MainStreet Bancshares, Inc. - Quarter Report: 2019 March (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

☒	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                      to                     

Commission file number: 001-38817

 

 

 

MainStreet Bancshares, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Virginia		81-2871064
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

10089 Fairfax Boulevard, Fairfax, VA 22030

(Address of Principal Executive Offices and Zip Code)

(703) 481-4567

(Registrant’s Telephone Number, Including Area Code)

Not applicable

(Former name, former address and former fiscal year, 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 filing requirements for the past 90 days.    ☐  Yes    ☒  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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ☒  Yes    ☐  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” or an “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer		☐		Accelerated filer		☐
Non-accelerated filer		☒		Smaller reporting company		☒
Emerging growth company		☒

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

Securities registered pursuant to Section 12(b) of the Act.

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock		MNSB		The Nasdaq Stock Market LLC

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of May 10, 2019, there were 8,250,259 outstanding shares, par value $4.00 per share, of the issuer’s common stock.

 

 

 

INDEX

 

PART I – FINANCIAL INFORMATION			3
Item 1 – Consolidated Financial Statements			3
Notes to Consolidated Financial Statements			8
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations			33
Item 3 – Quantitative and Qualitative Disclosures about Market Risk			44
Item 4 – Controls and Procedures			45
PART II OTHER INFORMATION			45
Item 1 – Legal Proceedings			45
Item 1A – Risk Factors			45
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds			45
Item 3 – Defaults upon Senior Securities			45
Item 4 – Mine Safety Disclosures			45
Item 5 – Other Information			45
Item 6 – Exhibits			46
SIGNATURES			47

 

2

PART I – FINANCIAL INFORMATION

Item 1 – Consolidated Financial Statements – Unaudited

MAINSTREET BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Financial Condition as of March 31, 2019 and December 31, 2018; (Dollars in thousands, except per share data)

 

		At March 31, 2019 (unaudited)				At December 31, 2018 (*)
Assets
Cash and due from banks		$	29,741			$	27,886
Federal funds sold			30,034				30,190
Cash and cash equivalents			59,775				58,076
Investment securities available-for-sale, at fair value			69,308				55,979
Investment securities held-to-maturity			25,487				26,178
Restricted securities, at cost			5,732				5,894
Loans receivable, net of allowance for loan losses of $9,189 at March 31, 2019 and $8,831 at December 31, 2018			943,735				917,125
Premises and equipment, net			14,226				14,222
Accrued interest and other receivables			5,644				5,148
Bank owned life insurance			14,169				14,064
Other assets			8,005				3,927
Total Assets		$	1,146,081			$	1,100,613
Liabilities and Stockholders’ Equity
Liabilities
Non-interest bearing deposits		$	193,744			$	211,749
Interest bearing demand deposits			59,639				60,588
Savings and NOW deposits			61,537				51,371
Money market deposits			147,655				138,152
Time deposits			504,252				458,277
Total deposits			966,827				920,137
Federal Home Loan Bank advances			30,000				40,000
Subordinated debt, net			14,783				14,776
Other liabilities			9,488				4,449
Total Liabilities			1,021,098				979,362
Stockholders’ Equity
Preferred stock, $1.00 par value, 2,000,000 shares authorized; no shares issued and outstanding as of March 31, 2019 and December 31, 2018.			—				—
Common stock, $4.00 par value, 10,000,000 shares authorized; issued and outstanding 8,249,759 shares (including 153,086 nonvested shares) for March 31, 2019 and 8,177,978 shares (including 133,869 nonvested shares) for December 31, 2018.			32,387				32,176
Capital surplus			74,353				74,256
Retained earnings			18,395				15,186
Accumulated other comprehensive loss			(152	)			(367	)
Total Stockholders’ Equity			124,983				121,251
Total Liabilities and Stockholders’ Equity		$	1,146,081			$	1,100,613

 

*	Derived from audited consolidated financial statements.

See Notes to the Unaudited Consolidated Financial Statements

 

3

MAINSTREET BANCSHARES, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Income for the Three Months Ended March 31, 2019 and 2018; (Dollars in thousands, except per share data)

 

		For the Three Months Ended March 31,
		2019				2018
Interest Income
Interest and fees on loans		$	12,916			$	8,316
Interest on investments securities			556				341
Interest on federal funds sold			345				100
Total Interest Income			13,817				8,757
Interest Expense
Interest on interest bearing DDA deposits			245				164
Interest on savings and NOW deposits			73				46
Interest on money market deposits			763				264
Interest on time deposits			2,931				1,091
Interest on Federal Home Loan Bank advances and other borrowings			219				179
Interest on subordinated debt			238				238
Total Interest Expense			4,469				1,982
Net interest income			9,348				6,775
Provision for Loan Losses			325				635
Net interest income after provision for loan losses			9,023				6,140
Non-Interest Income
Deposit account service charges			370				213
Bank owned life insurance income			105				106
Other fee income			451				189
Total Non-Interest Income			926				508
Non-Interest Expense
Salaries and employee benefits			3,860				2,749
Furniture and equipment expenses			385				381
Advertising and marketing			105				156
Occupancy expenses			213				151
Outside services			227				196
Administrative expenses			167				118
Other operating expenses			1,051				826
Total Non-Interest Expense			6,008				4,577
Income before income taxes			3,941				2,071
Income Tax Expense			694				385
Net Income		$	3,247			$	1,686
Net Income per common share:
Basic		$	0.39			$	0.29
Diluted		$	0.39			$	0.29

See Notes to the Unaudited Consolidated Financial Statements

 

4

MAINSTREET BANCSHARES, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2019 and 2018 (Dollars in thousands)

 

		For the Three Months Ended March 31,
		2019				2018
Comprehensive Income, net of taxes
Net Income		$	3,247			$	1,686
Other comprehensive gain (loss), net of tax:
Unrealized gains (losses) on available for sale securities arising during the period (net of tax (benefit), $56 and ($37), respectively)			209				(140	)
Add: reclassification adjustment for amortization of unrealized losses on securities transferred from available for sale to held to maturity (net of tax, $1 and $2, respectively)			6				7
Other comprehensive income (loss)			215				(133	)
Comprehensive Income		$	3,462			$	1,553

See Notes to the Unaudited Consolidated Financial Statements

 

5

MAINSTREET BANCSHARES, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2019 and 2018 (Dollars in thousands, except per share data)

 

														Accumulated Other Comprehensive
		Common				Capital				Retained
		Stock				Surplus				Earnings				Income(Loss)				Total
Balance, December, 2018		$	32,176			$	74,256			$	15,186			$	(367	)		$	121,251
Vesting of restricted stock			211				(211	)			—				—				—
Stock based compensation expense			—				270				—				—				270
Net income			—				—				3,247				—				3,247
Change related to restricted stock awards			—				38				(38	)			—				—
Other comprehensive income			—				—				—				215				215
Balance, March 31, 2019		$	32,387			$	74,353			$	18,395			$	(152	)		$	124,983
														Accumulated Other Comprehensive
		Common				Capital				Retained
		Stock				Surplus				Earnings				Income(Loss)				Total
Balance, December, 2017		$	21,442			$	35,693			$	11,682			$	(20	)		$	68,797
Vesting of restricted stock			137				(137	)			—				—				—
Stock based compensation expense			—				213				—				—				213
Net income			—				—				1,686				—				1,686
Other comprehensive loss			—				—				—				(133	)			(133	)
Balance, March 31, 2018		$	21,579			$	35,769			$	13,368			$	(153	)		$	70,563

See Notes to the Unaudited Consolidated Financial Statements

 

6

MAINSTREET BANCSHARES, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Cash Flows (Dollars in thousands)

 

Three Months Ended March 31, 2019 and 2018		2019				2018
Cash Flows from Operating Activities
Net income		$	3,247			$	1,686
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion, net			378				401
Deferred income tax benefit			(94	)			(116	)
Provision for loan losses			325				635
Stock based compensation expense			270				213
Income from bank owned life insurance			(105	)			(106	)
Subordinated debt amortization expense			7				7
Gain on disposal of premises and equipment			(59	)			—
Change in:
Accrued interest receivable and other receivables			(503	)			(89	)
Other assets			(3,984	)			(18	)
Other liabilities			5,039				330
Net cash provided by operating activities			4,521				2,943
Cash Flows from Investing Activities
Activity in available-for-sale securities:
Payments			806				986
Maturities and repayments			30,000				30,000
Purchases			(43,984	)			(27,025	)
Activity in held-to-maturity securities:
Refunded			650				—
Purchases of restricted investment in bank stock			(1,113	)			(1,644	)
Redemption of restricted investment in bank stock			1,275				340
Net (increase) decrease in loan portfolio			(26,935	)			(48,996	)
Proceeds from sale of premises and equipment			69				—
Purchases of premises and equipment			(280	)			(812	)
Net cash used in investing activities			(39,512	)			(47,151	)
Cash Flows from Financing Activities
Net decrease in non-interest deposits			(18,005	)			(6,777	)
Net increase in interest bearing demand, savings, and time deposits			64,695				30,056
Net decrease in Federal Home Loan Bank advances and other borrowings			(10,000	)			10,349
Net cash provided by financing activities			36,690				33,628
Increase (Decrease) in Cash and Cash Equivalents			1,699				(10,580	)
Cash and Cash Equivalents, beginning of period			58,076				37,493
Cash and Cash Equivalents, end of period		$	59,775			$	26,913
Supplementary Disclosure of Cash Flow Information
Cash paid during the period for interest		$	3,929			$	1,648
Cash paid during the period for income taxes		$	—			$	1,831
Right of use assets obtained in exchange for new operating lease liabilities		$	2,647			$	—

See Notes to the Unaudited Consolidated Financial Statements

 

7

MAINSTREET BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

Note 1. Organization, Basis of Presentation and Impact of Recently Issued Accounting Pronouncements

Organization

MainStreet Bancshares Inc. (the “Company”) is a bank holding company incorporated under the laws of the Commonwealth of Virginia whose principal activity is the ownership and management of MainStreet Bank. On May 18, 2016, the stockholders of MainStreet Bank (the “Bank”) approved a Reorganization Agreement and Plan of Share Exchange (“Reorganization”) whereby the Bank would reorganize into a holding company structure. The Plan of Share Exchange called for each outstanding share of Bank common stock to be automatically converted into and exchanged for one share of the Company’s common stock, and the common stockholders of the Bank would become the common stockholders of the Company on the effective date of the Reorganization. The Company is authorized to issue 10,000,000 shares of common stock with a par value of $4.00 per share. Additionally, the Company is authorized to issue 2,000,000 shares of preferred stock at a par value $1.00 per share. There is currently no preferred stock outstanding. There are no plans currently nor does the Board of Directors of the Company anticipate any need in the foreseeable future to issue shares of preferred stock.

On July 15, 2016, the Reorganization became effective, and the Bank became a wholly-owned subsidiary of the Company. The holding company is regulated under the Bank Holding Company Act of 1956, as amended (“BHC Act”) and is subject to inspection, examination, and supervision by the Federal Reserve Board.

On April 18, 2019, the Company completed the registration of its common stock with the Securities Exchange Commission through its filing of a General Form for Registration of Securities on Form 10 (“Form 10”), pursuant to Section 12(b) of the Securities Exchange Act of 1934. The Company is considered an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the “JOBS Act,” and as defined in Section 2(a) of the Securities Act of 1933, as amended, or the “Securities Act.” We are also a “smaller reporting company” as defined in Exchange Act Rule 12b-2. As such, we may elect to comply with certain reduced public company reporting requirements in future reports that we file with the Securities and Exchange Commission, or the “SEC.”

We were approved to list shares of our common stock on the Nasdaq Capital Market under our current symbol “MNSB.” as of April 22, 2019.

MainStreet Bank is headquartered in Fairfax, Virginia where it also operates a branch. The Bank was incorporated on March 28, 2003 and received its charter from the Bureau of Financial Institutions of the Commonwealth of Virginia (the “Bureau”) on March 16, 2004. The Bank commenced regular operations on May 26, 2004 and is supervised by the Bureau and the Federal Reserve Bank of Richmond. The Bank is a member of the Federal Reserve System and the Federal Deposit Insurance Corporation. The Bank places special emphasis on serving the needs of individuals, and small and medium-sized business and professional concerns in the Washington, D.C. metropolitan area.

Basis of Presentation

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) for interim information and with the instructions to the Quarterly Report on Form 10-Q, as applicable to a smaller reporting company. Accordingly, they do not include all the information and footnotes required by US GAAP for complete financial statements.

The financial statements are unaudited; but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation thereof. The balances as of December 31, 2018 have been derived from the audited consolidated financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto contained in the Form 10 filed by the Company with the U.S. Securities and Exchange Commission on February 15, 2019. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019, events through the date of issuance of the financial statements included herein.

 

8

Principles of Consolidation – The unaudited interim consolidated financial statements include accounts of the Company and its wholly-owned subsidiary, the Bank. All significant intercompany transactions and balances have been eliminated in consolidation.

Cash and cash equivalents – For the purpose of presentation in the Statements of Cash Flows, the Bank has defined cash and cash equivalents as those amounts included in the balance sheet captions “Cash and due from banks” and “Federal funds sold.”

Investment securities – The Bank’s investment securities are classified as either held to maturity, available for sale or trading. At March 31, 2019 and December 31, 2018, the Bank held approximately $25.5 million and $26.2 million, respectively, in securities classified as held to maturity. The Bank held no securities classified as trading. Municipal securities that were originally purchased as available for sale were transferred to held to maturity during 2013. The unrealized loss on the securities transferred to held to maturity is being amortized over the expected life of the securities. At March 31, 2019 and December 31, 2018, the unamortized unrealized loss was $102,336 and $109,420, respectively, before tax, and remains in accumulated other comprehensive loss, net of tax.

Securities which are not classified as held to maturity or trading are classified as securities available for sale. Securities available for sale are reported at fair value. Any unrealized gain or loss, net of applicable income taxes, is reported as a separate addition to or reduction from stockholders’ equity. Gains and losses arising from the sale of securities available for sale are recognized based on the specific identification method on a trade-date basis and included in results of operations.

Securities held to maturity includes securities purchased with the ability and positive intent to hold to maturity. Debt securities are stated at historical cost adjusted for amortization of premiums and accretion of discount. Any investment security, for which there has been a value impairment deemed by management to be other than temporary, is written down to its estimated market value or fair value with a charge to current operations.

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In determining whether other-than-temporary impairment exists, management considers many factors, including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether the Bank intends to sell the security, whether it is more likely than not that the Bank will be required to sell the security before recovery of its amortized cost basis, and whether the Bank expects to recover the security’s entire amortized cost basis. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Restricted equity securities consist of the Federal Reserve Bank and Federal Home Loan Bank of Atlanta (“FHLB”) stock in the amount of $3.3 million and $2.3 million respectively, as of March 31, 2019, compared to $3.3 million and $2.4 million, respectively, as of December 31, 2018. Restricted equity securities also consisted of $126,800 in Community Bankers Bank stock at March 31, 2019 and December 31, 2018. This restricted stock is recorded at cost because its ownership is restricted and it lacks a market for resale. The Bank is required to maintain Federal Reserve Bank stock at a level of 6% of capital and surplus. The FHLB requires the Bank to maintain stock, at a minimum, in an amount equal to 4.5% of outstanding borrowings and 0.20% of total assets. When evaluating restricted stock for impairment, its value is based on ultimate recoverability of the par value rather than by recognizing temporary declines in value. The Bank does not consider these investments to be impaired at March 31, 2019 or December 31, 2018 and no previous impairment has been recognized.

Loans - The Bank makes commercial and consumer loans to customers. Our recorded investment in loans that management has the intent and ability to hold for the foreseeable future, or until maturity or pay-off, generally are reported at their unpaid principal balances adjusted for charge-offs, unearned discounts, any deferred fees or costs on originated loans, and the allowance for loan losses. Interest on loans is credited to operations based on the principal amount outstanding. Loan fees and origination costs are deferred and the net amount is amortized as an adjustment of the related loan’s yield using the effective interest method. The Bank is amortizing these amounts over the contractual life of the related loans.

 

9

A loan’s past due status is based on the contractual due date of the most delinquent payment due. All loans which are 30 or more days past due at the end of the month are reported to the Board of Directors. Commercial loans are generally placed on nonaccrual status when the collection of principal or interest is 90 days or more past due, or earlier, if collection is uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the borrower. Consumer loans are generally placed on nonaccrual status when the collection of principal or interest is 120 days or more past due, or earlier, if collection is uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the borrower. Loans greater than 90 days past due may remain on accrual status if management determines it has adequate collateral to cover the principal and interest. For those loans that are carried on nonaccrual status, payments are first applied to principal outstanding. A loan may be returned to accrual status if the borrower has demonstrated a sustained period of repayment performance in accordance with the contractual terms of the loan and there is reasonable assurance the borrower will continue to make payments as agreed. It is Bank policy to charge-off loans whose collectability is sufficiently questionable and can no longer be justified as an asset on the balance sheet. To determine if a loan should be charged-off, all possible sources of repayment are analyzed, including: (1) the potential for future cash flow, (2) the value of the Bank’s collateral, and (3) the strength of co-makers or guarantors. All principal and previously accrued interest is charged to the allowance for loan losses. All future payments received on the loan are credited to the allowance for loan losses as a recovery. These policies are applied consistently across our loan portfolio.

Impairment of a loan - The Bank considers a loan impaired when it is probable that the Bank will be unable to collect all interest and principal payments as scheduled in the loan agreement. A loan is not considered impaired during a period of an insignificant delay in payment if the ultimate collectability of all amounts due is expected. Impairment is measured on a loan by loan basis for all commercial, construction and residential loans 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. Consistent with the Bank’s method for nonaccrual loans, payments on impaired loans are first applied to principal outstanding. Smaller balance consumer loans are not individually evaluated for impairment.

Troubled Debt Restructuring (TDR) occurs when the Bank agrees to modify the original terms of a loan due to the deterioration in the financial condition of the borrower. TDRs are considered impaired loans. Upon designation as a TDR, the Bank evaluates the borrower’s payment history, past due status and ability to make payments based on the revised terms of the loan. If a loan was accruing prior to being modified as a TDR and if the Bank concludes that the borrower is able to continue making such payments, and there are no other factors or circumstances that would cause it to conclude otherwise, the loan will remain on an accruing status. If a loan was on nonaccrual status at the time of the TDR, the loan will remain on nonaccrual status following the modification and may be returned to accrual status based on the policy for returning loans to accrual status as noted above. Restructured loans for which there was no rate concession, and therefore made at a market rate of interest, may be eligible to be removed from TDR status in periods subsequent to the restructuring depending on the performance of the loan. As of March 31, 2019, and December 31, 2018, the Bank had approximately $3.4 million of loans classified as TDR. At March 31, 2019 and December 31, 2018, TDR loans consisted of two loans. One loan in the amount of approximately $1.5 million is currently performing in accordance with its modified terms. The other loan in the amount of approximately $1.9 million is on non-accrual.

Allowance for Loan Losses - The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. Loan losses are charged against the allowance for loan losses for the difference between the carrying value of the loan and the estimated net realizable value or fair value of the collateral, if collateral dependent, when:

 

•

Management believes that the collectability of the principal is unlikely regardless of delinquency status.

 

•

The loan is a consumer loan and is 120 days past due.

 

•

The loan is a non-consumer loan, unless the loan is well secured and recovery is probable.

 

•

The borrower is in bankruptcy, unless the debt has been reaffirmed, is well secured and recovery is probable.

Subsequent recoveries, if any, are credited to the allowance.

 

10

The allowance represents an amount that, in management’s judgment, will be adequate to absorb probable losses inherent in the loan portfolio. Management’s judgment in determining the level of the allowance is based on evaluations of the collectability of loans while taking into consideration such factors as trends in delinquencies and charge-offs, changes in the nature and volume of the loan portfolio, current economic conditions that may affect a borrower’s ability to repay and the value of collateral, overall portfolio quality and review of specific potential losses. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The evaluation also considers the following risk characteristics of each loan portfolio segment:

 

•

Real estate residential mortgage loans, including equity lines of credit, carry risks associated with the continued credit-worthiness of the borrower and the changes in the value of the collateral.

 

•

Real estate construction loans and land improvement carry risks that the project will not be finished according to schedule, the project will not be finished according to budget and the value of the collateral may, at any point in time, be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor, who may or may not be a loan customer, may be unable to finish the construction project as planned because of financial pressure unrelated to the project.

 

•

Commercial real estate loans carry risks of the client’s ability to repay the loan from the cash flow derived from the underlying real estate. Risks inherent in managing a commercial real estate portfolio relate to sudden or gradual drops in property values as well as changes in the economic climate. Real estate security diminishes risks only to the extent that a market exists for the subject collateral. These risks are attempted to be mitigated by carefully underwriting loans of this type and by following appropriate loan-to-value standards.

 

•

Commercial and industrial loans carry risks associated with the successful operation of a business or a real estate project, in addition to other risks associated with the ownership of real estate, because the repayment of these loans may be dependent upon the profitability and cash flows of the business or project. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time and cannot be appraised with as much precision.

 

•

Consumer secured loans (indirect lending) carry risks associated with the continued credit-worthiness of the borrower and the value of the collateral (e.g., rapidly-depreciating assets such as automobiles). These risks are attempted to be mitigated by following appropriate loan-to-value standards and an experienced management team for this type of portfolio.

 

•

Consumer unsecured loans (credit cards) carry risks associated with the continued credit-worthiness of the borrower. Consumer unsecured loans are more likely to be immediately adversely affected by job loss, divorce, illness or personal bankruptcy.

The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired and 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. For collateral dependent loans, an updated appraisal will be ordered if a current one is not on file. Appraisals are performed by independent third-party appraisers with the relevant industry experience. Adjustments to the appraised value may be made based on recent sales of like properties or general market conditions when appropriate. The general component covers non-classified or performing loans and those loans classified as substandard or special mention that are not impaired. The general component is based on historical loss experience adjusted for qualitative factors, such as current economic conditions, including current home sales and foreclosures, unemployment rates and retail sales. Non-impaired classified loans are assigned a higher allowance factor based on an internal migration analysis, which increases with the severity of classification, than non-classified loans. The characteristics of the loan ratings are as follows:

 

•

Pass rated loans are to persons or business entities with an acceptable financial condition, appropriate collateral margins, appropriate cash flow to service the existing loan, and an appropriate leverage ratio. The borrower has paid all obligations as agreed and it is expected that this type of payment history will continue. When necessary, acceptable personal guarantors support the loan.

 

•

Watch rated loans have all the characteristics of pass rated loans but show signs of emerging financial weaknesses which the Bank will continue monitoring more closely Watch rated loans are still performing as agreed.

 

•

Special mention loans have a specific defined weakness in the borrower’s operations and the borrower’s ability to generate positive cash flow on a sustained basis. The borrower’s recent payment history is characterized by late payments. The Bank’s risk exposure is mitigated by collateral supporting the loan. The collateral is considered to be well-margined, well maintained, accessible and readily marketable.

 

11

•

Substandard loans are considered to have specific and well-defined weaknesses that jeopardize the viability of the Bank’s credit extension. The payment history for the loan has been inconsistent and the expected or projected primary repayment source may be inadequate to service the loan. The estimated net liquidation value of the collateral pledged and/or ability of the personal guarantor(s) to pay the loan may not adequately protect the Bank. There is a distinct possibility that the Bank will sustain some loss if the deficiencies associated with the loan are not corrected in the near term. A substandard loan would not automatically meet our definition of impaired unless the loan is significantly past due and the borrower’s performance and financial condition provide evidence that it is probable that the Bank will be unable to collect all amounts due.

 

•

Doubtful rated loans have all the weaknesses inherent in a loan that is classified substandard but with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high.

 

•

Loss rated loans are not considered collectible under normal circumstances and there is no realistic expectation for any future payment on the loan. Loss rated loans are fully charged off.

Other Real Estate Owned (“OREO”)- Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less costs to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, management periodically performs valuations of the foreclosed assets based on updated appraisals, general market conditions, and recent sales of like properties, length of time the properties have been held and our ability and intention with regard to continued ownership of the properties. The Bank may incur additional write-downs of foreclosed assets to fair value less costs to sell if valuations indicate a further deterioration in market values. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets and improvements are capitalized.

Interest income on loans – Interest on loans is accrued and credited to income on daily balances of the principal amount outstanding. The accrual of interest on loans is discontinued when, in the opinion of management, there is an indication that the borrower may be unable to meet payments as they become due. Upon such discontinuance, all unpaid accrued interest is reversed.

Generally, the Bank will return a loan to accrual status when all delinquent interest and principal becomes current and remains current for six consecutive months under the terms of the loan agreement or the loan is well-secured or in process of collection. Upon returning to accrual status, interest payments applied to the principal balance of a loan while in nonaccrual status are recognized as a yield adjustment over the remaining life.

Loan origination and commitment fees and certain related direct costs - Loan origination and commitment fees charged by the Bank and certain direct loan origination costs are deferred and the net amount is amortized as a yield adjustment. The Bank amortizes these net amounts over the life of the related loans or, in the case of demand loans, over the estimated life. Net fees related to standby letters of credit are recognized over the commitment period.

Premises and equipment – Land is carried at cost. Premises and equipment are stated at cost, less accumulated depreciation and amortization computed principally on the straight-line basis over the estimated useful life of each asset, which ranges from 3 to 27.5 years. Leasehold improvements are amortized over the shorter of the related lease term or the estimated useful lives of the improvements. Construction in progress includes assets which will be reclassified and depreciated once placed into service.

Income taxes – The Bank uses an asset and liability approach in financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. The principal items relate primarily to differences between the allowance for loan losses, deferred loan fees, and accumulated depreciation and amortization. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense (benefit) is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.

 

12

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. As of March 31, 2019, and December 31, 2018, there were no such liabilities recorded.

Interest and penalties associated with unrecognized tax benefits, if any, would be classified as additional income taxes in the statement of operations.

Comprehensive income – Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although, certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

Stock compensation plans – Stock compensation accounting guidance (FASB ASC 718, “Compensation – Stock Compensation”) requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued.

The stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employees’ service period, generally defined as the vesting period. For awards with graded-vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. A Black-Sholes model is used to estimate the fair value of stock options, while the market price of the Bank’s common stock at the date of grant is used for restricted stock awards. No stock options were granted during 2019 and 2018.

Earnings per share – Net income per common share has been determined under the provisions of FASB ASC 260, “Earnings Per Share” and has been computed based on the weighted average common shares outstanding during the quarter ended March 31 (8,242,873 for 2019 and 5,799,496 for 2018 as adjusted for a 5% stock dividend issued April 30, 2018). Diluted earnings per share reflect additional potential common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance.

The only potential dilutive stock of the Bank as defined in FASB ASC 260 would be stock options granted to various directors, officers, and employees of the Bank. There were no such options outstanding at March 31, 2019 or December 31, 2018. Restricted stock is included in the computation of basic earnings per share as the holder is entitled to full benefits of a stockholder during the vesting period.

Off-balance sheet instruments – In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments consisting of commitments to extend credit, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded, or related fees are incurred or received.

Advertising and marketing expense – Advertising and marketing costs are expensed as incurred.

Use of estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from the estimates.

 

13

The Company’s critical accounting policies relate to (1) the allowance for loan losses, (2) fair value of financial instruments, (3) derivative financial instruments, and (4) income taxes. These critical accounting policies require the use of estimates, assumptions and judgments which are based on information available as of the date of the financial statements. Accordingly, as this information changes, future financial statements could reflect the use of different estimates, assumptions and judgments. Certain determinations inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. In connection with the determination of the allowances for losses on loans and valuation of other real estate owned management obtains independent appraisals for significant properties.

Fair value of financial instruments – Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 5. Fair value estimates involve uncertainties and matters of significant judgment. Changes in assumptions or in market conditions could significantly affect the estimates.

Derivative Financial Instruments – The Bank recognizes derivative financial instruments at fair value as either an other asset or other liability in the consolidated balance sheet. The Bank’s derivative financial instruments include interest rate swaps with certain qualifying commercial loan customers and dealer counterparties. Because the interest rate swaps with loan customers and dealer counterparties are not designated as hedging instruments, adjustments to reflect unrealized gains and losses resulting from changes in fair value of these instruments are reported as noninterest income or noninterest expense, as applicable. The Bank’s interest rate swaps with loan customers and dealer counterparties are described more fully in Note 4.

Transfers of financial assets – Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank – put presumptively beyond reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.

Impact of Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements. In anticipation of the ASU, the Company has entered into a contract with a third party, compiled data for the modeling and is working on developing an estimate using historically and qualitative data based on the requirements of ASU 2016-13.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments modify the disclosure requirements in Topic 820 to add disclosures regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty. Certain disclosure requirements in Topic 820 are also removed or modified. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Certain of the amendments are to be applied prospectively while others are to be applied retrospectively. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-13 to have a material impact on its consolidated financial statements.

 

14

Note 2. Investment Securities

Investment securities available-for-sale was comprised of the following:

 

		March 31, 2019
(Dollars in thousands)		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
U.S. Treasury Securities		$	29,994			$	—			$	(8	)		$	29,986
Collateralized Mortgage Backed			10,400				16				(127	)			10,289
Subordinated Debt			2,000				28				—				2,028
Municipal Securities			17,068				260				(30	)			17,298
U.S Governmental Agencies			9,947				—				(240	)			9,707
Total		$	69,409			$	304			$	(405	)		$	69,308

Investment securities held-to-maturity was comprised of the following:

 

		March 31, 2019
(Dollars in thousands)		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Municipal Securities		$	23,987			$	492			$	(126	)		$	24,353
Subordinated Debt			1,500				—				—				1,500
Total		$	25,487			$	492			$	(126	)		$	25,853

Investment securities available-for-sale was comprised of the following:

 

		December 31, 2018
(Dollars in thousands)		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
U.S. Treasury Securities		$	29,996			$	1			$	—			$	29,997
Collateralized Mortgage Backed			4,967				21				(95	)			4,893
Subordinated Debt			2,000				15				—				2,015
Municipal Securities			8,869				—				(36	)			8,833
U.S Governmental Agencies			10,516				—				(275	)			10,241
Total		$	56,348			$	37			$	(406	)		$	55,979

Investment securities held-to-maturity was comprised of the following:

 

		December 31, 2018
(Dollars in thousands)		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Municipal Securities		$	24,678			$	314			$	(260	)		$	24,732
Subordinated Debt			1,500				—				—				1,500
Total		$	26,178			$	314			$	(260	)		$	26,232

 

15

The scheduled maturities of securities available-for-sale and held-to-maturity at March 31, 2019 were as follows:

 

		March 31, 2019
		Available-for-Sale								Held-to-Maturity
(Dollars in thousands)		Amortized Cost				Fair Value				Amortized Cost				Fair Value
Due in one year or less		$	30,012			$	30,005			$	—			$	—
Due from one to five years			582				581				517				530
Due from after five to ten years			3,021				3,041				7,236				7,368
Due after ten years			35,794				35,681				17,734				17,955
Total		$	69,409			$	69,308			$	25,487			$	25,853

Securities with a fair value of $265,064 and $258,046 at March 31, 2019 and December 31, 2018, respectively, were pledged to secure FHLB advances.

There were no sales of available-for-sale securities for the three months ended March 31, 2019 and 2018.

The following tables summarize the unrealized loss positions of securities available-for-sale and held-to-maturity as of March 31, 2019 and December 31, 2018:

 

		March 31, 2019
		Less than 12 Months								12 Months or Longer								Total
(Dollars in thousands)		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
Available-for-sale:
U.S. Treasury Securities		$	29,986			$	(8	)		$	—			$	—			$	29,986			$	(8	)
Collateralized Mortgage Backed			7,385				(61	)			2,581				(66	)			9,966				(127	)
Municipal Securities			1,872				(21	)			1,594				(9	)			3,466				(30	)
U.S Governmental Agencies			1,532				(18	)			8,085				(222	)			9,617				(240	)
Total		$	40,775			$	(108	)		$	12,260			$	(297	)		$	53,035			$	(405	)
Held-to-maturity:
Municipal securities			—				—				6,435				(126	)			6,435				(126	)
Total		$	—			$	—			$	6,435			$	(126	)		$	6,435			$	(126	)

 

16

		December 31, 2018
		Less than 12 Months								12 Months or Longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
(Dollars in thousands)		Value				Loss				Value				Loss				Value				Loss
Available-for-sale:
Collateralized Mortgage Backed			1,706				(14	)			2,659				(81	)			4,365				(95	)
Municipal Securities			3,684				(18	)			1,588				(18	)			5,272				(36	)
U.S Government Agencies			6,520				(121	)			3,586				(154	)			10,106				(275	)
Total		$	11,910			$	(153	)		$	7,833			$	(253	)		$	19,743			$	(406	)
Held-to-maturity:
Municipal Securities		$	1,025			$	(5	)		$	8,899			$	(255	)		$	9,924			$	(260	)
Total		$	1,025			$	(5	)		$	8,899			$	(255	)		$	9,924			$	(260	)

The factors considered in evaluating securities for impairment include whether the Bank intends to sell the security, whether it is more likely than not that the Bank will be required to sell the security before recovery of its amortized cost basis, and whether the Bank expects to recover the security’s entire amortized cost basis. These unrealized losses are primarily attributable to current financial market conditions for these types of investments, particularly changes in interest rates, causing bond prices to decline, and are not attributable to credit deterioration.

At March 31, 2019, there was one U.S. Treasury security with a fair value of approximately $30.0 million, five collateralized mortgage backed securities with fair values totaling approximately $7.4 million, one U.S. government agency with a fair value totaling $1.5 million, and two municipal securities with fair values totaling $1.8 million considered temporarily impaired and in an unrealized loss position of less than 12 months. At March 31, 2019, there were six collateralized mortgage backed securities with fair values totaling $2.6 million, eight U.S. government agencies with fair values totaling approximately $8.1 million, and fifteen municipal securities with fair values totaling $8.0 million that were in an unrealized loss position of more than 12 months. The Bank does not consider the securities in the available for sale or held to maturity portfolio to be other-than-temporarily impaired at March 31, 2019 and December 31, 2018. There were no securities sold during 2019 and 2018.

All municipal securities originally purchased as available for sale were transferred to held to maturity during 2013. The unrealized loss on the securities transferred to held to maturity is being amortized over the expected life of the securities. The unamortized, unrealized loss, before tax, at March 31, 2019 and December 31, 2018 was $102,336 and $109,420, respectively.

 

17

Note 3. Loans Receivable

Loans receivable were comprised of the following:

 

		March 31,				December 31,
(Dollars in thousands)		2019				2018
Residential Real Estate:
Single family		$	143,761			$	139,620
Multifamily			7,306				9,182
Farmland			817				825
Commercial Real Estate:
Owner-occupied			140,463				121,622
Non-owner occupied			269,059				256,139
Construction and Land Development			192,494				183,551
Commercial – Non Real-Estate:
Commercial & industrial			105,391				114,221
Consumer – Non Real Estate:
Unsecured			1,429				1,402
Secured			93,870				100,875
Total Gross Loans			954,590				927,437
Less: unearned fees			(1,606	)			(1,400	)
Less: unamortized discount on consumer secured loans			(60	)			(81	)
Less: allowance for loan losses			(9,189	)			(8,831	)
Net Loans		$	943,735			$	917,125

The secure consumer loans above include $99,088 and $452,190 of overdrafts reclassified as loans for the quarters ended March 31, 2019 and December 31, 2018, respectively.

The Bank held no loans for sale at March 31, 2019 and December 31, 2018.

 

18

The following tables summarize the activity in the allowance for loan losses by loan class for the three months ended March 31, 2019 and 2018.

Allowance for Credit Losses By Portfolio Segment

For the three months ended March 31, 2019

 

		Real Estate
		Residential				Commercial				Construction				Consumer				Commercial				Total
(Dollars in thousands)
Beginning Balance		$	1,019			$	4,299			$	1,469			$	826			$	1,218			$	8,831
Charge-offs			—				—				—				—				—				—
Recoveries			30				—				—				3				—				33
Provision			52				139				66				32				36				325
Ending Balance		$	1,101			$	4,438			$	1,535			$	861			$	1,254			$	9,189
Ending Balance:
Individually evaluated for Impairment			—			$	733				—				—				—			$	733
Collectively evaluated for Impairment		$	1,101			$	3,705			$	1,535			$	861			$	1,254			$	8,456
Allowance for Credit Losses By Portfolio Segment
For the three months ended March 31, 2018
		Real Estate
		Residential				Commercial				Construction				Consumer				Commercial				Total
(Dollars in thousands)
Beginning Balance		$	789			$	2,339			$	833			$	742			$	1,002			$	5,705
Charge-offs			—				—				—				(10	)			—				(10	)
Recoveries			—				1				—				2				1				4
Provision			56				254				152				90				83				635
Ending Balance		$	845			$	2,594			$	985			$	824			$	1,086			$	6,334
Ending Balance:
Individually evaluated for Impairment			—			$	202				—				—				—			$	202
Collectively evaluated for Impairment		$	845			$	2,392			$	985			$	824			$	1,086			$	6,132

The Company maintains a general allowance for loan losses based on evaluating known and inherent risks in the loan portfolio, including management’s continuing analysis of the factors underlying the quality of the loan portfolio. These factors include changes in the size and composition of the loan portfolio, actual loan loss experience, and current and anticipated economic conditions. The reserve is an estimate based upon factors and trends identified by management at the time the financial statements are prepared.

 

19

The following tables summarize information in regards to the recorded investment in loans receivable by loan class as of March 31, 2019 and December 31, 2018:

 

March 31, 2019
Loans Receivable
(Dollars in thousands)		Ending Balance				Ending Balance: Individually Evaluated for Impairment				Ending Balance: Collectively Evaluated for Impairment
Residential Real Estate		$	151,884			$	1,502			$	150,382
Commercial Real Estate			409,522				1,939				407,583
Construction and Land Development			192,494				—				192,494
Commercial & Industrial			105,391				—				105,391
Consumer			95,299				—				95,299
Total		$	954,590			$	3,441			$	951,149

 

December 31, 2018
Loans Receivable
(Dollars in thousands)		Ending Balance				Ending Balance: Individually Evaluated for Impairment				Ending Balance: Collectively Evaluated for Impairment
Residential Real Estate		$	149,627			$	1,510			$	148,117
Commercial Real Estate			377,761				1,939				375,822
Construction and Land Development			183,551				—				183,551
Commercial & Industrial			114,221				—				114,221
Consumer			102,277				—				102,277
Total		$	927,437			$	3,449			$	923,988

 

20

The following table summarizes information in regard to impaired loans by loan portfolio class as of March 31, 2019 and December 31, 2018:

 

		March 31, 2019												December 31, 2018
(Dollars in thousands)		Recorded Investment				Unpaid Principal Balance				Related Allowance				Recorded Investment				Unpaid Principal Balance				Related Allowance
With no related allowance recorded
Residential Real Estate:
Single family		$	1,502			$	1,502			$	—			$	1,510			$	1,510			$	—
			1,502				1,502				—				1,510				1,510				—
With an allowance recorded
Commercial Real Estate:
Owner occupied			1,939				1,939				733				1,939				1,939				733
			1,939				1,939				733				1,939				1,939				733
Total		$	3,441			$	3,441			$	733			$	3,449			$	3,449			$	733

The following table presents additional information regarding the impaired loans for the three months ended March 31, 2019 and March 31, 2018:

 

		Three Months Ended March 31,
		2019								2018
(Dollars in thousands)		Average Record Investment				Interest Income Recognized				Average Record Investment				Interest Income Recognized
With no related allowance recorded
Residential Real Estate:
Single family		$	1,506			$	15			$	1,526			$	15
			1,506				15				1,526				15
With an allowance recorded
Commercial Real Estate:
Owner occupied			1,939				—				1,939				—
			1,939				—				1,939				—
Total		$	3,445			$	15			$	3,465			$	15

If interest on nonaccrual loans had been accrued, such income would have been $35,155 and $26,715 for the three months ended March 31, 2019 and 2018.

 

21

The following table presents nonaccrual loans by classes of the loan portfolio as of March 31, 2019 and December 31, 2018:

 

		March 31,				December 31,
(Dollars in thousands)		2019				2018
Commercial Real Estate:
Owner occupied		$	1,939			$	1,939
Total		$	1,939			$	1,939

Credit quality risk ratings include regulatory classifications of Pass, Watch, Special Mention, Substandard, Doubtful and Loss. Loans classified as Pass have quality metrics to support that the loan will be repaid according to the terms established. Loans classified as Watch have similar characteristics as Pass loans with some emerging signs of financial weaknesses that should be monitored closer. Loans classified as Special Mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of prospects for repayment. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass.

The following tables summarize the aggregate Pass and criticized categories of Watch, Special Mention, Substandard and Doubtful within the Company’s internal risk rating system as of March 31, 2019 and December 31, 2018:

 

		March 31, 2019
										Special
(Dollars in thousands)		Pass				Watch				Mention				Substandard				Doubtful				Total
Residential Real Estate:
Single Family		$	143,380			$	—			$	—			$	381			$	—			$	143,761
Multifamily			7,306				—				—				—				—				7,306
Farmland			817				—				—				—				—				817
Commercial Real Estate:
Owner occupied			136,747				—				—				1,777				1,939				140,463
Non-owner occupied			269,059				—				—				—				—				269,059
Construction & Land Development			192,494				—				—				—				—				192,494
Commercial – Non Real Estate:
Commercial & industrial			100,268				2,384				—				2,739				—				105,391
Consumer – Non Real Estate:
Unsecured			1,429				—				—				—				—				1,429
Secured			93,870				—				—				—				—				93,870
Total		$	945,370			$	2,384				—			$	4,897			$	1,939			$	954,590
		December 31, 2018
										Special
(Dollars in thousands)		Pass				Watch				Mention				Substandard				Doubtful				Total
Residential Real Estate:
Single Family		$	138,483			$	755			$	—			$	382			$	—			$	139,620
Multifamily			9,182				—				—				—				—				9,182
Farmland			825				—				—				—				—				825
Commercial Real Estate:
Owner occupied			117,906				1,777				—				—				1,939				121,622
Non-owner occupied			256,139				—				—				—				—				256,139
Construction & Land Development			183,551				—				—				—				—				183,551
Commercial – Non Real Estate:
Commercial & industrial			110,631				1,333			$	2,257				—				—				114,221
Consumer – Non Real Estate:
Unsecured			1,402				—				—				—				—				1,402
Secured			100,875				—				—				—				—				100,875
Total		$	918,994			$	3,865			$	2,257			$	382			$	1,939			$	927,437

 

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