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Loans and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2018

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)	2018			2017

One-to-four family residential real estate	$	136,995		$	136,215
Construction and land		30,841			19,356
Commercial real estate		128,292			120,624
Commercial		67,898			54,591
Agriculture		91,376			83,008
Municipal		2,990			3,396
Consumer		23,012			22,046
Total gross loans		481,404			439,236
Net deferred loan costs and loans in process		(18	)		(34	)
Allowance for loan losses		(5,889	)		(5,459	)
Loans, net	$	475,497		$	433,743

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, 2018
	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, 2018	$	439	$	109		$	1,466		$	1,693		$	2,005	$	7		$	116		$	5,835
Charge-offs		-		-			-			(352	)		-		-			(49	)		(401	)
Recoveries		1		-			-			1			-		-			3			5
Provision for loan losses		109		6			(19	)		191			99		-			64			450
Balance at September 30, 2018		549		115			1,447			1,533			2,104		7			134			5,889

Balance at January 1, 2018	$	542	$	181		$	1,540		$	1,226		$	1,812	$	8		$	150		$	5,459
Charge-offs		-		-			-			(381	)		-		-			(126	)		(507	)
Recoveries		3		-			1			3			-		2			28			37
Provision for loan losses		4		(66	)		(94	)		685			292		(3	)		82			900
Balance at September 30, 2018		549		115			1,447			1,533			2,104		7			134			5,889

(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

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, 2018
	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	$	190	$	-	$	13	$	666	$	-	$	-	$	1	$	870
Collectively evaluated for loss		359		115		1,434		867		2,104		7		133		5,019
Total	$	549	$	115	$	1,447	$	1,533	$	2,104	$	7	$	134	$	5,889

Loan balances:
Individually evaluated for loss	$	773	$	1,616	$	3,916	$	2,013	$	647	$	58	$	80	$	9,103
Collectively evaluated for loss		136,222		29,225		124,376		65,885		90,729		2,932		22,932		472,301
Total	$	136,995	$	30,841	$	128,292	$	67,898	$	91,376	$	2,990	$	23,012	$	481,404

(Dollars in thousands)	As of December 31, 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	$	73	$	102	$	52	$	391	$	24	$	-	$	-	$	642
Collectively evaluated for loss		469		79		1,488		835		1,788		8		150		4,817
Total	$	542	$	181	$	1,540	$	1,226	$	1,812	$	8	$	150	$	5,459

Loan balances:
Individually evaluated for loss	$	747	$	2,031	$	3,973	$	2,002	$	833	$	140	$	34	$	9,760
Collectively evaluated for loss		135,468		17,325		116,651		52,589		82,175		3,256		22,012		429,476
Total	$	136,215	$	19,356	$	120,624	$	54,591	$	83,008	$	3,396	$	22,046	$	439,236

The Company’s impaired loans decreased from $9.8 million at December 31, 2017 to $9.1 million at September 30, 2018. 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, 2018 and December 31, 2017, 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 on impaired loans was immaterial during the three and nine month periods ended September 30, 2018 and 2017.

The following tables present information on impaired loans:

(Dollars in thousands)	As of September 30, 2018
	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	$	773	$	773	$	450	$	323	$	190	$	793	$	7
Construction and land		3,351		1,616		1,616		-		-		1,817		42
Commercial real estate		3,916		3,916		3,880		36		13		3,926		365
Commercial		2,013		2,013		2		2,011		666		2,043		-
Agriculture		862		647		647		-		-		717		39
Municipal		58		58		58		-		-		58		1
Consumer		80		80		73		7		1		83		-
Total impaired loans	$	11,053	$	9,103	$	6,726	$	2,377	$	870	$	9,437	$	454

(Dollars in thousands)	As of December 31, 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	$	747	$	747	$	503	$	244	$	73	$	774	$	8
Construction and land		3,766		2,031		430		1,601		102		2,033		65
Commercial real estate		3,973		3,973		3,888		85		52		3,989		490
Commercial		2,002		2,002		11		1,991		391		2,082		-
Agriculture		1,048		833		545		288		24		912		1
Municipal		140		140		140		-		-		192		5
Consumer		34		34		34		-		-		35		-
Total impaired loans	$	11,710	$	9,760	$	5,551	$	4,209	$	642	$	10,017	$	569

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 or more delinquent and accruing interest at September 30, 2018 or December 31, 2017.

The Company is currently in the process of foreclosure on a non-accrual and impaired commercial loan relationship consisting of a $1.8 million commercial real estate loan and $1.8 million of commercial loans. The Company allocated $610,000 of the allowance for loan losses against these loans as of September 30, 2018.

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, 2018
	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	$	129		$	344		$	-		$	473		$	588		$	1,061		$	135,934
Construction and land		157			116			-			273			671			944			29,897
Commercial real estate		227			-			-			227			1,792			2,019			126,273
Commercial		26			93			-			119			2,013			2,132			65,766
Agriculture		294			50			-			344			413			757			90,619
Municipal		-			-			-			-			-			-			2,990
Consumer		35			4			-			39			80			119			22,893
Total	$	868		$	607		$	-		$	1,475		$	5,557		$	7,032		$	474,372

Percent of gross loans		0.18	%		0.13	%		0.00	%		0.31	%		1.15	%		1.46	%		98.54	%

(Dollars in thousands)	As of December 31, 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	$	101		$	313		$	-		$	414		$	552		$	966		$	135,249
Construction and land		-			4			-			4			779			783			18,573
Commercial real estate		22			209			-			231			1,841			2,072			118,552
Commercial		-			397			-			397			2,002			2,399			52,192
Agriculture		-			-			-			-			833			833			82,175
Municipal		-			-			-			-			-			-			3,396
Consumer		105			204			-			309			34			343			21,703
Total	$	228		$	1,127		$	-		$	1,355		$	6,041		$	7,396		$	431,840

Percent of gross loans		0.05	%		0.26	%		0.00	%		0.31	%		1.37	%		1.68	%		98.32	%

Under the original terms of the Company’s non-accrual loans, interest earned on such loans for the nine months ended September 30, 2018 and 2017 would have increased interest income by $205,000 and $79,000, respectively. No interest income related to non-accrual loans was included in interest income for the nine months ended September 30, 2018 and 2017.

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, 2018				As of December 31, 2017
	Non-classified		Classified		Non-classified		Classified

One-to-four family residential real estate	$	135,821	$	1,174	$	135,475	$	740
Construction and land		29,896		945		18,577		779
Commercial real estate		118,293		9,999		114,736		5,888
Commercial		59,788		8,110		52,313		2,278
Agriculture		84,344		7,032		76,455		6,553
Municipal		2,990		-		3,396		-
Consumer		22,932		80		22,006		40
Total	$	454,064	$	27,340	$	422,958	$	16,278

At September 30, 2018, the Company had 10 loan relationships consisting of 14 outstanding loans that were classified as TDRs. There were no loans classified as TDRs during the third quarter of 2018. An agriculture loan relationship consisting of two loans that were originally classified as TDRs during 2015 and a municipal loan that was classified as a TDR in 2010 were both paid off in the third quarter of 2018. During the second quarter of 2018, the Company classified an agriculture loan totaling $64,000 as a TDR after originating a loan to an existing loan relationship that was classified as a TDR in 2016. As part of the restructuring the borrower paid off three loans previously classified as TDRs. Since the agriculture loan relationship was adequately secured, no impairments were recorded against the principal as of September 30, 2018. The Company also classified a $41,000 commercial loan as a TDR after extending the maturity of the loan during the second quarter of 2018. The commercial loan had a $11,000 impairment recorded against the principal balance as of September 30, 2018. There were no new loans classified as TDRs during the first three months of 2018.

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 loan totaling $25,000 as a TDR after modifying the terms of the loan 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 the loans classified as TDRs during 2017.

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 that were classified as TDRs that defaulted within 12 months of modification during the first nine months of 2018. There was one commercial real estate loan totaling $11,000 that was classified as a TDR during the second quarter of 2017 which defaulted within 12 months of modification. The loan was charged off in the fourth quarter of 2017. The Company did not record any charge-offs against loans classified as TDRs in the first nine months of either 2018 or 2017. A credit provision for loan losses of $25,000 and $17,000 related to TDRs was recorded in the three months ended September 30, 2018 and 2017, respectively. A credit provision for loan losses of $116,000 and $30,000 related to TDRs was recorded in the nine months ended September 30, 2018 and 2017, respectively. The Company allocated $11,000 and $127,000 of the allowance for loan losses against loans classified as TDRs at September 30, 2018 and December 31, 2017, respectively.

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

(Dollars in thousands)	As of September 30, 2018						As of December 31, 2017
	Number of loans		Non-accrual balance		Accruing balance		Number of loans		Non-accrual balance		Accruing balance

One-to-four family residential real estate		2	$	-	$	185		2	$	-	$	194
Construction and land		4		527		945		4		575		1,252
Commercial real estate		2		-		2,124		3		45		2,133
Commercial		1		41		-		-		-		-
Agriculture		4		63		234		9		471		-
Municipal		1		-		58		2		-		140
Total troubled debt restructurings		14	$	631	$	3,546		20	$	1,091	$	3,719

- 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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