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Section 1: 10-K (10-K)

cfbi-10k_20180930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended September 30, 2018

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to                  

 

Commission File Number: 001-38074

 

Community First Bancshares, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

Federal

 

82-1147778

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

3175 Highway 278, Covington, Georgia

 

30014

(Address of principal executive offices)

 

(Zip code)

 

(770) 786-7088

(Registrant’s telephone number including area code)

 

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

 

Title of each class

Name of exchange on which registered

Common Stock, par value $0.01 per share

The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes    No 

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

Yes    No 

 

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 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 such shorter period that the registrant was required to submit such files). Yes    No 

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  

 

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

 

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 

 

The aggregate value of the voting and non-voting common stock held by non-affiliates of the registrant, computed by reference to the closing price of the common stock of $11.36 as of March 31, 2018, was $37.6 million.

 

As of December 20, 2018 there were 7,486,216 shares outstanding of the registrant’s common stock.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

1.  Portions of the Proxy Statement for the 2019 Annual Meeting of Stockholders. (Part III)

 

 

 

 

 


TABLE OF CONTENTS

 

 

 

PAGE

 

 

 

PART I

 

2

 

 

 

ITEM 1.

Business

2

 

 

 

ITEM 1A.

Risk Factors

29

 

 

 

ITEM 1B.

Unresolved Staff Comments

29

 

 

 

ITEM 2.

Properties

30

 

 

 

ITEM 3.

Legal Proceedings

30

 

 

 

ITEM 4.

Mine Safety Disclosures

30

 

 

 

PART II

 

31

 

 

 

ITEM 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

31

 

 

 

ITEM 6.

Selected Financial Data

32

 

 

 

ITEM 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

34

 

 

 

ITEM 7A.

Quantitative and Qualitative Disclosures About Market Risk

45

 

 

 

ITEM 8.

Financial Statements and Supplementary Data

F-1

 

 

 

ITEM 9.

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

45

 

 

 

ITEM 9A.

Controls and Procedures

45

 

 

 

ITEM 9B.

Other Information

45

 

 

 

PART III

 

46

 

 

 

ITEM 10.

Directors, Executive Officers and Corporate Governance

46

 

 

 

ITEM 11.

Executive Compensation

46

 

 

 

ITEM 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

46

 

 

 

ITEM 13.

Certain Relationships and Related Transactions, and Director Independence

47

 

 

 

ITEM 14.

Principal Accountant Fees and Services

47

 

 

 

PART IV

 

48

 

 

 

ITEM 15.

Exhibits and Financial Statement Schedules

48

 

 

 

ITEM 16.

Form 10-K Summary

49

 

 

 

SIGNATURES

 

50

 

 

 

1


 

PART I

ITEM 1.

Business

Forward Looking Statements

This annual report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “contemplate,” “continue,” “potential,” “target” and words of similar meaning.  These forward-looking statements include, but are not limited to:

 

statements of our goals, intentions and expectations;

 

statements regarding our business plans, prospects, growth and operating strategies;

 

statements regarding the quality of our loan and investment portfolios; and

 

estimates of our risks and future costs and benefits.

These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.  Accordingly, you should not place undue reliance on such statements.  We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this annual report.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

general economic conditions, either nationally or in our market areas, that are worse than expected;

 

changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses;

 

our ability to access cost-effective funding;

 

fluctuations in real estate values and both residential and commercial real estate market conditions;

 

demand for loans and deposits in our market area;

 

our ability to implement and change our business strategies;

 

competition among depository and other financial institutions;

 

inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments or our level of loan originations, or prepayments on loans we have made and make;

 

adverse changes in the securities or secondary mortgage markets;

 

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

 

changes in the quality or composition of our loan or investment portfolios;

 

technological changes that may be more difficult or expensive than expected, or the failure or breaches of information technology security systems;

2


 

 

the inability of third-party providers to perform as expected;

 

our ability to manage market risk, credit risk and operational risk in the current economic environment;

 

our ability to enter new markets successfully and capitalize on growth opportunities;

 

our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto;

 

changes in consumer spending, borrowing and savings habits;

 

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;

 

our ability to retain key employees;

 

our compensation expense associated with equity allocated or awarded to our employees; and

 

changes in the financial condition, results of operations or future prospects of issuers of securities that we own. 

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

Community First Bancshares, Inc.

Community First Bancshares, Inc., a federal corporation that was organized in 2017, is a savings and loan holding company headquartered in Covington, Georgia. Community First Bancshares, Inc.’s common stock is traded on the Nasdaq Capital Market under the symbol “CFBI.”  Community First Bancshares, Inc. conducts its operations primarily through its wholly owned subsidiary, Newton Federal Bank, a federally chartered savings bank. Community First Bancshares, Inc. manages its operations as one unit, and thus does not have separate operating segments. At September 30, 2018, Community First Bancshares, Inc. had total assets of $306.0 million, loans of $222.5 million, deposits of $216.4 million, and stockholders’ equity of $76.4 million.

Community First Bancshares, Inc. was formed as part of the mutual holding company reorganization of Newton Federal Bank, which was completed in April 2017.  In connection with the reorganization, Community First Bancshares, Inc. sold 3,467,595 shares of common stock to the public at $10.00 per share, representing 46% of its outstanding shares of common stock.  Community First Bancshares, MHC has been organized as a mutual holding company under the laws of the United States and owns the remaining 54% of the outstanding common stock of Community First Bancshares, Inc.          

The executive offices of Community First Bancshares, Inc. are located at 3175 Highway 278, Covington, Georgia 30014, and its telephone number is (770) 786-7088. Community First Bancshares, Inc. is subject to comprehensive regulation and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”).

Community First Bancshares, MHC

Community First Bancshares, MHC was formed as a federal mutual holding company and will, for as long as it is in existence, own a majority of the outstanding shares of Community First Bancshares, Inc.’s common stock.  

Community First Bancshares, MHC’s principal assets are the common stock of Community First Bancshares, Inc. it received in the reorganization and offering and $100,000 cash in initial capitalization, which was contributed from the net proceeds of the stock offering.  Presently, it is expected that the only business activity of Community First Bancshares, MHC will be to own a majority of Community First Bancshares, Inc.’s common stock.  Community First Bancshares, MHC is authorized, however, to engage in any other business activities that are permissible for mutual holding companies under federal law, including investing in loans and securities.

3


 

Newton Federal Bank

Newton Federal Bank is a federally chartered stock savings association headquartered in Covington, Georgia.  Newton Federal Bank was originally chartered in 1928 as a Georgia-chartered mutual building and loan association under the name Newton County Building and Loan Association.  In 1947, we converted to a federal charter and changed our name to “Newton Federal Savings and Loan Association.” In 2004 we changed our name to “Newton Federal Bank.”  In 2017 we reorganized from the mutual to the stock form of ownership.

Our business consists primarily of taking deposits from the general public and, historically, investing those deposits, together with funds generated from operations, in one- to four-family residential real estate loans, and, to a lesser extent, commercial real estate loans, commercial and industrial loans, construction and land loans and consumer loans.  Subject to market conditions, we expect to increase our focus on originating commercial real estate loans, commercial and industrial loans, construction loans, and indirect automobile loans in an effort to diversify our overall loan portfolio, increase the overall yield earned on our loans and assist in managing interest rate risk.  We also invest in securities, which have historically consisted primarily of mortgage-backed securities issued by U.S. government sponsored enterprises and Federal Home Loan Bank stock.  We offer a variety of deposit accounts, including checking accounts, savings accounts and certificate of deposit accounts.  We have also used Federal Home Loan Bank borrowings to fund our operations.

Newton Federal Bank is subject to comprehensive regulation and examination by the Office of the Comptroller of the Currency.  Newton Federal Bank is a member of the Federal Home Loan Bank system.  Our website address is www.newtonfederal.com.   Information on our website is not considered a part of this report.

Market Area

 

We conduct our operations from our main office and branch office in Covington, Georgia, which are located in Newton County, Georgia, as well as our loan production offices located in (i) Watkinsville, Georgia, which is in Oconee County (in the Athens, Georgia market area) and (ii) Braselton, Georgia, which is in Jackson County.  Newton County, Georgia represents our primary geographic market area for deposits, while we make loans in Newton County and the contiguous counties.  In March 2018 we closed our Southside branch office in Covington at 10131 Carlin Avenue.  Although it no longer operates as a branch, we opened our indirect automobile lending division, Community First Auto, in this location on October 1, 2018.  

 

Covington, Georgia is located 35 miles east of Atlanta, Georgia and 47 miles south of Athens, Georgia. In Newton County, the manufacturing sector represents 24% of the non-farm, non-government labor force. This is more than double the state of Georgia. Other significant employer industries in the county include retail trades, health care and social assistance and food services and accommodations. There are approximately 1,390 businesses operating in Newton County.   Newton County’s total population is estimated at 110,196, which grew 10.2% from 2010.  The state of Georgia grew 9.4% during that period. Newton County is projected to grow 6.0% between 2019 and 2024, compared to 5.2% for Georgia.  The median household income in Newton County was approximately $51,082, which is higher than the Georgia state median of $59,397 and lower than the national median household income of $63,174.

 

Oconee County’s total population is estimated at 39,456, grew 20% since 2010, and is estimated to grow over 8% by 2024. It has approximately 1,118 businesses, with the largest employers in the construction, health care and social assistance, and professional, scientific, and technical services.

 

Clarke County has a total population of 129,527, grew 11.0% since 2010, and is projected to grow another 6.0% by 2024. It is the home to the University of Georgia. It is also home to 3,015 businesses, with the most significant employee representation in accommodation and food services, health care and social services, and retail trade.

 

Jackson County has a total population of 69,961, grew 15.7% since 2010, and is projected to grow another 8.2% by 2024. It has approximately 1,256 businesses, with the most significant employee representation in retail trade, construction, and other services (except public administration).

 

The unemployment rates in October 2018 for Newton, Oconee, Clarke, and Jackson Counties were 3.9%, 2.8%, 3.6% and 2.8%, respectively, compared to 3.6% for the State of Georgia and 3.5% for the United States.

 

We believe that we have developed products and services that will meet the financial needs of our current and future customer base; however, we plan, and believe it is necessary, to expand the range of products and services that we offer to be more competitive in our market area. Marketing strategies focus on the strength of our knowledge of local consumer and small business markets, as well as expanding relationships with current customers and reaching out to develop new, profitable business relationships.

4


 

Competition

We face competition within our market area both in making loans and attracting deposits.  Our market area has a concentration of financial institutions that include large money center and regional banks, community banks and credit unions.  We also face competition from savings institutions, mortgage banking firms, consumer finance companies and credit unions and, with respect to deposits, from money market funds, brokerage firms, mutual funds and insurance companies.  As of June 30, 2018 (the most recent date for which data is available), our market share of deposits represented 21.89% of Federal Deposit Insurance Corporation-insured deposits in Newton County, ranking us third in market share of deposits out of seven institutions operating in the county.  

Lending Activities  

General.  Our historical principal lending activity has been originating one- to four-family residential real estate loans and, to a lesser extent, commercial real estate loans, commercial and industrial loans, construction and land loans and consumer loans. To a much lesser extent, we also originate multi-family residential real estate loans and home equity loans and lines of credit.  We initiated indirect automobile lending in October 2018.  Subject to market conditions, we expect to increase our focus on originating commercial real estate loans, commercial and industrial loans, and construction loans in an effort to diversify our overall loan portfolio, increase the overall yield earned on our loans and assist in managing interest rate risk.  Historically, we have not originated significant amounts of loans for sale, but we originated, processed and sold several Small Business Administration (SBA) loans during 2018, and we intend to continue that activity in 2019.  

 

5


 

Loan Portfolio Composition.  The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated.  In addition to the loans included in the table below, at September 30, 2018, we had no loans held for sale, $5.7 million of loans in process and $554,000 of deferred loan fees.

 

 

 

At September 30,

 

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

 

Amount

 

 

Percent

 

 

Amount

 

 

Percent

 

 

Amount

 

 

Percent

 

 

Amount

 

 

Percent

 

 

Amount

 

 

Percent

 

 

 

(Dollars in thousands)

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential (1)

 

$

135,508

 

 

 

59.85

%

 

$

138,875

 

 

 

63.78

%

 

$

132,899

 

 

 

68.54

%

 

$

132,480

 

 

 

75.42

%

 

$

139,977

 

 

 

77.84

%

Commercial (2)

 

 

39,768

 

 

 

17.57

%

 

 

29,861

 

 

 

13.71

 

 

 

29,162

 

 

 

15.04

 

 

 

24,581

 

 

 

13.99

 

 

 

25,860

 

 

 

14.38

 

Construction and land

 

 

20,188

 

 

 

8.92

%

 

 

25,165

 

 

 

11.56

 

 

 

13,343

 

 

 

6.88

 

 

 

2,261

 

 

 

1.28

 

 

 

817

 

 

 

0.45

 

Commercial and industrial loans

 

 

28,375

 

 

 

12.53

%

 

 

21,060

 

 

 

9.67

 

 

 

16,221

 

 

 

8.37

 

 

 

14,333

 

 

 

8.16

 

 

 

11,639

 

 

 

6.47

 

Consumer loans

 

 

2,555

 

 

 

1.13

%

 

 

2,783

 

 

 

1.28

 

 

 

2,262

 

 

 

1.17

 

 

 

2,017

 

 

 

1.15

 

 

 

1,547

 

 

 

0.86

 

 

 

 

226,394

 

 

 

100.00

%

 

 

217,744

 

 

 

100.00

%

 

 

193,887

 

 

 

100.00

%

 

 

175,672

 

 

 

100.00

%

 

 

179,840

 

 

 

100.00

%

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for losses

 

 

3,909

 

 

 

 

 

 

 

4,551

 

 

 

 

 

 

 

4,309

 

 

 

 

 

 

 

5,874

 

 

 

 

 

 

 

5,708

 

 

 

 

 

Total loans

 

$

222,485

 

 

 

 

 

 

$

213,193

 

 

 

 

 

 

$

189,578

 

 

 

 

 

 

$

169,798

 

 

 

 

 

 

$

174,132

 

 

 

 

 

 

(1)

Includes home equity loans and lines of credit, which totaled $2.5 million at September 30, 2018.

(2)

Includes multi-family residential real estate loans, which totaled $948,000 at September 30, 2018.

 

 

 

6


 

Contractual Maturities.  The following tables set forth the contractual maturities of our total loan portfolio at September 30, 2018.  Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. The tables present contractual maturities and do not reflect repricing or the effect of prepayments.  Actual maturities may differ.  

 

September 30, 2018

 

One- to

Four-Family

Residential

Real Estate

 

 

Commercial

Real Estate

 

 

Construction

and Land

 

 

 

(In thousands)

 

Amounts due in:

 

 

 

 

 

 

 

 

 

 

 

 

One year or less

 

$

4,716

 

 

$

2,303

 

 

$

9,132

 

More than one to five years

 

 

24,638

 

 

 

18,274

 

 

 

2,570

 

More than five years

 

 

106,154

 

 

 

19,191

 

 

 

8,486

 

Total

 

$

135,508

 

 

$

39,768

 

 

$

20,188

 

 

September 30, 2018

 

Commercial

and

Industrial

 

 

Consumer

 

 

Total

 

 

 

(In thousands)

 

Amounts due in:

 

 

 

 

 

 

 

 

 

 

 

 

One year or less

 

$

6,165

 

 

$

225

 

 

$

22,541

 

More than one to five years

 

 

14,562

 

 

 

1,740

 

 

 

61,784

 

More than five years

 

 

7,648

 

 

 

590

 

 

 

142,069

 

Total

 

$

28,375

 

 

$

2,555

 

 

$

226,394

 

 

The following table sets forth our fixed and adjustable-rate loans at September 30, 2018 that are contractually due after September 30, 2019.

 

 

 

Due After September 30, 2019

 

 

 

Fixed

 

 

Adjustable

 

 

Total

 

 

 

(In thousands)

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential

 

$

127,798

 

 

$

2,244

 

 

$

130,042

 

Commercial

 

 

32,830

 

 

 

4,832

 

 

 

37,662

 

Construction and land

 

 

9,164

 

 

 

1,892

 

 

 

11,056

 

Commercial and industrial loans

 

 

15,119

 

 

 

7,091

 

 

 

22,210

 

Consumer loans

 

 

2,084

 

 

 

246

 

 

 

2,330

 

Total loans

 

$

186,995

 

 

$

16,305

 

 

$

203,300

 

 

(1)

Consists of home equity loans and lines of credit.

One- to Four-Family Residential Real Estate Lending.  The focus of our lending program has historically been the origination of one- to four-family residential real estate loans.  At September 30, 2018, we had $135.5 million of loans secured by one- to four-family real estate, representing 59.85% of our total loan portfolio.  We currently originate fixed-rate residential mortgage loans, including loans with balloon terms.  At September 30, 2018, $37.3 million, or 27.51%, of our one- to four-family residential real estate loans were balloon loans.  We have recently introduced adjustable-rate, one- to four-family residential real estate loans (in addition to our existing home equity loans and lines of credit, which are originated with adjustable interest rates).

Our one- to four-family residential real estate loans are generally underwritten to internal guidelines, although we generally follow the documentation practices of Fannie Mae guidelines.  We generally originate one- to four-family residential real estate loans in amounts up to $150,000, although we will originate loans above this amount.  The significant majority of our one- to four-family residential real estate loans are secured by properties located in our primary market area.

We generally limit the loan-to-value ratios of our one- to four-family residential mortgage loans to 89.9% of the purchase price or appraised value, whichever is lower.  

Historically, our one- to four-family residential real estate loans typically have terms of up to 30 years.  We now offer adjustable rate mortgages with a five or seven year initial fixed rate.  Our balloon loans generally have terms of five or seven years, but with amortization terms of 30 years.  We will originate balloon loans with initial terms of ten years.      

7


 

We do not offer “interest only” mortgage loans on permanent one- to four-family residential real estate loans (where the borrower pays interest for an initial period, after which the loan converts to a fully amortizing loan).  We also do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan. We do not currently offer “subprime loans” on one- to four-family residential real estate loans (i.e., generally loans to borrowers with credit scores less than 620).  

Commercial Real Estate Loans.   In recent years, we have sought to increase our commercial real estate loans.  Our commercial real estate loans are secured primarily by one- to four-family non-owner occupied investment properties and houses of worship and, to a lesser extent, office buildings, industrial facilities, hotels, convenience stores and retail facilities, substantially all of which are located in our primary market area.  At September 30, 2018, we had $39.8 million in commercial real estate loans, representing 17.57% of our total loan portfolio.  This amount included $948,000 of multi-family residential real estate loans.  At September 30, 2018, our commercial real estate loans had an average balance of $404,000.

Most of our commercial real estate loans are balloon loans with a five-year initial term and a 20-year amortization period.  The maximum loan-to-value ratio of our commercial real estate loans is generally 75%.  All of our commercial real estate loans are subject to our underwriting procedures and guidelines.  At September 30, 2018, our largest commercial real estate loan totaled $3 million and is a convenience store secured by 1.115 acres and an 8,282 square foot building.  At September 30, 2018, this loan was performing in accordance with its terms.  

We consider a number of factors in originating commercial real estate loans.  We evaluate the qualifications and financial condition of the borrower, including credit history, profitability and expertise, as well as the value and condition of the property securing the loan.  When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service).  The significant majority of our commercial real estate loans are appraised by outside independent appraisers approved by the board of directors, although we are only required to obtain independent appraisals on commercial real estate loans in amounts of $500,000 or greater.  Personal guarantees are generally obtained from the principals of commercial real estate borrowers.

Commercial and Industrial Loans.  We make commercial and industrial loans, primarily in our market area, to a variety of professionals, sole proprietorships and small businesses.  These loans are generally secured by business assets, and we may support this collateral with junior liens on real property.  At September 30, 2018, commercial and industrial loans were $28.4 million, or 12.53% of our gross loans.  As part of our relationship driven focus, we encourage our commercial borrowers to maintain their primary deposit accounts with us, which enhances our interest rate spread and margin.

Commercial lending products include term loans and revolving lines of credit. Commercial loans and lines of credit are made with either adjustable or fixed rates of interest. Adjustable rates and fixed rates are based on the prime rate as published in The Wall Street Journal, plus a margin. We are focusing our efforts on experienced, growing small- to medium-sized, privately-held companies with solid historical and projected cash flow that operate in our market areas.

When making commercial and industrial loans, we consider the financial statements of the borrower, our lending history with the borrower, the debt service capabilities and global cash flows of the borrower and other guarantors, the projected cash flows of the business and the value of the collateral, accounts receivable, inventory and equipment.  Depending on the collateral used to secure the loans, commercial and industrial loans are made in amounts of up to 80% of the value of the collateral securing the loan.  All of these loans are secured by assets of the respective borrowers.

Our largest commercial and industrial loan at September 30, 2018 totaled $1.1 million, was originated in 2013 to a trucking company and is secured by accounts receivable.  At September 30, 2018, this loan was performing in accordance with its terms.  

Construction and Land Loans.  We make construction loans, primarily to individuals for the construction of their primary residences and to contractors and builders of single-family homes. We also make a limited amount of land loans to complement our construction lending activities, as such loans are generally secured by lots that will be used for residential development.  Land loans also include loans secured by land purchased for investment purposes. At September 30, 2018, our construction loans totaled $20.2 million, representing 8.92% of our total loan portfolio, and included $200,000 of land loans.  At that date, we also had $5.6 million of construction loans in process.  At September 30, 2018, $5.4 million of our single-family construction loans were to individuals and $4.7 were to contractors and builders.

8


 

While we may originate loans to contractors and builders whether or not the collateral property underlying the loan is under contract for sale, we consider each project carefully in light of current residential real estate market conditions.  We actively monitor the number of unsold homes in our construction loan portfolio and local housing markets to attempt to maintain an appropriate balance between home sales and new loan originations.  We generally will limit the maximum number of speculative units (units that are not pre-sold) approved for each builder.  We have attempted to diversify the risk associated with speculative construction lending by doing business with experienced small and mid-sized builders within our market area.

We also originate construction loans for commercial development projects, including retail buildings, houses of worship, small industrial, hotels and office buildings.  Most of our construction loans are interest-only loans that provide for the payment of interest during the construction phase, which is usually up to 12 months.  At the end of the construction phase, the loan may convert to a permanent mortgage loan or the loan may be paid in full. Construction loans generally can be made with a maximum loan-to-value ratio of 75% of the estimated appraised market value upon completion of the project.  Before making a commitment to fund a construction loan, we require an appraisal of the property by an independent licensed appraiser.  We also generally require inspections of the property before disbursements of funds during the term of the construction loan.

At September 30, 2018, our largest construction and land loan was for $2.8 million, of which $725,000 was outstanding. This loan was originated in 2018 and is secured by a convenience store with inline retail.  This loan was performing according to its terms at September 30, 2018.  

Consumer Loans.  We offer a limited range of consumer loans, principally to customers residing in our primary market area with other relationships with us and with acceptable credit ratings.  Our consumer loans generally consist of loans secured by deposit accounts, loans on new and used automobiles and unsecured personal loans.  At September 30, 2018, consumer and other loans were $2.5 million, or 1.13% of gross loans.

In October 2018, our indirect automobile lending division, Community First Auto, opened an office in Covington, Georgia at a former branch location.  The bank has brought in an experienced manager and sales team to operate this line of business.  At September 30, 2018, we had no indirect automobile loans.  We intend to increase this type of lending.  

Community First Auto (CFA) will purchase retail installment sales contracts from dealerships in the states of Georgia, Tennessee, North Carolina and South Carolina.  Each dealership will submit credit applications to CFA for consideration.  CFA will fully underwrite each loan for credit worthiness, vehicle valuation, debt ratios and the consumer’s stability.  CFA will underwrite each loan carefully to ensure all credit policy guidelines are followed.  Applications that are approved and counter-offered will be submitted to CFA for verification and funding.

All dealerships that submit retail installment contracts to CFA will sign a separate retail dealer agreement that will make representations and warranties to CFA with respect to our security interest and the accuracy and validity of all information provided during the credit application and contract process.  Borrowers will be responsible for carrying full coverage insurance during the life of the loan, but CFA will have a blanket VSI policy in place to cover all loans in case of lapse of coverage, skip or confiscation.

Loan Underwriting Risks

Commercial Real Estate Loans.  Loans secured by commercial real estate generally have larger balances and involve a greater degree of risk than one- to four-family residential real estate loans.  The primary concern in commercial real estate lending is the borrower’s creditworthiness and the feasibility and cash flow potential of the project.  Payments on loans secured by income properties often depend on successful operation and management of the properties.  As a result, repayment of such loans may be subject, to a greater extent than residential real estate loans, to adverse conditions in the real estate market or the economy.  To monitor cash flows on income properties, we require borrowers and loan guarantors to provide semi annual, quarterly or annual financial statements, depending on the size of the loan, on commercial real estate loans.  In reaching a decision on whether to make a commercial real estate loan, we consider and review a global cash flow analysis of the borrower and consider the net operating income of the property, the borrower’s expertise, credit history and profitability and the value of the underlying property.  We have generally required that the properties securing these real estate loans have an aggregate debt service ratio, including the guarantor’s cash flow and the borrower’s other projects, of at least 1.20x.  An environmental phase one report is obtained when the possibility exists that hazardous materials may have existed on the site, or the site may have been impacted by adjoining properties that handled hazardous materials.  

9


 

If we foreclose on a commercial real estate loan, the marketing and liquidation period to convert the real estate asset to cash can be lengthy with substantial holding costs. In addition, vacancies, deferred maintenance, repairs and market stigma can result in prospective buyers expecting sale price concessions to offset their real or perceived economic losses for the time it takes them to return the property to profitability.  Depending on the individual circumstances, initial charge-offs and subsequent losses on commercial real estate loans can be unpredictable and substantial.  

Commercial and Industrial Loans.  Unlike residential real estate loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial and industrial loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business and the collateral securing these loans may fluctuate in value.  Our commercial and industrial loans are originated primarily based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower.  Most often, this collateral consists of real estate, accounts receivable, inventory or equipment.  Credit support provided by the borrower for most of these loans is based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any.  Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.  As a result, the availability of funds for the repayment of commercial and industrial loans may depend substantially on the success of the business itself.  

Construction and Land Loans.  Our construction loans are based upon estimates of costs and values associated with the completed project.  Underwriting is focused on the borrowers’ financial strength, credit history and demonstrated ability to produce a quality product and effectively market and manage their operations.  

Construction lending involves additional risks when compared with permanent lending because funds are advanced upon the security of the project, which is of uncertain value prior to its completion.  Because of the uncertainties inherent in estimating construction costs, as well as the market value of the completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio.  In addition, generally during the term of a construction loan, interest may be funded by the borrower or disbursed from an interest reserve set aside from the construction loan budget.  These loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or guarantor to repay principal and interest.  If the appraised value of a completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project and may incur a loss.  

Balloon Loans.  Although balloon mortgage loans may reduce to an extent our vulnerability to changes in market interest rates because they reprice at the end of the term, the ability of the borrower to renew or repay the loan and the marketability of the underlying collateral may be adversely affected if real estate values decline prior to the expiration of the term of the loan or in a rising interest rate environment.

Adjustable-Rate Loans.  While we anticipate that adjustable-rate loans will better offset the adverse effects of an increase in interest rates as compared to fixed-rate loans, an increased monthly payment required of adjustable-rate loan borrowers in a rising interest rate environment could cause an increase in delinquencies and defaults.  The marketability of the underlying collateral also may be adversely affected in a high interest rate environment.  

Consumer Loans.  Consumer loans may entail greater risk than residential real estate loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and a small remaining deficiency often does not warrant further substantial collection efforts against the borrower.  Consumer loan collections depend on the borrower’s continuing financial stability, and therefore are likely to be adversely affected by various factors, including job loss, divorce, illness or personal bankruptcy.  Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.

Indirect automobile loans are inherently risky as they are often secured by assets that may be difficult to locate and can depreciate rapidly.  In some cases, repossessed collateral for a defaulted automobile loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency may not warrant further substantial collection efforts against the borrower.  Automobile loan collections depend on the borrower’s continuing financial stability, and therefore, are more likely to be adversely affected by job loss, divorce, illness, or personal bankruptcy.  Additional risk elements associated with indirect lending include the limited personal contact with the borrower as a result of indirect lending through non-bank channels, namely automobile dealers.

10


 

Originations, Purchases and Sales of Loans

Lending activities are conducted by our salaried loan personnel operating at our main and branch office locations and our loan production offices.  All loans originated by us are underwritten pursuant to our policies and procedures.  We primarily originate fixed-rate loans and balloon loans and, to a lesser extent, adjustable-rate loans.  Our ability to originate fixed-rate loans, balloon loans or adjustable-rate loans is dependent upon relative customer demand for such loans, which is affected by current and expected future levels of market interest rates.  We originate real estate and other loans through our loan officers, marketing efforts, our customer base, walk-in customers and referrals from real estate brokers, builders and attorneys.  

We sometimes purchase whole loans from third parties to supplement our loan production.  These loans generally consist of loans to health care professionals and loans secured by manufactured housing.  At September 30, 2018, we had $5.2 million of whole loans that we purchased.  The majority of our purchased loans are to borrowers who are not located in our primary market area.  

In addition, from time to time, we may purchase or sell participation interests in loans.  We underwrite our participation interest in the loan that we are purchasing according to our own underwriting criteria and procedures.  At September 30, 2018, we had $2.7 million of committed funds for loan participation interests that we purchased, and at that date, we had $9.3 million of loans for which we had sold participation interests.  

Historically, we have not originated significant amounts of loans for sale, but we intend to increase this activity in the future in order to manage the duration and time to repricing of our loan portfolio, and to generate fee income.  We currently sell loans through the LenderSelect Mortgage Group and a new partnership with Quicken Loans has been added.  At September 30, 2018, we had no loans for sale, and we sold $1.3 million of loans during the year ended September 30, 2018, all on a servicing-released basis, generating $45,000 in fee income.  

Loan Approval Procedures and Authority

Pursuant to federal law, the aggregate amount of loans that Newton Federal Bank is permitted to make to any one borrower or a group of related borrowers is generally limited to 15% of Newton Federal Bank’s unimpaired capital and surplus (25% if the amount in excess of 15% is secured by “readily marketable collateral” or 30% for certain residential development loans).  At September 30, 2018, based on the 15% limitation, Newton Federal Bank’s loans-to-one-borrower limit was approximately $9.3 million.  On the same date, Newton Federal Bank had no borrowers with outstanding balances in excess of this amount.  At September 30, 2018, our largest loan relationship with one borrower was for $3.8 million, which was secured a home, towing and wrecker equipment and pawn shop, and the underlying loans were performing in accordance with their terms on that date.  

Our lending is subject to written underwriting standards and origination procedures.  Decisions on loan applications are made on the basis of detailed applications submitted by the prospective borrower, credit histories that we obtain, and property valuations (consistent with our appraisal policy) prepared by outside independent licensed appraisers approved by our board of directors as well as internal evaluations, where permitted by regulations.  The loan applications are designed primarily to determine the borrower’s ability to repay the requested loan, and the more significant items on the application are verified through use of credit reports, bank statements and tax returns.  

All loan approval amounts are based on the aggregate loans, including total balances of outstanding loans and the proposed loan to the individual borrower and any related entity. Each of our President and Chief Executive Officer, our Chief Credit Officer and our Chief Lending Officer has individual authorization to approve loans up to $500,000.  Any two of these individuals can combine their authority to approve loans up to $1.0 million.  All three of these individuals can combine their authority to approve loans up to $1.5 million. The Officer Loan Committee, which consists of our President and Chief Executive Officer, Chief Credit Officer, Chief Lending Officer, Chief Operations Officer, a Commercial Lending Officer and a non-voting outside board member, can approve loans greater than $1.5 million up to $3.5 million.  Loans in excess of $3.5 million require the approval of our full board of directors.  

Generally, we require title insurance or abstracts on our mortgage loans as well as fire and extended coverage casualty insurance in amounts at least equal to the principal amount of the loan or the value of improvements on the property, depending on the type of loan.  

Delinquencies and Asset Quality

Delinquency Procedures.  When a loan payment becomes 15 days past due, we contact the customer by mailing a late notice, and loan officers may contact their customers.  If a loan payment becomes 30 days past due, we mail an additional late notice and a loan-specific letter written by a collection representative, and we also place telephone calls to the borrower.  These loan collection efforts continue until a loan becomes 90 days past due, at which point we would refer the loan for foreclosure proceedings unless management determines that it is in the best interest of Newton Federal Bank to work further with the borrower to arrange a workout plan.  The foreclosure process would begin when a loan becomes 120 days delinquent.  From time to time we may accept deeds in lieu of foreclosure.  

11


 

Loans Past Due and Non-Performing Assets.  Loans are reviewed on a regular basis.  Management determines that a loan is impaired or non-performing when it is probable at least a portion of the loan will not be collected in accordance with the original terms due to a deterioration in the financial condition of the borrower or the value of the underlying collateral if the loan is collateral dependent.  When a loan is determined to be impaired, the measurement of the loan in the allowance for loan losses is based on present value of expected future cash flows, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. Non-accrual loans are loans for which collectability is questionable and, therefore, interest on such loans will no longer be recognized on an accrual basis. All loans that become 90 days or more delinquent are placed on non-accrual status unless the loan is well secured and in the process of collection.  When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received on a cash basis or cost recovery method.  

When we acquire real estate as a result of foreclosure, the real estate is classified as real estate owned.  The real estate owned is recorded at the lower of carrying amount or fair value, less estimated costs to sell.  Soon after acquisition, we order a new appraisal to determine the current market value of the property.  Any excess of the recorded value of the loan satisfied over the market value of the property is charged against the allowance for loan losses, or, if the existing allowance is inadequate, charged to expense of the current period.  After acquisition, all costs incurred in maintaining the property are expensed.  Costs relating to the development and improvement of the property, however, are capitalized to the extent of estimated fair value less estimated costs to sell.

A loan is classified as a troubled debt restructuring if, for economic or legal reasons related to the borrower’s financial difficulties, we grant a concession to the borrower that we would not otherwise consider. This usually includes a modification of loan terms, such as a reduction of the interest rate to below market terms, capitalizing past due interest or extending the maturity date and possibly a partial forgiveness of the principal amount due. Interest income on restructured loans is accrued after the borrower demonstrates the ability to pay under the restructured terms through a sustained period of repayment performance, which is generally six consecutive months.

Delinquent Loans. The following tables set forth our loan delinquencies, including non-accrual loans, by type and amount at the dates indicated.

 

 

 

At September 30,

 

 

 

2018

 

 

2017

 

 

2016

 

 

 

30-59

Days

Past

Due

 

 

60-89

Days

Past

Due

 

 

90

Days

or

More

Past

Due

 

 

30-59

Days

Past

Due

 

 

60-89

Days

Past

Due

 

 

90

Days

or

More

Past

Due

 

 

30-59

Days

Past

Due

 

 

60-89

Days

Past

Due

 

 

90

Days

or

More

Past

Due

 

 

 

 

 

 

 

(In thousands)

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

   residential

 

$

167

 

 

$

980

 

 

$

1,115

 

 

$

173

 

 

$

3,236

 

 

$

1,559

 

 

$

32

 

 

$

3,382

 

 

$

1,955

 

Commercial

 

 

283

 

 

 

3

 

 

 

 

 

 

 

 

 

0

 

 

 

45

 

 

 

 

 

 

66

 

 

 

44

 

Construction and land

 

 

 

 

 

257

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and

   industrial loans

 

 

 

 

 

 

 

 

 

 

 

19

 

 

 

45

 

 

 

 

 

 

194

 

 

 

 

 

 

0

 

Consumer loans

 

 

 

 

 

30

 

 

 

7

 

 

 

24

 

 

 

7

 

 

 

 

 

 

20

 

 

 

0

 

 

 

0

 

Total

 

$

450

 

 

$

1,270

 

 

$

1,122

 

 

$

216

 

 

$

3,288

 

 

$

1,604

 

 

$

246

 

 

$

3,448

 

 

$

1,999

 

 

12


 

 

 

At September 30,

 

 

 

2015

 

 

2014

 

 

 

30-59

Days

Past

Due

 

 

60-89

Days

Past

Due

 

 

90

Days

or

More

Past

Due

 

 

30-59

Days

Past

Due

 

 

60-89

Days

Past

Due

 

 

90

Days

or

More

Past

Due

 

 

 

(In thousands)

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential

 

$

 

 

$

2,909

 

 

$

1,598

 

 

$

 

 

$

3,244

 

 

$

1,583

 

Commercial

 

 

 

 

 

408

 

 

 

50

 

 

 

0

 

 

 

564

 

 

 

509

 

Construction and land

 

 

 

 

 

0

 

 

 

 

 

 

0

 

 

 

11

 

 

 

 

Commercial and industrial loans

 

 

 

 

 

0

 

 

 

33

 

 

 

 

 

 

243

 

 

 

0

 

Consumer loans

 

 

 

 

 

15

 

 

 

20

 

 

 

 

 

 

18

 

 

 

 

Total

 

$

 

 

$

3,332

 

 

$

1,701

 

 

$

 

 

$

4,080

 

 

$

2,092

 

 

Non-Performing Assets.  The following table sets forth information regarding our non-performing assets.  Non-accrual loans include non-accruing troubled debt restructurings of $279,000, $620,000, $810,000, $1.3 million, and $1.4 million as of September 30, 2018, 2017, 2016, 2015, and 2014, respectively.

 

 

 

At September 30,

 

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

 

(Dollars in thousands)

 

Non-accrual loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential

 

$

2,089

 

 

$

3,540

 

 

$

3,013

 

 

$

2,056

 

 

$

2,269

 

Commercial

 

 

70

 

 

 

129

 

 

 

230

 

 

 

448

 

 

 

777

 

Construction and land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial loans

 

 

29

 

 

 

 

 

 

0

 

 

 

33

 

 

 

0

 

Consumer loans

 

 

7

 

 

 

 

 

 

0

 

 

 

26

 

 

 

 

Total non-accrual loans

 

$

2,195

 

 

 

3,669

 

 

 

3,243

 

 

 

2,563

 

 

 

3,046

 

Accruing loans past due 90 days or more

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate owned:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential

 

 

67

 

 

 

61

 

 

 

 

 

 

0

 

 

 

822

 

Commercial

 

 

 

 

 

 

 

 

0

 

 

 

470

 

 

 

0

 

Construction and land

 

 

 

 

 

 

 

 

0

 

 

 

62

 

 

 

307

 

Commercial and industrial loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total real estate owned

 

67

 

 

 

61

 

 

 

0

 

 

 

532

 

 

 

1,129

 

Total non-performing assets

 

$

2,262

 

 

$

3,730

 

 

$

3,243

 

 

$

3,095

 

 

$

4,175

 

Total accruing troubled debt restructured loans

 

$

4,136

 

 

$

4,956

 

 

$

5,815

 

 

$

4,358

 

 

$

4,845

 

Total non-performing loans to total loans

 

 

0.97

%

 

 

1.69

%

 

 

1.71

%

 

 

1.51

%

 

 

1.75

%

Total non-performing assets to total assets

 

 

0.74

%

 

 

1.34

%

 

 

1.39

%

 

 

1.37

%

 

 

1.84

%

 

Interest income that would have been recorded for the year ended September 30, 2018 had non-accruing loans been current according to their original terms amounted to $843,000.  We recognized $62,000 of interest income for these loans for the year ended September 30, 2018.  In addition, interest income that would have been recorded for the year ended September 30, 2018 had troubled debt restructurings been current according to their original terms amounted to $284,000.  We recognized $278,000 of interest income for these loans for the year ended September 30, 2018.  

Classified Assets.  Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the Office of the Comptroller of the Currency to be of lesser quality, as “substandard,” “doubtful” or “loss.”  An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected.  Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.”  Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss

13


 

allowance is not warranted.  Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as “special mention” by our management.  

When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances in an amount deemed prudent by management to cover probable accrued losses.  General allowances represent loss allowances which have been established to cover probable accrued losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets.  When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount.  An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory authorities, which may require the establishment of additional general or specific loss allowances.

In connection with the filing of our periodic reports with the Office of the Comptroller of the Currency and in accordance with our classification of assets policy, we regularly review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable regulations.

On the basis of this review of our assets, our classified and special mention assets at the dates indicated were as follows:

 

 

 

At September 30,

 

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Substandard assets

 

$

6,651

 

 

$

6,416

 

Doubtful assets

 

 

 

 

 

 

Loss assets

 

 

 

 

 

 

Total classified assets

 

$

6,651

 

 

$

6,416

 

Special mention assets

 

$

66

 

 

$

224

 

 

Allowance for Loan Losses

The allowance for loan losses is maintained at a level which, in management’s judgment, is adequate to absorb probable credit losses inherent in the loan portfolio. The amount of the allowance is based on management’s evaluation of the collectability of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. Because of uncertainties associated with regional economic conditions, collateral values, and future cash flows on impaired loans, it is reasonably possible that management’s estimate of probable credit losses inherent in the loan portfolio and the related allowance may change materially in the near-term. The allowance is increased by a provision for loan losses, which is charged to expense and reduced by full and partial charge-offs, net of recoveries. Changes in the allowance relating to impaired loans are charged or credited to the provision for loan losses. Management’s periodic evaluation of the adequacy of the allowance is based on various factors, including, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses.

As an integral part of their examination process, the Office of the Comptroller of the Currency will periodically review our allowance for loan losses, and as a result of such reviews, we may have to adjust our allowance for loan losses.  However, regulatory agencies are not directly involved in the process for establishing the allowance for loan losses as the process is our responsibility and any increase or decrease in the allowance is the responsibility of management.

14


 

The following table sets forth activity in our allowance for loan losses for the years indicated.

 

 

 

Years Ended September 30,

 

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

 

(Dollars in thousands)

 

Allowance at beginning of year

 

 

4,551

 

 

$

4,309

 

 

$

5,874

 

 

$

5,708

 

 

$

5,947

 

Provision for loan losses

 

 

500

 

 

 

 

 

 

 

 

 

 

 

 

 

Charge offs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential

 

 

(1,425

)

 

 

(41

)

 

 

(337

)

 

 

(438

)

 

 

(1,214

)

Commercial

 

 

(6

)

 

 

 

 

 

(1,796

)

 

 

(20

)

 

 

(132

)

Construction and land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(125

)

Commercial and industrial loans

 

 

(1,275

)

 

 

(66

)

 

 

 

 

 

0

 

 

 

(48

)

Consumer loans

 

 

(33

)

 

 

(60

)

 

 

(12

)

 

 

(18

)

 

 

(1

)

Total charge-offs

 

 

(2,739

)

 

 

(167

)

 

 

(2,145

)

 

 

(476

)

 

 

(1,520

)

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential

 

 

1,287

 

 

 

333

 

 

 

341

 

 

 

356

 

 

 

970

 

Commercial

 

 

172

 

 

 

52

 

 

 

233

 

 

 

130

 

 

 

281

 

Construction and land

 

 

17

 

 

 

 

 

 

 

 

 

0

 

 

 

23

 

Commercial and industrial loans

 

 

121

 

 

 

15

 

 

 

 

 

 

154

 

 

 

7

 

Consumer loans