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Loans and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2020

3.	Loans and Allowance for Loan Losses

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

Schedule of Loans

	September 30,			December 31,
(Dollars in thousands)	2020			2019

One-to-four family residential real estate	$	162,344		$	146,505
Construction and land		28,094			22,459
Commercial real estate		154,804			133,501
Commercial		137,286			109,612
Paycheck protection program		130,977			-
Agriculture		99,430			98,558
Municipal		2,389			2,656
Consumer		23,988			25,101
Total gross loans		739,312			538,392
Net deferred loan (fees)/costs and loans in process		(2,796	)		255
Allowance for loan losses		(8,366	)		(6,467	)
Loans, net	$	728,150		$	532,180

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, 2020
	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, 2020	$	707		$	273		$	1,693		$	2,356		$	2,565		$	6		$	147		$	7,747
Charge-offs		(89	)		(91	)		-			(167	)		(3	)		-			(57	)		(407	)
Recoveries		-			-			-			1			-			-			25			26
Provision for loan losses		213			22			264			436			15			-			50			1,000
Balance at September 30, 2020		831			204			1,957			2,626			2,577			6			165			8,366

Balance at January 1, 2020	$	501		$	271		$	1,386		$	1,815		$	2,347		$	7		$	140		$	6,467
Charge-offs		(109	)		(191	)		(120	)		(200	)		(3	)		-			(180	)		(803	)
Recoveries		-			-			13			3			-			6			80			102
Provision for loan losses		439			124			678			1,008			233			(7	)		125			2,600
Balance at September 30, 2020		831			204			1,957			2,626			2,577			6			165			8,366

(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

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, 2020
	One-to-four family residential real estate		Construction and land		Commercial real estate		Commercial		Paycheck protection loans		Agriculture		Municipal		Consumer		Total

Allowance for loan losses:
Individually evaluated for loss		213		-		-		25		-		-		-		-		238
Collectively evaluated for loss		618		204		1,957		2,601		-		2,577		6		165		8,128
Total		831		204		1,957		2,626		-		2,577		6		165		8,366

Loan balances:
Individually evaluated for loss		1,259		1,198		4,929		2,055		-		1,059		58		2		10,560
Collectively evaluated for loss		161,085		26,896		149,875		135,231		130,977		98,371		2,331		23,986		728,752
Total	$	162,344	$	28,094	$	154,804	$	137,286	$	130,977	$	99,430	$	2,389	$	23,988	$	739,312

(Dollars in thousands)	As of December 31, 2019
	One-to-four family residential real estate		Construction and land		Commercial real estate		Commercial		Paycheck protection loans		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’s impaired loans increased from $8.7 million at December 31, 2019 to $10.6 million at September 30, 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 September 30, 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 on impaired loans was immaterial during the three and nine month periods ended September 30, 2020 and 2019.

The following tables present information on impaired loans:

(Dollars in thousands)	As of September 30, 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	$	1,348	$	1,259	$	959	$	300	$	213	$	1,319	$	1
Construction and land		2,933		1,198		1,198		-		-		1,225		19
Commercial real estate		4,929		4,929		4,929		-		-		4,946		356
Commercial		2,354		2,055		1,952		103		25		2,281		32
Agriculture		1,274		1,059		1,059		-		-		1,155		61
Municipal		58		58		58		-		-		58		1
Consumer		2		2		2		-		-		3		-
Total impaired loans	$	12,898	$	10,560	$	10,157	$	403	$	238	$	10,987	$	470

(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 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, 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 September 30, 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	$	30	$	425	$	-	$	455	$	1,243	$	1,698	$	160,646
Construction and land		598		-		-		598		697		1,295		26,799
Commercial real estate		-		1,654		-		1,654		2,910		4,564		150,240
Commercial		443		37		-		480		1,202		1,682		135,604
Paycheck protection loans		-		-		-		-		-		-		130,977
Agriculture		476		-		-		476		292		768		98,662
Municipal		-		-		-		-		-		-		2,389
Consumer		24		1		-		25		2		27		23,961
Total	$	1,571	$	2,117	$	-	$	3,688	$	6,346	$	10,034	$	729,278

Percent of gross loans		0.21%		0.29%		0.00%		0.50%		0.86%		1.36%		98.64%

(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 nine months ended September 30, 2020 and 2019 would have increased interest income by $264,000 and $171,000, respectively. No interest income related to non-accrual loans was included in interest income for the nine months ended September 30, 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. 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, 2020				As of December 31, 2019
	Non-classified		Classified		Non-classified		Classified

One-to-four family residential real estate	$	161,026	$	1,318	$	145,311	$	1,194
Construction and land		26,799		1,295		21,560		899
Commercial real estate		149,712		5,092		130,714		2,787
Commercial		129,882		7,404		101,678		7,934
Payroll protection loan		130,977		-		-		-
Agriculture		89,405		10,025		93,259		5,299
Municipal		2,389		-		2,656		-
Consumer		23,986		2		25,097		4
Total	$	714,176	$	25,136	$	520,275	$	18,117

At September 30, 2020, the Company had twelve loan relationships consisting of 22 outstanding loans that were classified as TDRs. During the three and nine months ended September 30, 2020, the Company modified the payment terms for two agriculture loans totaling $571,000 and classified the restructurings as TDRs. A commercial loan totaling $33,000 and a $1.4 million loan relationship consisting of two commercial real estate loans and one construction loan were classified as TDRs during the three and nine months ended September 30, 2020 after negotiating restructuring agreements with the borrowers. One commercial loan relationship with five loans totaling $827,000 were classified as TDRs during the nine months ended September 30, 2020, after the payments were modified to interest only. All of the loans classified as TDRs were experiencing financial difficulties prior to the COVID-19 pandemic. One agriculture loan previously classified as a TDR paid off during 2020. No loans were classified as TDRs during the first nine months of 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 September 30, 2020 and 2019. The Company did not record any charge-offs against loans classified as TDRs in the first nine months of 2020 or 2019. No provision for loan losses were recorded against TDRs in the three months ended September 30, 2020 as compared to a credit provision of $1,000 recorded in the three months ended September 30, 2019. No provision for loan losses was recorded against TDRs in the nine months ended September 30, 2020 compared to a credit provision of $1,000 in the nine months ended September 30, 2019. The Company allocated $9,000 of the allowance for loan losses against loans classified as TDRs at September 30, 2020 and December 31, 2019, respectively.

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

(Dollars in thousands)	As of September 30, 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		1	$	-	$	15		2	$	-	$	168
Construction and land		5		697		501		4		510		581
Commercial real estate		3		1,227		2,019		1		-		2,021
Commercial		7		33		853		1		-		28
Agriculture		5		-		767		4		-		278
Municipal		1		-		58		1		-		58
Total troubled debt restructurings		22	$	1,957	$	4,213		13	$	510	$	3,134

As of September 30, 2020, the Company had 33 loan modifications on outstanding loan balances of $22.9 million in connection with the COVID-19 pandemic. These modifications consisted of payment deferrals that consisted of either the full loan payment or just the principal component. Between March 31, 2020 and September 30, 2020, 107 loans with outstanding loan balances of $35.7 million had reached the end of their initial deferral periods and returned to their respective contractual payment terms. Additionally, as of September 30, 2020, only three borrowers with aggregate loans outstanding of $6.8 million were granted a second deferral. The Company also entered into short-term forbearance plans or short-term repayment plans on eight one-to-four family residential mortgage loans totaling $982,000 as of September 30, 2020. Consistent with the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) and Joint Interagency Regulatory Guidance, these loan modifications were not classified as TDRs and are excluded from the table above.