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Loans and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2020

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)	2020			2019

One-to-four family residential real estate	$	148,994		$	146,505
Construction and land		24,657			22,459
Commercial real estate		141,712			133,501
Commercial		121,271			109,612
Agriculture		96,120			98,558
Municipal		2,628			2,656
Consumer		25,662			25,101
Total gross loans		561,044			538,392
Net deferred loan costs and loans in process		171			255
Allowance for loan losses		(7,479	)		(6,467	)
Loans, net	$	553,736		$	532,180

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

	Three months ended March 31, 2020
(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, 2020	$	501	$	271		$	1,386	$	1,815		$	2,347	$	7		$	140		$	6,467
Charge-offs		-		(100	)		-		(33	)		-		-			(87	)		(220	)
Recoveries		-		-			-		1			-		6			25			32
Provision for loan losses		152		54			242		642			34		(6	)		82			1,200
Balance at March 31, 2020	$	653	$	225		$	1,628	$	2,425		$	2,381	$	7		$	160		$	7,479

	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

	As of March 31, 2020
(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	$	129	$	91	$	52	$	235	$	36	$	-	$	-	$	543
Collectively evaluated for loss		524		134		1,576		2,190		2,345		7		160		6,936
Total	$	653	$	225	$	1,628	$	2,425	$	2,381	$	7	$	160	$	7,479

Loan balances:
Individually evaluated for loss	$	1,436	$	1,319	$	5,504	$	1,576	$	690	$	58	$	15	$	10,598
Collectively evaluated for loss		147,558		23,338		136,208		119,695		95,430		2,570		25,647		550,446
Total	$	148,994	$	24,657	$	141,712	$	121,271	$	96,120	$	2,628	$	25,662	$	561,044

	As of December 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	$	129	$	191	$	103	$	204	$	106	$	-	$	-	$	733
Collectively evaluated for loss		372		80		1,283		1,611		2,241		7		140		5,734
Total	$	501	$	271	$	1,386	$	1,815	$	2,347	$	7	$	140	$	6,467

Loan balances:
Individually evaluated for loss	$	1,256	$	1,479	$	3,461	$	1,298	$	1,124	$	58	$	4	$	8,680
Collectively evaluated for loss		145,249		20,980		130,040		108,314		97,434		2,598		25,097		529,712
Total	$	146,505	$	22,459	$	133,501	$	109,612	$	98,558	$	2,656	$	25,101	$	538,392

The Company recorded net loan charge-offs of $188,000 during the first quarter of 2020 compared to net loan charge-offs of $27,000 during the first quarter of 2019.

The Company’s impaired loans increased from $8.7 million at December 31, 2019 to $10.6 million at March 31, 2020. 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, 2020 and December 31, 2019, 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, 2020 and 2019. The following tables present information on impaired loans:

(Dollars in thousands)	As of March 31, 2020
	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	$	1,477	$	1,436	$	1,067	$	369	$	129	$	1,442	$	2
Construction and land		3,154		1,319		1,228		91		91		1,353		7
Commercial real estate		5,504		5,504		5,308		196		52		5,510		118
Commercial		1,710		1,576		680		896		235		1,578		1
Agriculture		905		690		514		176		36		733		13
Municipal		58		58		58		-		-		58		-
Consumer		15		15		15		-		-		15		-
Total impaired loans	$	12,823	$	10,598	$	8,870	$	1,728	$	543	$	10,689	$	141

(Dollars in thousands)	As of December 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	$	1,297	$	1,256	$	887	$	369	$	129	$	1,291	$	10
Construction and land		3,214		1,479		1,288		191		191		1,631		36
Commercial real estate		3,461		3,461		3,258		203		103		3,489		478
Commercial		1,427		1,298		416		882		204		1,464		11
Agriculture		1,339		1,124		613		511		106		1,166		48
Municipal		58		58		58		-		-		58		1
Consumer		4		4		4		-		-		5		-
Total impaired loans	$	10,800	$	8,680	$	6,524	$	2,156	$	733	$	9,104	$	584

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, 2020 or December 31, 2019.

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, 2020
	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	$	67		$	221		$	-		$	288		$	1,271		$	1,559		$	147,435
Construction and land		-			-			-			-			796			796			23,861
Commercial real estate		265			64			-			329			3,483			3,812			137,900
Commercial		201			127			-			328			1,548			1,876			119,395
Agriculture		456			1,262			-			1,718			447			2,165			93,955
Municipal		-			-			-			-			-			-			2,628
Consumer		11			-			-			11			15			26			25,636
Total	$	1,000		$	1,674		$	-		$	2,674		$	7,560		$	10,234		$	550,810

Percent of gross loans		0.18	%		0.30	%		0.00	%		0.48	%		1.35	%		1.83	%		98.17	%

(Dollars in thousands)	As of December 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	$79			$593			$-			$672			$1,088			$1,760			$144,745
Construction and land		-			-			-			-			898			898			21,561
Commercial real estate		1,137			707			-			1,844			1,440			3,284			130,217
Commercial		510			68			-			578			1,270			1,848			107,764
Agriculture		316			-			-			316			846			1,162			97,396
Municipal		-			-			-			-			-			-			2,656
Consumer		27			-			-			27			4			31			25,070
Total	$	2,069		$	1,368		$	-		$	3,437		$	5,546		$	8,983		$	529,409

Percent of gross loans		0.39	%		0.25	%		0.00	%		0.64	%		1.03	%		1.67	%		98.33	%

Under the original terms of the Company’s non-accrual loans, interest earned on such loans for the three months ended March 31, 2020 and 2019 would have increased interest income by $120,000 and $124,000, respectively. No interest income related to non-accrual loans was included in interest income for the three months ended March 31, 2020 and 2019.

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:

	As of March 31, 2020				As of December 31, 2019
(Dollars in thousands)	Nonclassified		Classified		Nonclassified		Classified

One-to-four family residential real estate	$	147,591	$	1,403	$	145,311	$	1,194
Construction and land		23,861		796		21,560		899
Commercial real estate		137,577		4,135		130,714		2,787
Commercial		113,195		8,076		101,678		7,934
Agriculture		90,158		5,962		93,259		5,299
Municipal		2,628		-		2,656		-
Consumer		25,647		15		25,097		4
Total	$	540,657	$	20,387	$	520,275	$	18,117

At March 31, 2020, 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 2020 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, 2020 and 2019. The Company did not record any charge-offs against loans classified as TDRs in the first quarter of 2020 or 2019. A credit provision of $1,000 was recorded in the three months ended March 31, 2020 compared to no provisions related to TDRs recorded in the three months ended March 31, 2019. The Company allocated $9,000 of the allowance for loan losses recorded against loans classified as TDRs at March 31, 2020 and December 31, 2019.

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

(Dollars in thousands)
	As of March 31, 2020						As of December 31, 2019
	Number of loans		Non-accrual balance		Accruing balance		Number of loans		Non-accrual balance		Accruing balance

One-to-four family residential real estate		2	$	-	$	165		2	$	-	$	168
Construction and land		4		508		523		4		510		581
Commercial real estate		1		-		2,021		1		-		2,021
Commercial		1		-		28		1		-		28
Agriculture		4		-		243		4		-		278
Municipal		1		-		58		1		-		58
Total troubled debt restructurings		13	$	508	$	3,038		13	$	510	$	3,134

As of March 31, 2020, the Company had 12 loan modifications on outstanding loan balances of $8.4 million in connection with the Coronavirus Disease 2019 (COVID-19) pandemic. These modifications consisted of payment deferrals that were less than 180 days and consisted of either the full loan payment or just the principal component. Consistent with regulatory guidance, the Company also entered into short-term forbearance plans or short-term repayment plans on three one-to-four family residential mortgage loans totaling $682,000 as of March 31, 2020. Based on the Joint Interagency Regulatory Guidance, these loan modifications were not classified as TDRs and are excluded from the table above.