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Loans and Allowance for Loan Losses

6 Months Ended

Jun. 30, 2021

3. Loans and Allowance for Loan Losses

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

Schedule of Loans

	June 30,			December 31,
(Dollars in thousands)	2021			2020

One-to-four family residential real estate loans	$	162,606		$	157,984
Construction and land loans		27,092			26,106
Commercial real estate loans		189,093			172,307
Commercial loans		127,672			134,047
Paycheck protection program loans		61,236			100,084
Agriculture loans		89,667			96,532
Municipal loans		2,178			2,332
Consumer loans		25,676			24,122
Total gross loans		685,220			713,514
Net deferred loan fees and loans in process		(2,361	)		(1,957	)
Allowance for loan losses		(9,163	)		(8,775	)
Loans, net	$	673,696		$	702,782

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

	Three and six months ended June 30, 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 April 1, 2021	$	897		$	186		$	3,257	$	2,246		$	-	$	2,503		$	6		$	176		$	9,271
Charge-offs		(58	)		-			-		(72	)		-		(50	)		-			(48	)		(228	)
Recoveries		1			100			-		1			-		-			-			18			120
Provision for loan losses		(115	)		(155	)		155		413			-		(297	)		(1	)		-			-
Balance at June 30, 2021	$	725		$	131		$	3,412	$	2,588		$	-	$	2,156		$	5		$	146		$	9,163

Balance at January 1, 2021	$	859		$	181		$	2,482	$	2,388		$	-	$	2,690		$	6		$	169		$	8,775
Charge-offs		(81	)		-			-		(72	)		-		(50	)		-			(89	)		(292	)
Recoveries		2			101			-		2			-		-			6			69			180
Provision for loan losses		(55	)		(151	)		930		270			-		(484	)		(7	)		(3	)		500
Balance at June 30, 2021	$	725		$	131		$	3,412	$	2,588		$	-	$	2,156		$	5		$	146		$	9,163

	Three and six months ended June 30, 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 April 1, 2020	$	653		$	225		$	1,628		$	2,425		$	-	$	2,381	$	7		$	160		$	7,479
Charge-offs		(20	)		-			(120	)		-			-		-		-			(36	)		(176	)
Recoveries		-			-			13			1			-		-		-			30			44
Provision for loan losses		74			48			172			(70	)		-		184		(1	)		(7	)		400
Balance at June 30, 2020	$	707		$	273		$	1,693		$	2,356		$	-	$	2,565	$	6		$	147		$	7,747

Balance at January 1, 2020	$	501		$	271		$	1,386		$	1,815		$	-	$	2,347	$	7		$	140		$	6,467
Charge-offs		(20	)		(100	)		(120	)		(33	)		-		-		-			(123	)		(396	)
Recoveries		-			-			13			2			-		-		6			55			76
Provision for loan losses		226			102			414			572			-		218		(7	)		75			1,600
Balance at June 30, 2020	$	707		$	273		$	1,693		$	2,356		$	-	$	2,565	$	6		$	147		$	7,747

	As of June 30, 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	$	-	$	-	$	504	$	512	$	-	$	143	$	-	$	-	$	1,159
Collectively evaluated for loss		725		131		2,908		2,076		-		2,013		5		146		8,004
Total	$	725	$	131	$	3,412	$	2,588	$	-	$	2,156	$	5	$	146	$	9,163

Loan balances:
Individually evaluated for loss	$	767	$	966	$	7,849	$	1,333	$	-	$	3,836	$	36	$	-	$	14,787
Collectively evaluated for loss		161,839		26,126		181,244		126,339		61,236		85,831		2,142		25,676		670,433
Total	$	162,606	$	27,092	$	189,093	$	127,672	$	61,236	$	89,667	$	2,178	$	25,676	$	685,220

	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 $108,000 during the second quarter of 2021 compared to net loan charge-offs of $132,000 during the second quarter of 2020. The Company recorded net loan charge-offs of $112,000 during the six months ended June 30, 2021 compared to net loan charge-offs of $320,000 during the six months ended June 30, 2020.

The Company’s impaired loans increased from $12.5 million at December 31, 2020 to $14.8 million at June 30, 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 June 30, 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 six months ended June 30, 2021 and 2020.

The following tables present information on impaired loans:

	As of June 30, 2021
(Dollars in thousands)	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	$	767	$	767	$	767	$	-	$	-	$	777	$	4
Construction and land		2,701		966		966		-		-		1,020		11
Commercial real estate		7,849		7,849		2,394		5,455		504		7,883		19
Commercial		1,684		1,333		751		582		512		1,349		1
Agriculture		4,051		3,836		2,257		1,579		143		3,860		32
Municipal		36		36		36		-		-		36		-
Total impaired loans	$	17,088	$	14,787	$	7,171	$	7,616	$	1,159	$	14,925	$	67

	As of December 31, 2020
(Dollars in thousands)	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 June 30, 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 June 30, 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	$	10		$	173		$	-		$	183		$	605		$	788		$	161,818
Construction and land loans		-			-			-			-			687			687			26,405
Commercial real estate loans		-			-			-			-			7,849			7,849			181,244
Commercial loans		380			650			-			1,030			841			1,871			125,801
Paycheck protection program loans		-			-			-			-			-			-			61,236
Agriculture loans		306			338			-			644			3,315			3,959			85,708
Municipal loans		-			-			-			-			-			-			2,178
Consumer loans		23			1			-			24			-			24			25,652
Total	$	719		$	1,162		$	-		$	1,881		$	13,297		$	15,178		$	670,042

Percent of gross loans		0.10	%		0.17	%		0.00	%		0.27	%		1.94	%		2.21	%		97.79	%

(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 six months ended June 30, 2021 and 2020 would have increased interest income by $584,000 and $239,000, respectively. No interest income related to non-accrual loans was included in interest income for the six months ended June 30, 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 June 30 2021				As of December 31, 2020
(Dollars in thousands)	Nonclassified		Classified		Nonclassified		Classified

One-to-four family residential real estate loans	$	159,159	$	3,447	$	154,985	$	2,999
Construction and land loans		26,405		687		25,412		694
Commercial real estate loans		178,308		10,785		161,661		10,646
Commercial loans		125,697		1,975		132,023		2,024
Paycheck protection program loans		61,236		-		100,084		-
Agriculture loans		83,487		6,180		87,662		8,870
Municipal loan		2,178		-		2,332		-
Consumer loans		25,676		-		24,119		3
Total	$	662,146	$	23,074	$	688,278	$	25,236

At June 30, 2021, the Company had ten loan relationships consisting of 17 outstanding loans that were classified as TDRs. During the three and six months ended June 30, 2021, a commercial loan relationship consisting of five loans was modified after the originally being classified as a TDR in 2020. The borrower liquidated some of the collateral securing the loans and refinanced the remaining balance of $479,000 into one loan which retained a TDR classification. During the six months ended June 30, 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 six months of 2021. There were no loans classified as TDRs during the first three months of 2020. One commercial loan relationship with five loans totaling $827,000 were classified as TDRs during the three months and six months ended June 30, 2020. The Company modified the five commercial loans to interest only as a result of the impact of the Coronavirus Disease 2019 (COVID-19) pandemic. Because the borrower was experiencing financial difficulties prior to the pandemic, the loans were classified as TDRs.

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 June 30, 2021 and 2020. The Company did not record any charge-offs against loans classified as TDRs in the first six months of 2021 or 2020. A credit provision for loan losses of $3,000 was recorded against TDRs in the three months ended June 30, 2021 as compared to no provision for loan losses in the three months ended June 30, 2020. A credit provision for loan losses of $6,000 was recorded against TDRs in the six months ended June 30, 2021 as compared to no provision for loan losses in the six months ended June 30, 2020. The Company allocated $3,000 of the allowance for loan losses recorded against loans classified as TDRs at June 30, 2021 compared to $9,000 at December 31, 2020.

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

	As of June 30, 2021						As of December 31, 2020
(Dollars in thousands)	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	$	-	$	162		2	$	-	$	165
Construction and land loans		4		687		279		5		693		443
Commercial real estate loans		2		1,227		-		2		1,227		-
Commercial loans		4		73		492		7		33		765
Agriculture loans		4		-		521		4		-		538
Municipal loan		1		-		36		1		-		36
Total		17	$	1,987	$	1,490		21	$	1,953	$	1,947

As of June 30, 2021, the Company had one loan modification with an outstanding loan balance of $3.8 million in connection with the COVID-19 pandemic. This modification consisted of the deferral of principal payments. The Company also entered into short-term forbearance plans or short-term repayment plans on one one-to-four family residential mortgage loans totaling $56,000 as of June 30, 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.