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Loans and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2019

3.	Loans and Allowance for Loan Losses

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

(Dollars in thousands)	September 30, 2019			December 31, 2018

One-to-four family residential real estate	$	141,801		$	136,895
Construction and land		19,702			20,083
Commercial real estate		135,950			138,967
Commercial		101,150			74,289
Agriculture		100,958			96,632
Municipal		2,728			2,953
Consumer		24,150			25,428
Total gross loans		526,439			495,247
Net deferred loan costs and loans in process		(27	)		(109	)
Allowance for loan losses		(6,279	)		(5,765	)
Loans, net	$	520,133		$	489,373

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, 2019
	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, 2019	$	441		$	255		$	1,758		$	1,404		$	2,260	$	7		$	141		$	6,266
Charge-offs		(15	)		(31	)		-			(284	)		-		-			(81	)		(411	)
Recoveries		-			-			-			1			-		-			23			24
Provision for loan losses		249			(156	)		(326	)		490			40		(1	)		104			400
Balance at September 30, 2019		675			68			1,432			1,611			2,300		6			187			6,279

Balance at January 1, 2019	$	449		$	168		$	1,686		$	1,051		$	2,238	$	7		$	166		$	5,765
Charge-offs		(56	)		(31	)		-			(324	)		-		-			(183	)		(594	)
Recoveries		1			-			-			52			-		6			49			108
Provision for loan losses		281			(69	)		(254	)		832			62		(7	)		155			1,000
Balance at September 30, 2019		675			68			1,432			1,611			2,300		6			187			6,279

(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

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, 2019
	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		316		7		112		228		-		-		-		663
Collectively evaluated for loss		359		61		1,320		1,383		2,300		6		187		5,616
Total		675		68		1,432		1,611		2,300		6		187		6,279

Loan balances:
Individually evaluated for loss		1,225		1,540		3,472		1,047		1,764		58		4		9,110
Collectively evaluated for loss		140,576		18,162		132,478		100,103		99,194		2,670		24,146		517,329
Total	$	141,801	$	19,702	$	135,950	$	101,150	$	100,958	$	2,728	$	24,150	$	526,439

(Dollars in thousands)	As of December 31, 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		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’s impaired loans increased from $8.7 million at December 31, 2018 to $9.1 million at September 30, 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 September 30, 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 on impaired loans was immaterial during the three and nine month periods ended September 30, 2019 and 2018.

The following tables present information on impaired loans:

(Dollars in thousands)	As of September 30, 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	$	1,266	$	1,225	$	855	$	370	$	316	$	1,253	$	8
Construction and land		3,275		1,540		1,348		192		7		195		28
Commercial real estate		3,472		3,472		3,269		203		112		3,504		357
Commercial		1,047		1,047		128		919		228		1,107		11
Agriculture		1,979		1,764		1,764		-		-		1,753		35
Municipal		58		58		58		-		-		58		1
Consumer		4		4		4		-		-		4		-
Total impaired loans	$	11,101	$	9,110	$	7,426	$	1,684	$	663	$	7,874	$	440

(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 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 90 days or more delinquent and accruing interest at September 30, 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 September 30, 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	$	71		$	564		$	-		$	635		$	1,053		$	1,688		$	140,113
Construction and land		-			-			-			-			904			904			18,798
Commercial real estate		15			328			-			343			1,449			1,792			134,158
Commercial		16			392			-			408			1,019			1,427			99,723
Agriculture		510			106			-			616			1,509			2,125			98,833
Municipal		-			-			-			-			-			-			2,728
Consumer		35			47			-			82			4			86			24,064
Total	$	647		$	1,437		$	-		$	2,084		$	5,938		$	8,022		$	518,417

Percent of gross loans		0.12	%		0.28	%		0.00	%		0.40	%		1.13	%		1.53	%		98.47	%

(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 nine months ended September 30, 2019 and 2018 would have increased interest income by $171,000 and $205,000, respectively. No interest income related to non-accrual loans was included in interest income for the nine months ended September 30, 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. 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, 2019				As of December 31, 2018
	Non-classified		Classified		Non-classified		Classified

One-to-four family residential real estate	$	140,596	$	1,205	$	135,947	$	948
Construction and land		18,798		904		19,135		948
Commercial real estate		130,913		5,037		126,619		12,348
Commercial		93,125		8,025		66,490		7,799
Agriculture		92,120		8,838		86,917		9,715
Municipal		2,728		-		2,953		-
Consumer		24,146		4		25,383		45
Total	$	502,426	$	24,013	$	463,444	$	31,803

At September 30, 2019, the Company had nine loan relationships consisting of 13 outstanding loans that were classified as TDRs. There were no loans classified as TDRs during the first nine months of 2019.

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 an $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.

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, 2019 and 2018. The Company did not record any charge-offs against loans classified as TDRs in the first nine months of 2019 or 2018. No provision for loan losses related to TDRs was recorded in the three months ended September 30, 2019. A credit provision for loan losses of $25,000 related to TDRs was recorded in the three months ended September 30, 2018. A credit provision for loan losses of $1,000 and $116,000 related to TDRs was recorded in the nine months ended September 30, 2019 and 2018, respectively. The Company allocated $9,000 and $10,000 of the allowance for loan losses against loans classified as TDRs at September 30, 2019 and December 31, 2018, respectively.

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

(Dollars in thousands)	As of September 30, 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	$	-	$	172		2	$	-	$	181
Construction and land		4		513		636		4		523		860
Commercial real estate		1		-		2,023		2		-		2,121
Commercial		1		-		28		1		36		-
Agriculture		4		-		255		4		23		235
Municipal		1		-		58		1		-		58
Total troubled debt restructurings		13	$	513	$	3,172		14	$	582	$	3,455