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Loans and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2021

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)	2021			2020

One-to-four family residential real estate loans	$	159,798		$	157,984
Construction and land loans		26,591			26,106
Commercial real estate loans		179,781			172,307
Commercial loans		126,998			134,047
Paycheck protection program loans		117,297			100,084
Agriculture loans		92,486			96,532
Municipal loans		2,183			2,332
Consumer loans		25,557			24,122
Total gross loans		730,691			713,514
Net deferred loan (fees) costs and loans in process		(3,611	)		(1,957	)
Allowance for loan losses		(9,271	)		(8,775	)
Loans, net	$	717,809		$	702,782

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

	Three months ended March 31, 2021
(Dollars in thousands)	One-to-four family residential real estate loans			Construction and land loans		Commercial real estate loans		Commercial loans			Paycheck protection program loans		Agriculture loans			Municipal loans			Consumer loans			Total

Allowance for loan losses:
Balance at January 1, 2021	$	859		$	181	$	2,482	$	2,388		$	-	$	2,690		$	6		$	169		$	8,775
Charge-offs		(23	)		-		-		-			-		-			-			(41	)		(64	)
Recoveries		1			1		-		1			-		-			6			51			60
Provision for loan losses		60			4		775		(143	)		-		(187	)		(6	)		(3	)		500
Balance at March 31, 2021	$	897		$	186	$	3,257	$	2,246		$	-	$	2,503		$	6		$	176		$	9,271

	Three months ended March 31, 2020
(Dollars in thousands)	One-to-four family residential real estate loans		Construction and land loans			Commercial real estate loans		Commercial loans			Paycheck protection program loans		Agriculture loans		Municipal loans			Consumer loans			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

	As of March 31, 2021
(Dollars in thousands)	One-to-four family residential real estate loans		Construction and land loans		Commercial real estate loans		Commercial loans		Paycheck protection program loans		Agriculture loans		Municipal loans		Consumer loans		Total

Allowance for loan losses:
Individually evaluated for loss	$	-	$	-	$	424	$	28	$	-	$	40	$	-	$	-	$	492
Collectively evaluated for loss		897		186		2,833		2,218		-		2,463		6		176		8,779
Total	$	897	$	186	$	3,257	$	2,246	$	-	$	2,503	$	6	$	176	$	9,271

Loan balances:
Individually evaluated for loss	$	956	$	1,027	$	7,874	$	1,679	$	-	$	1,182	$	36	$	4	$	12,758
Collectively evaluated for loss		158,842		25,564		171,907		125,319		117,297		91,304		2,147		25,553		717,933
Total	$	159,798	$	26,591	$	179,781	$	126,998	$	117,297	$	92,486	$	2,183	$	25,557	$	730,691

	As of December 31, 2020
(Dollars in thousands)	One-to-four family residential real estate loan		Construction and land loans		Commercial real estate loans		Commercial loans		Paycheck protection program loans		Agriculture loans		Municipal loans		Consumer loans		Total

Allowance for loan losses:
Individually evaluated for loss	$	-	$	-	$	177	$	22	$	-	$	67	$	-	$	-	$	266
Collectively evaluated for loss		859		181		2,305		2,366		-		2,623		6		169		8,509
Total	$	859	$	181	$	2,482	$	2,388	$	-	$	2,690	$	6	$	169	$	8,775

Loan balances:
Individually evaluated for loss	$	914	$	1,137	$	8,119	$	1,639	$	-	$	614	$	36	$	3	$	12,462
Collectively evaluated for loss		157,070		24,969		164,188		132,408		100,084		95,918		2,296		24,119		701,052
Total	$	157,984	$	26,106	$	172,307	$	134,047	$	100,084	$	96,532	$	2,332	$	24,122	$	713,514

The Company recorded net loan charge-offs of $4,000 during the first quarter of 2021 compared to net loan charge-offs of $188,000 during the first quarter of 2020.

The Company’s impaired loans increased from $12.5 million at December 31, 2020 to $12.8 million at March 31, 2021. 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, 2021 and December 31, 2020, 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, 2021 and 2020. The following tables present information on impaired loans:

(Dollars in thousands)	As of March 31, 2021
	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	$	956	$	956	$	956	$	-	$	-	$	963	$	2
Construction and land		2,762		1,027		1,027		-		-		1,043		6
Commercial real estate		7,874		7,874		2,404		5,470		424		7,875		9
Commercial		2,030		1,679		1,561		118		28		1,705		10
Agriculture		1,397		1,182		1,131		51		40		1,237		16
Municipal		36		36		36		-		-		36		-
Consumer		4		4		4		-		-		5		-
Total impaired loans	$	15,059	$	12,758	$	7,119	$	5,639	$	492	$	12,864	$	43

(Dollars in thousands)	As of December 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	$	914	$	914	$	914	$	-	$	-	$	925	$	3
Construction and land		2,872		1,137		1,137		-		-		1,211		26
Commercial real estate		8,119		8,119		4,302		3,817		177		8,152		8
Commercial		1,990		1,639		1,543		96		22		1,984		43
Agriculture		829		614		538		76		67		618		67
Municipal		36		36		36		-		-		54		1
Consumer		3		3		3		-		-		4		-
Total impaired loans	$	14,763	$	12,462	$	8,473	$	3,989	$	266	$	12,948	$	148

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, 2021 or December 31, 2020.

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, 2021
	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	$	1,268		$	124		$	-		$	1,392		$	793		$	2,185		$	157,613
Construction and land loans		-			-			-			-			691			691			25,900
Commercial real estate loans		-			-			-			-			7,874			7,874			171,907
Commercial loans		1,587			-			-			1,587			947			2,534			124,464
Paycheck protection program loans		-			-			-			-			-			-			117,297
Agriculture loans		1,583			424			-			2,007			706			2,713			89,773
Municipal loans		-			-			-			-			-			-			2,183
Consumer loans		15			24			-			39			4			43			25,514
Total	$	4,453		$	572		$	-		$	5,025		$	11,015		$	16,040		$	714,651

Percent of gross loans		0.61	%		0.08	%		0.00	%		0.69	%		1.51	%		2.20	%		97.80	%

(Dollars in thousands)	As of December 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 loans	$	262		$	185		$	-		$	447		$	749		$	1,196		$	156,788
Construction and land loans		-			-			-			-			694			694			25,412
Commercial real estate loans		-			-			-			-			8,119			8,119			164,188
Commercial loans		832			-			-			832			874			1,706			132,341
Paycheck protection program loans		-			-			-			-			-			-			100,084
Agriculture loans		206			29			-			235			76			311			96,221
Municipal loans		-			-			-			-			-			-			2,332
Consumer loans		15			1			-			16			3			19			24,103
Total	$	1,315		$	215		$	-		$	1,530		$	10,515		$	12,045		$	701,469

Percent of gross loans		0.19	%		0.03	%		0.00	%		0.22	%		1.47	%		1.69	%		98.31	%

Under the original terms of the Company’s non-accrual loans, interest earned on such loans for the three months ended March 31, 2021 and 2020 would have increased interest income by $186,000 and $120,000, respectively. No interest income related to non-accrual loans was included in interest income for the three months ended March 31, 2021 and 2020.

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, 2021				As of December 31, 2020
(Dollars in thousands)	Nonclassified		Classified		Nonclassified		Classified

One-to-four family residential real estate loans	$	155,668	$	4,130	$	154,985	$	2,999
Construction and land loans		25,900		691		25,412		694
Commercial real estate loans		168,909		10,872		161,661		10,646
Commercial loans		125,069		1,929		132,023		2,024
Paycheck protection program loans		117,297		-		100,084		-
Agriculture loans		85,305		7,181		87,662		8,870
Municipal loan		2,183		-		2,332		-
Consumer loans		25,554		3		24,119		3
Total	$	705,885	$	24,806	$	688,278	$	25,236

At March 31, 2021, the Company had ten loan relationships consisting of 21 outstanding loans that were classified as TDRs. During the first quarter of 2021, one commercial loan totaling $47,000 was classified as a TDR after extending the maturity of the loan. The restructuring changed the payment terms to match the borrower’s cash flows. The Company had previously charged-off $100,000 of the loan due to a collateral shortfall. A construction and land loan previously classified as TDR in 2012 paid off during the first three months of 2021. There were no loans classified as TDRs during the first three months of 2020.

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, 2021 and 2020. The Company did not record any charge-offs against loans classified as TDRs in the first quarter of 2021 or 2020. No credit provisions related to TDRs were recorded in the three months ended March 31, 2021 compared to a credit provision of $1,000 recorded in the three months ended March 31, 2020. The Company allocated $8,000 of the allowance for loan losses recorded against loans classified as TDRs at March 31, 2021 and December 31, 2020.

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

(Dollars in thousands)
	As of March 31, 2021						As of December 31, 2020
	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	$	-	$	163		2	$	-	$	165
Construction and land loans		4		691		336		5		693		443
Commercial real estate loans		2		1,227		-		2		1,227		-
Commercial loans		8		80		732		7		33		765
Agriculture loans		4		-		476		4		-		538
Municipal loan		1		-		36		1		-		36
Total		21	$	1,998	$	1,743		21	$	1,953	$	1,947

As of March 31, 2021, the Company had 4 loan modifications on outstanding loan balances of $6.8 million in connection with the Coronavirus Disease 2019 (COVID-19) pandemic. These modifications consisted of payment deferrals that consisted of either the full loan payment or just the principal component. The Company also entered into short-term forbearance plans or short-term repayment plans on two one-to-four family residential mortgage loans totaling $250,000 as of March 31, 2021. Consistent with the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and the Joint Interagency Regulatory Guidance, these loan modifications were not classified as TDRs and are excluded from the table above.