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Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2018

(5) Loans and Allowance for Loan Losses

Loans consisted of the following:

	As of December 31,
(Dollars in thousands)	2018			2017

One-to-four family residential real estate loans	$	136,895		$	136,215
Construction and land loans		20,083			19,356
Commercial real estate loans		138,967			120,624
Commercial loans		74,289			54,591
Agriculture loans		96,632			83,008
Municipal loans		2,953			3,396
Consumer loans		25,428			22,046
Total gross loans		495,247			439,236
Net deferred loan costs and loans in process		(109	)		(34	)
Allowance for loan losses		(5,765	)		(5,459	)
Loans, net	$	489,373		$	433,743

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

	Year ended December 31, 2018
(Dollars in thousands)	One-to-four family residential real estate loans			Construction and land loans			Commercial real estate loans		Commercial loans			Agriculture loans		Municipal loans			Consumer loans			Total

Allowance for loan losses:
Balance at January 1, 2018	$	542		$	181		$	1,540	$	1,226		$	1,812	$	8		$	150		$	5,459
Charge-offs		(32	)		-			-		(950	)		-		-			(178	)		(1,160	)
Recoveries		4			-			1		22			1		2			36			66
Provision for loan losses		(65	)		(13	)		145		753			425		(3	)		158			1,400
Balance at December 31, 2018	$	449		$	168		$	1,686	$	1,051		$	2,238	$	7		$	166		$	5,765

Allowance for loan losses:
Individually evaluated for loss	$	100		$	103		$	67	$	27		$	13	$	-		$	-		$	310
Collectively evaluated for loss		349			65			1,619		1,024			2,225		7			166			5,455
Total	$	449		$	168		$	1,686	$	1,051		$	2,238	$	7		$	166		$	5,765

Loan balances:
Individually evaluated for loss	$	623		$	1,808		$	3,912	$	1,528		$	717	$	58		$	45		$	8,691
Collectively evaluated for loss		136,272			18,275			135,055		72,761			95,915		2,895			25,383			486,556
Total	$	136,895		$	20,083		$	138,967	$	74,289		$	96,632	$	2,953		$	25,428		$	495,247

	Year ended December 31, 2017
(Dollars in thousands)	One-to-four family residential real estate			Construction and land		Commercial real estate			Commercial loans		Agriculture loans			Municipal loans			Consumer loans			Total

Allowance for loan losses:
Balance at January 1, 2017	$	504		$	53	$	1,777		$	1,119	$	1,684		$	12		$	195		$	5,344
Charge-offs		(37	)		-		(71	)		-		(45	)		-			(335	)		(488	)
Recoveries		11			-		-			20		1			37			84			153
Provision for loan losses		64			128		(166	)		87		172			(41	)		206			450
Balance at December 31, 2017	$	542		$	181	$	1,540		$	1,226	$	1,812		$	8		$	150		$	5,459

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

	Year ended December 31, 2016
	One-to-four family residential real estate loans			Construction and land loans			Commercial real estate loans		Commercial loans			Agriculture loans			Municipal loans			Consumer loans			Total

Allowance for loan losses:
Balance at January 1, 2016	$	925		$	77		$	1,740	$	1,530		$	1,428		$	23		$	199		$	5,922
Charge-offs		(14	)		-			-		(306	)		(375	)		-			(471	)		(1,166	)
Recoveries		9			-			-		34			-			6			39			88
Provision for loan losses		(416	)		(24	)		37		(139	)		631			(17	)		428			500
Balance at December 31, 2016	$	504		$	53		$	1,777	$	1,119		$	1,684		$	12		$	195		$	5,344

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 decreased $1.1 million from $9.8 million at December 31, 2017 to $8.7 million at December 31, 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 December 31, 2018 and December 31, 2017 was related to TDRs that are current and accruing interest, but still classified as impaired. Interest income recognized on a cash basis for impaired loans was immaterial during the years 2018, 2017 and 2016. The following tables present information on impaired loans:

	As of December 31, 2018
(Dollars in thousands)	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 loans	$	623	$	623	$	413	$	210	$	100	$	640	$	10
Construction and land loans		3,543		1,808		1,383		425		103		2,689		53
Commercial real estate loans		3,912		3,912		2,120		1,792		67		3,928		487
Commercial loans		1,528		1,528		1,446		82		27		1,537		-
Agriculture loans		932		717		529		188		13		844		52
Municipal loans		58		58		58		-		-		58		1
Consumer loans		45		45		45		-		-		49		-
Total impaired loans	$	10,641	$	8,691	$	5,994	$	2,697	$	310	$	9,745	$	603

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

	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 loans	$	780	$	780	$	780	$	-	$	-	$	798	$	7
Construction and land loans		3,672		1,937		1,937		-		-		2,068		72
Commercial real estate loans		2,445		2,445		2,145		300		81		2,587		505
Commercial loans		355		355		46		309		87		425		2
Agriculture loans		1,173		881		147		734		89		1,000		2
Municipal loans		258		258		258		-		-		418		-
Consumer loans		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 December 31, 2018 or December 31, 2017. The following tables present information on the Company’s past due and non-accrual loans by loan class:

	As of December 31, 2018
(Dollars in thousands)	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 loans	$	131		$	206		$	-		$	337		$	442		$	779		$	136,116
Construction and land loans		-			134			-			134			948			1,082			19,001
Commercial real estate loans		465			-			-			465			1,791			2,256			136,711
Commercial loans		398			20			-			418			1,528			1,946			72,343
Agriculture loans		100			88			-			188			482			670			95,962
Municipal loans		-			-			-			-			-			-			2,953
Consumer loans		106			23			-			129			45			174			25,254
Total	$	1,200		$	471		$	-		$	1,671		$	5,236		$	6,907		$	488,340

Percent of gross loans		0.24	%		0.10	%		0.00	%		0.34	%		1.06	%		1.40	%		98.60	%

	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 loans	$	101		$	313		$	-		$	414		$	552		$	966		$	135,249
Construction and land loans		-			4			-			4			779			783			18,573
Commercial real estate loans		22			209			-			231			1,841			2,072			118,552
Commercial loans		-			397			-			397			2,002			2,399			52,192
Agriculture loans		-			-			-			-			833			833			82,175
Municipal loans		-			-			-			-			-			-			3,396
Consumer loans		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 years 2018, 2017 and 2016, would have increased interest income by $254,000, $185,000 and $75,000, respectively. No interest income related to non-accrual loans was included in interest income for the years ended December 31, 2018, 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 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:

	As of December 31, 2018				As of December 31, 2017
(Dollars in thousands)	Nonclassified		Classified		Nonclassified		Classified

One-to-four family residential real estate loans	$	135,947	$	948	$	135,475	$	740
Construction and land loans		19,135		948		18,577		779
Commercial real estate loans		126,619		12,348		114,736		5,888
Commercial loans		66,490		7,799		52,313		2,278
Agriculture loans		86,917		9,715		76,455		6,553
Municipal loans		2,953		-		3,396		-
Consumer loans		25,383		45		22,006		40
Total	$	463,444	$	31,803	$	422,958	$	16,278

At December 31, 2018, the Company had ten loan relationships consisting of fourteen outstanding loans totaling $4.0 million that were classified as TDRs compared to twelve relationships consisting of twenty outstanding loans totaling $4.8 million that were classified as TDRs at December 31, 2017.

During 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 December 31, 2018. The Company also classified a $36,000 commercial loan as a TDR after extending the maturity of the loan during 2018. The commercial loan had a $10,000 impairment recorded against the principal balance as of December 31, 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 2018.

During 2017, the Company classified four agriculture loans totaling $98,000 as TDRs after refinancing existing loans to two agriculture loan relationships that were classified as TDRs in 2016 and 2015. The Company also classified a $104,000 agriculture loan as a TDR in 2017 after extending the maturity of the loan. The Company also classified a one-to-four family residential real estate loan totaling $25,000 as a TDR during 2017 after modifying the terms per a bankruptcy judgment. Also during 2017, the Company classified an $11,000 commercial real estate loan as a TDR after extending the maturity of the loan. The $11,000 commercial real estate loan was charged-off during 2017 as a result of the borrower failing to comply with the terms of the restructuring.

During 2016, the Company classified a $268,000 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. The Company also classified an $8,000 commercial loan as a TDR during 2016 after modifying the payments to interest only. Also during 2016, the Company classified an $188,000 one-to-four family residential real estate loan as a TDR after agreeing to a loan modification which adjusted the payment schedule.

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 was one commercial real estate loan totaling $11,000 that was classified as a TDR during 2017 which defaulted within 12 months of modification. The loan was charged-off as of December 31, 2017. There were no loans modified as TDRs for which there was a payment default within 12 months of modification as of December 31, 2018 and 2016. At December 31, 2018, there was a commitment of $10,000 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 during 2018 and recorded a credit provision for loan loss of $117,000 against TDRs during 2018. The Company recorded charge-offs of $11,000 and a provision for loan loss of $47,000 against TDRs during 2017. The Company recorded charge-offs of $215,000 and a provision for loan loss of $16,000 against TDRs during 2016. The Company allocated $10,000 and $127,000 of the allowance for loan losses recorded against loans classified as TDRs at December 31, 2018 and 2017, respectively.

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

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

One-to-four family residential real estate loans		2	$	-	$	181		2	$	-	$	195
Construction and land loans		4		523		860		4		575		1,252
Commercial real estate loans		2		-		2,121		3		45		2,132
Commerical loans		1		36		-		-		-		-
Agriculture		4		23		235		9		471		-
Municipal loans		1		-		58		2		-		140
Total troubled debt restructurings		14	$	582	$	3,455		20	$	1,091	$	3,719

The Company had loans and unfunded commitments to directors and officers, and to affiliated parties, at December 31, 2018 and 2017. A summary of such loans is as follows:

(Dollars in thousands)
Balance at December 31, 2017	$	14,681
New loans		11,909
Repayments		(12,929	)
Balance at December 31, 2018	$	13,661

- 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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