 2019 and December 31, 2018. 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, 2019 and December 31, 2018:

 

 

 

One large loan relationship,75% guaranteed by the SBA and partially secured by real estate, comprises $2.7 million, or 76%, of the $3.6 million in nonaccrual loans at March 31, 2019 and $2.3 million, or 64% of the total March 31, 2019 nonaccrual loan balance, is guaranteed by the SBA.

 

 

Credit Quality Indicators – The following table represents the credit exposure by internally assigned grades at March 31, 2019 and December 31, 2018. 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 each of the three months ended March 31, 2019 and 2018, no interest income was recognized on nonaccrual loans.

 

 

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, 2019 and December 31, 2018.

 

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 balances of $52,000 and $54,000, as of March 31, 2019 and December 31, 2018, respectively.