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Loans and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2019

3. Loans and Allowance for Loan Losses

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

	March 31,			December 31,
(Dollars in thousands)	2019			2018
One-to-four family residential real estate	$	135,871		$	136,895
Construction and land		18,386			20,083
Commercial real estate		141,148			138,967
Commercial		79,103			74,289
Agriculture		94,905			96,632
Municipal		2,922			2,953
Consumer		24,160			25,428
Total gross loans		496,495			495,247
Net deferred loan costs and loans in process		116			(109	)
Allowance for loan losses		(5,938	)		(5,765	)
Loans, net	$	490,673		$	489,373

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

	Three months ended March 31, 2019
(Dollars in thousands)	One-to-four family residential real estate		Construction and land			Commercial real estate		Commercial		Agriculture			Municipal			Consumer			Total
Allowance for loan losses:
Balance at January 1, 2019	$	449	$	168		$	1,686	$	1,051	$	2,238		$	7		$	166		$	5,765
Charge-offs		-		-			-		-		-			-			(49	)		(49	)
Recoveries		1		-			-		1		-			6			14			22
Provision for loan losses		24		(12	)		185		113		(110	)		(6	)		6			200
Balance at March 31, 2019	$	474	$	156		$	1,871	$	1,165	$	2,128		$	7		$	137		$	5,938

	Three months ended March 31, 2018
(Dollars in thousands)	One-to-four family residential real estate			Construction and land			Commercial real estate		Commercial		Agriculture		Municipal			Consumer			Total
Allowance for loan losses:
Balance at January 1, 2018	$	542		$	181		$	1,540	$	1,226	$	1,812	$	8		$	150		$	5,459
Charge-offs		-			-			-		-		-		-			(33	)		(33	)
Recoveries		1			-			1		1		-		2			13			18
Provision for loan losses		(66	)		(60	)		21		257		55		(3	)		(4	)		200
Balance at March 31, 2018	$	477		$	121		$	1,562	$	1,484	$	1,867	$	7		$	126		$	5,644

	As of March 31, 2019
(Dollars in thousands)	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	$	115	$	97	$	223	$	20	$	-	$	-	$	-	$	455
Collectively evaluated for loss		359		59		1,648		1,145		2,128		7		137		5,483
Total	$	474	$	156	$	1,871	$	1,165	$	2,128	$	7	$	137	$	5,938
Loan balances:
Individually evaluated for loss	$	958	$	1,766	$	3,986	$	1,567	$	1,609	$	58	$	41	$	9,985
Collectively evaluated for loss		134,913		16,620		137,162		77,536		93,296		2,864		24,119		486,510
Total	$	135,871	$	18,386	$	141,148	$	79,103	$	94,905	$	2,922	$	24,160	$	496,495

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

The Company recorded net loan charge-offs of $27,000 during the first quarter of 2019 compared to net loan charge-offs of $15,000 during the first quarter of 2018.

The Company’s impaired loans increased from $8.7 million at December 31, 2018 to $10.0 million at March 31, 2019. 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 March 31, 2019 and December 31, 2018, 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 months ended March 31, 2019 and 2018. The following tables present information on impaired loans:

(Dollars in thousands)	As of March 31, 2019
	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	$	958	$	958	$	681	$	277	$	115	$	961	$	3
Construction and land		3,501		1,766		1,341		425		97		1,782		10
Commercial real estate		3,986		3,986		2,023		1,963		223		3,992		118
Commercial		1,567		1,567		1,441		126		20		1,570		-
Agriculture		1,824		1,609		1,609		-		-		1,641		12
Municipal		58		58		58		-		-		58		-
Consumer		41		41		41		-		-		43		-
Total impaired loans	$	11,935	$	9,985	$	7,194	$	2,791	$	455	$	10,047	$	143

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

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 90 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 90 days or more delinquent and accruing interest at March 31, 2019 or December 31, 2018.

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

(Dollars in thousands)	As of March 31, 2019
	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	$	728		$	30		$	-		$	758		$	779		$	1,537		$	134,334
Construction and land		223			-			-			223			946			1,169			17,217
Commercial real estate		264			632			-			896			1,962			2,858			138,290
Commercial		188			73			-			261			1,567			1,828			77,275
Agriculture		23			-			-			23			1,393			1,416			93,489
Municipal		-			-			-			-			-			-			2,922
Consumer		61			2			-			63			41			104			24,056
Total	$	1,487		$	737		$	-		$	2,224		$	6,688		$	8,912		$	487,583

Percent of gross loans		0.30	%		0.15	%		0.00	%		0.45	%		1.35	%		1.79	%		98.21	%

(Dollars in thousands)	As of December 31, 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	$	131		$	206		$	-		$	337		$	442		$	779		$	136,116
Construction and land		-			134			-			134			948			1,082			19,001
Commercial real estate		465			-			-			465			1,791			2,256			136,711
Commercial		398			20			-			418			1,528			1,946			72,343
Agriculture		100			88			-			188			482			670			95,962
Municipal		-			-			-			-			-			-			2,953
Consumer		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	%

Under the original terms of the Company’s non-accrual loans, interest earned on such loans for the three months ended March 31, 2019 and 2018 would have increased interest income by $124,000 and $76,000, respectively. No interest income related to non-accrual loans was included in interest income for the three months ended March 31, 2019 and 2018.

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. Nonclassified 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 March 31, 2019				As of December 31, 2018
	Nonclassified		Classified		Nonclassified		Classified

One-to-four family residential real estate	$	134,626	$	1,245	$	135,947	$	948
Construction and land		17,440		946		19,135		948
Commercial real estate		129,045		12,103		126,619		12,348
Commercial		71,275		7,828		66,490		7,799
Agriculture		86,279		8,626		86,917		9,715
Municipal		2,922		-		2,953		-
Consumer		24,119		41		25,383		45
Total	$	465,706	$	30,789	$	463,444	$	31,803

At March 31, 2019, the Company had nine loan relationships consisting of thirteen outstanding loans that were classified as TDRs. There were no loans classified as TDRs during the first three months of 2018 or 2019.

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 March 31, 2019 and 2018. The Company did not record any charge-offs against loans classified as TDRs in the first quarter of 2019 or 2018. No provision was recorded in the three months ended March 31, 2019 compared to a credit provision of $33,000 related to TDRs recorded in the three months ended March 31, 2018. The Company had $10,000 allowance for loan losses recorded against loans classified as TDRs at March 31, 2019 and December 31, 2018.

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

(Dollars in thousands)	As of March 31, 2019						As of December 31, 2018
	Number of loans		Non-accrual balance		Accruing balance		Number of loans		Non-accrual balance		Accruing balance

One-to-four family residential real estate		2	$	-	$	179		2	$	-	$	181
Construction and land		4		521		820		4		523		860
Commercial real estate		1		-		2,024		2		-		2,121
Commercial		1		32		-		1		36		-
Agriculture		4		6		216		4		23		235
Municipal		1		-		58		1		-		58
Total troubled debt restructurings		13	$	559	$	3,297		14	$	582	$	3,455