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Loans and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2017

3. Loans and Allowance for Loan Losses

Loans consisted of the following as of the dates indicated below:

	September 30,			December 31,
(Dollars in thousands)	2017			2016

One-to-four family residential real estate	$	136,829		$	136,846
Construction and land		15,898			13,738
Commercial real estate		120,818			118,200
Commercial		50,944			54,506
Agriculture		84,101			78,324
Municipal		3,479			3,884
Consumer		21,985			20,271
Total gross loans		434,054			425,769
Net deferred loan costs and loans in process		(236	)		36
Allowance for loan losses		(5,379	)		(5,344	)
Loans, net	$	428,439		$	420,461

Percent of total
One-to-four family residential real estate		31.5	%		32.1	%
Construction and land		3.7	%		3.2	%
Commercial real estate		27.8	%		27.8	%
Commercial loans		11.7	%		12.8	%
Agriculture loans		19.4	%		18.4	%
Municipal loans		0.8	%		0.9	%
Consumer loans		5.1	%		4.8	%
Total gross loans		100.0	%		100.0	%

The following tables provide information on the Company’s activity in the allowance for loan losses by loan class:

(Dollars in thousands)	Three and nine months ended September 30, 2017
	One-to-four family residential real estate			Construction and land		Commercial real estate			Commercial			Agriculture		Municipal			Consumer			Total

Allowance for loan losses:
Balance at July 1, 2017	$	499		$	70	$	1,709		$	1,081		$	1,772	$	10		$	185		$	5,326
Charge-offs		-			-		-			-			-		-			(84	)		(84	)
Recoveries		1			-		-			10			-		14			12			37
Provision for loan losses		-			33		11			(82	)		87		(15	)		66			100
Balance at September 30, 2017		500			103		1,720			1,009			1,859		9			179			5,379

Balance at January 1, 2017	$	504		$	53	$	1,777		$	1,119		$	1,684	$	12		$	195		$	5,344
Charge-offs		(19	)		-		(61	)		-			-		-			(249	)		(329	)
Recoveries		9			-		-			19			1		14			71			114
Provision for loan losses		6			50		4			(129	)		174		(17	)		162			250
Balance at September 30, 2017		500			103		1,720			1,009			1,859		9			179			5,379

(Dollars in thousands)	Three and nine months ended September 30, 2016
	One-to-four family residential real estate			Construction and land			Commercial real estate			Commercial			Agriculture			Municipal			Consumer			Total

Allowance for loan losses:
Balance at July 1, 2016	$	584		$	89		$	1,776		$	1,393		$	1,600		$	23		$	187		$	5,652
Charge-offs		(14	)		-			-			-			(215	)		-			(89	)		(318	)
Recoveries		3			-			-			9			-			-			11			23
Provision for loan losses		36			(7	)		(40	)		(28	)		88			-			101			150
Balance at September 30, 2016		609			82			1,736			1,374			1,473			23			210			5,507

Balance at January 1, 2016	$	925		$	77		$	1,740		$	1,530		$	1,428		$	23		$	199		$	5,922
Charge-offs		(14	)		-			-			(306	)		(298	)		-			(374	)		(992	)
Recoveries		8			-			-			29			-			6			34			77
Provision for loan losses		(310	)		5			(4	)		121			343			(6	)		351			500
Balance at September 30, 2016		609			82			1,736			1,374			1,473			23			210			5,507

12

The following tables provide information on the Company’s activity in the allowance for loan losses by loan class and allowance methodology:

(Dollars in thousands)	As of September 30, 2017
	One-to-four family residential real estate		Construction and land		Commercial real estate		Commercial		Agriculture		Municipal		Consumer		Total

Allowance for loan losses:
Individually evaluated for loss		15		36		53		35		111		-		-		250
Collectively evaluated for loss		485		67		1,667		974		1,748		9		179		5,129
Total		500		103		1,720		1,009		1,859		9		179		5,379

Loan balances:
Individually evaluated for loss		531		2,083		3,999		1,579		883		140		44		9,259
Collectively evaluated for loss		136,298		13,815		116,819		49,365		83,218		3,339		21,941		424,795
Total	$	136,829	$	15,898	$	120,818	$	50,944	$	84,101	$	3,479	$	21,985	$	434,054

(Dollars in thousands)	As of December 31, 2016
	One-to-four family residential real estate		Construction and land		Commercial real estate		Commercial		Agriculture		Municipal		Consumer		Total

Allowance for loan losses:
Individually evaluated for loss		-		-		81		87		89		-		17		274
Collectively evaluated for loss		504		53		1,696		1,032		1,595		12		178		5,070
Total		504		53		1,777		1,119		1,684		12		195		5,344

Loan balances:
Individually evaluated for loss		780		1,937		2,445		355		881		258		72		6,728
Collectively evaluated for loss		136,066		11,801		115,755		54,151		77,443		3,626		20,199		419,041
Total	$	136,846	$	13,738	$	118,200	$	54,506	$	78,324	$	3,884	$	20,271	$	425,769

The Company’s impaired loans increased from $6.7 million at December 31, 2016 to $9.3 million at September 30, 2017. The difference between the unpaid contractual principal and the impaired loan balance is a result of charge-offs recorded against impaired loans. The difference in the Company’s non-accrual loan balances and impaired loan balances at September 30, 2017 and December 31, 2016, was related to troubled debt restructurings (“TDR”) that are current and accruing interest, but still classified as impaired. Interest income recognized on a cash basis was immaterial during the three and nine month periods ended September 30, 2017 and 2016.

The following tables present information on impaired loans:

(Dollars in thousands)	As of September 30, 2017
	Unpaid contractual principal		Impaired loan balance		Impaired loans without an allowance		Impaired loans with an allowance		Related allowance recorded		Year-to-date average loan balance		Year-to-date interest income recognized

One-to-four family residential real estate	$	531	$	531	$	496	$	35	$	15	$	552	$	6
Construction and land		3,818		2,083		1,885		198		36		2,030		49
Commercial real estate		3,999		3,999		3,939		60		53		4,017		368
Commercial		1,579		1,579		1,372		207		35		1,660		-
Agriculture		1,098		883		486		397		111		992		7
Municipal		140		140		140		-		-		209		4
Consumer		44		44		44		-		-		47		-
Total impaired loans	$	11,209	$	9,259	$	8,362	$	897	$	250	$	9,507	$	434

(Dollars in thousands)	As of December 31, 2016
	Unpaid contractual principal		Impaired loan balance		Impaired loans without an allowance		Impaired loans with an allowance		Related allowance recorded		Year-to-date average loan balance		Year-to-date interest income recognized

One-to-four family residential real estate	$	780	$	780	$	780	$	-	$	-	$	798	$	7
Construction and land		3,672		1,937		1,937		-		-		2,068		72
Commercial real estate		2,445		2,445		2,145		300		81		2,587		505
Commercial		355		355		46		309		87		425		2
Agriculture		1,173		881		147		734		89		1,000		2
Municipal		258		258		258		-		-		418		-
Consumer		72		72		55		17		17		78		13
Total impaired loans	$	8,755	$	6,728	$	5,368	$	1,360	$	274	$	7,374	$	601

The Company’s key credit quality indicator is a loan’s performance status, defined as accruing or non-accruing. Performing loans are considered to have a lower risk of loss. Non-accrual loans are those which the Company believes have a higher risk of loss. The accrual of interest on non-performing loans is discontinued at the time the loan is ninety days delinquent, unless the credit is well secured and in process of collection. Loans are placed on non-accrual or are charged off at an earlier date if collection of principal or interest is considered doubtful. There were no loans ninety days delinquent and accruing interest at September 30, 2017 and December 31, 2016.

The following tables present information on the Company’s past due and non-accrual loans by loan class:

(Dollars in thousands)	As of September 30, 2017
	30-59 days delinquent and accruing			60-89 days delinquent and accruing			90 days or more delinquent and accruing			Total past due loans accruing			Non-accrual loans			Total past due and non-accrual loans			Total loans not past due

One-to-four family residential real estate	$	1,163		$	253		$	-		$	1,416		$	333		$	1,749		$	135,080
Construction and land		86			346			-			432			786			1,218			14,680
Commercial real estate		210			-			-			210			1,864			2,074			118,744
Commercial		50			-			-			50			1,579			1,629			49,315
Agriculture		588			90			-			678			883			1,561			82,540
Municipal		-			-			-			-			-			-			3,479
Consumer		122			5			-			127			44			171			21,814
Total	$	2,219		$	694		$	-		$	2,913		$	5,489		$	8,402		$	425,652

Percent of gross loans		0.51	%		0.16	%		0.00	%		0.67	%		1.26	%		1.94	%		98.06	%

(Dollars in thousands)	As of December 31, 2016
	30-59 days delinquent and accruing			60-89 days delinquent and accruing			90 days or more delinquent and accruing			Total past due loans accruing			Non-accrual loans			Total past due and non-accrual loans			Total loans not past due

One-to-four family residential real estate	$	215		$	388		$	-		$	603		$	595		$	1,198		$	135,648
Construction and land		-			-			-			-			599			599			13,139
Commercial real estate		-			-			-			-			300			300			117,900
Commercial		13			5			-			18			342			360			54,146
Agriculture		55			-			-			55			838			893			77,431
Municipal		-			-			-			-			-			-			3,884
Consumer		79			3			-			82			72			154			20,117
Total	$	362		$	396		$	-		$	758		$	2,746		$	3,504		$	422,265

Percent of gross loans		0.09	%		0.09	%		0.00	%		0.18	%		0.64	%		0.82	%		99.18	%

Under the original terms of the Company’s non-accrual loans, interest earned on such loans for the nine months ended September 30, 2017 and 2016 would have increased interest income by $79,000 and $43,000, respectively. No interest income related to non-accrual loans was included in interest income for the nine months ended September 30, 2017 and 2016.

The Company also categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis. Non-classified loans generally include those loans that are expected to be repaid in accordance with contractual loan terms. Classified loans are those that are assigned a special mention, substandard or doubtful risk rating using the following definitions:

Special Mention: Loans are currently protected by the current net worth and paying capacity of the obligor or of the collateral pledged but such protection is potentially weak. These loans constitute an undue and unwarranted credit risk, but not to the point of justifying a classification of substandard. The credit risk may be relatively minor, yet constitutes an unwarranted risk in light of the circumstances surrounding a specific asset.

Substandard: Loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged. Loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

The following table provides information on the Company’s risk categories by loan class:

(Dollars in thousands)	As of September 30, 2017				As of December 31, 2016
	Nonclassified		Classified		Nonclassified		Classified

One-to-four family residential real estate	$	136,064	$	765	$	135,640	$	1,206
Construction and land		15,112		786		13,138		600
Commercial real estate		115,000		5,818		111,641		6,559
Commercial		47,685		3,259		51,080		3,426
Agriculture		79,430		4,671		73,564		4,760
Municipal		3,479		-		3,884		-
Consumer		21,932		53		20,181		90
Total	$	418,702	$	15,352	$	409,128	$	16,641

At September 30, 2017, the Company had 12 loan relationships consisting of 20 outstanding loans that were classified as TDRs. During the third quarter of 2017, the Company classified one agriculture loan totaling $11,000 as a TDR after refinancing an existing loan to a loan relationship that was classified as a TDR in 2016. The Company also classified a one-to-four family residential real estate totaling $25,000 as a TDR after modifying the terms per a bankruptcy judgement. During the second quarter of 2017, the Company classified two agriculture loans totaling $87,000 as TDRs after renewing loans to an existing loan relationship that was classified as a TDR in 2016. During the first quarter of 2017, the Company classified an $11,000 commercial real estate loan as a TDR after extending the maturity of the loan and classified as a TDR a $15,000 agriculture loan extended to an existing loan relationship that was classified as a TDR in 2016. As of September 30, 2017, no impairments were recorded against the principal balances of loans classified as TDRs during 2017. Since the loans were adequately secured no charge-offs were recorded against the principal balances of loans classified as TDRs during 2017.

During the third quarter of 2016, the Company classified a $302,000 agriculture loan relationship consisting of three loans as a TDR after extending the maturities of the loans. The collateral securing the loans was deemed to be insufficient, resulting in a charge-off of $215,000. During the second quarter of 2016, the Company classified two loans as TDRs including an $8,000 commercial loan after modifying the payments to interest only and a $188,000 one-to-four family residential real estate loan after agreeing to a loan modification which adjusted the payment schedule. No loans were classified as TDR in the first quarter of 2016. As of September 30, 2016, an impairment of $2,000 was recorded against loans classified as TDRs. The Company recorded charge-offs of $215,000 against TDRs during the three and nine months ended September 30, 2016.

The Company evaluates each TDR individually and returns the loan to accrual status when a payment history is established after the restructuring and future payments are reasonably assured. There were no loans modified as TDRs for which there was a payment default within 12 months of modification as of September 30, 2017 and 2016. At September 30, 2017, there was a commitment of $32,000 to lend additional funds on one construction and land loan classified as a TDR. The Company did not record any charge-offs against loans classified as TDRs in the first nine months of 2017 or 2016. A credit provision for loan losses of $30,000 related to TDRs was recorded in the nine months ended September 30, 2017 compared to no provision in the same period of 2016. The Company allocated $50,000 and $80,000 of the allowance for loan losses against loans classified as TDRs at September 30, 2017 and December 31, 2016, respectively.

The following table presents information on loans that are classified as TDRs:

(Dollars in thousands)	As of September 30, 2017						As of December 31, 2016
	Number of loans		Non-accrual balance		Accruing balance		Number of loans		Non-accrual balance		Accruing balance

One-to-four family residential real estate		2	$	-	$	198		2	$	-	$	185
Construction and land		4		578		1,297		4		588		1,338
Commercial real estate		4		60		2,135		3		64		2,145
Commercial		-		-		-		2		-		13
Agriculture		8		361		-		4		268		44
Municipal		2		-		140		2		-		258
Total troubled debt restructurings		20	$	999	$	3,770		17	$	920	$	3,983

- Definition

The entire disclosure for claims held for amounts due a entity, excluding financing receivables. Examples include, but are not limited to, trade accounts receivables, notes receivables, loans receivables. Includes disclosure for allowance for credit losses.

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