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Loans and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2022

4. 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)	2022			2021

One-to-four family residential real estate loans	$	205,466		$	166,081
Construction and land loans		18,119			27,644
Commercial real estate loans		228,669			198,472
Commercial loans		144,582			132,154
Paycheck protection program loans		410			17,179
Agriculture loans		86,114			94,267
Municipal loans		2,036			2,050
Consumer loans		25,911			24,541
Total gross loans		711,307			662,388
Net deferred loan costs (fees) and loans in process		(311	)		(380	)
Allowance for loan losses		(8,858	)		(8,775	)
Loans, net	$	702,138		$	653,233

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

(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
	Three and nine months ended September 30, 2022
(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 July 1, 2022	$	580		$	133		$	2,982	$	2,651	$	-	$	1,820		$	6		$	143		$	8,315
Charge-offs		-			-			-		-		-		-			-			(106	)		(106	)
Recoveries		-			65			-		5		-		56			-			23			149
Provision for loan losses		25			(92	)		216		146		-		130			(1	)		76			500
Balance at September 30, 2022	$	605		$	106		$	3,198	$	2,802	$	-	$	2,006		$	5		$	136		$	8,858

Balance at January 1, 2022	$	623		$	138		$	3,051	$	2,613	$	-	$	2,221		$	6		$	123		$	8,775
Charge-offs		-			-			-		-		-		-			-			(235	)		(235	)
Recoveries		-			165			-		28		-		59			6			60			318
Provision for loan losses		(18	)		(197	)		147		161		-		(274	)		(7	)		188			-
Balance at September 30, 2022	$	605		$	106		$	3,198	$	2,802	$	-	$	2,006		$	5		$	136		$	8,858

	Three and nine months ended September 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 June 30, 2021	$	725		$	131		$	3,412		$	2,588		$	-	$	2,156		$	5		$	146		$	9,163
Charge-offs		-			-			(540	)		-			-		-			-			(75	)		(615	)
Recoveries		8			120			-			11			-		50			-			29			218
Provision for loan losses		(89	)		(117	)		25			18			-		117			-			46			-
Balance at September 30, 2021	$	644		$	134		$	2,897		$	2,617		$	-	$	2,323		$	5		$	146		$	8,766

Allowance for loan losses:
Balance at January 1, 2021	$	859		$	181		$	2,482		$	2,388		$	-	$	2,690		$	6		$	169		$	8,775
Charge-offs		(81	)		-			(540	)		(72	)		-		(50	)		-			(164	)		(907	)
Recoveries		10			221			-			13			-		50			6			98			398
Provision for loan losses		(144	)		(268	)		955			288			-		(367	)		(7	)		43			500
Balance at September 30, 2021	$	644		$	134		$	2,897		$	2,617		$	-	$	2,323		$	5		$	146		$	8,766

	As of September 30, 2022
(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	$	-	$	-	$	-	$	663	$	-	$	30	$	-	$	-	$	693
Collectively evaluated for loss		605		106		3,198		2,139		-		1,976		5		136		8,165
Total	$	605	$	106	$	3,198	$	2,802	$	-	$	2,006	$	5	$	136	$	8,858

Loan balances:
Individually evaluated for loss	$	352	$	195	$	2,124	$	1,105	$	-	$	1,877	$	36	$	19	$	5,708
Collectively evaluated for loss		205,114		17,924		226,545		143,477		410		84,237		2,000		25,892		705,599
Total	$	205,466	$	18,119	$	228,669	$	144,582	$	410	$	86,114	$	2,036	$	25,911	$	711,307

	As of December 31, 2021
(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	$	-	$	-	$	-	$	504	$	-	$	-	$	-	$	-	$	504
Collectively evaluated for loss		623		138		3,051		2,109		-		2,221		6		123		8,271
Total	$	623	$	138	$	3,051	$	2,613	$	-	$	2,221	$	6	$	123	$	8,775

Loan balances:
Individually evaluated for loss	$	578	$	794	$	2,214	$	1,029	$	-	$	2,067	$	36	$	-	$	6,718
Collectively evaluated for loss		165,503		26,850		196,258		131,125		17,179		92,200		2,014		24,541		655,670
Total	$	166,081	$	27,644	$	198,472	$	132,154	$	17,179	$	94,267	$	2,050	$	24,541	$	662,388

The Company recorded net loan recoveries of $43,000 during the third quarter of 2022 compared to net loan charge-offs of $397,000 during the third quarter of 2021. The Company recorded net loan recoveries of $83,000 during the nine months ended September 30, 2022 compared to net loan charge-offs of $509,000 during the nine months ended September 30, 2021.

The Company’s impaired loans decreased $1.0 million from $6.7 million at December 31, 2021 to $5.7 million at September 30, 2022. 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, 2022 and December 31, 2021, 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 and nine months ended September 30, 2022 and 2021.

The following tables present information on impaired loans:

	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
(Dollars in thousands)	As of September 30, 2022
	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	$	352	$	352	$	352	$	-	$	-	$	390	$	6
Construction and land		195		195		195		-		-		195		6
Commercial real estate		2,124		2,124		2,124		-		-		2,173		40
Commercial		1,356		1,105		324		781		663		1,186		12
Agriculture		1,960		1,877		1,847		30		30		1,932		48
Municipal		36		36		36		-		-		36		1
Consumer		19		19		19		-		-		19		-
Total impaired loans	$	6,042	$	5,708	$	4,897	$	811	$	693	$	5,931	$	113

(Dollars in thousands)	As of December 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	$	578	$	578	$	578	$	-	$	-	$	590	$	8
Construction and land		2,401		794		794		-		-		895		16
Commercial real estate		2,214		2,214		2,214		-		-		2,388		37
Commercial		1,380		1,029		520		509		504		1,096		38
Agriculture		2,235		2,067		2,067		-		-		2,420		67
Municipal		36		36		36		-		-		36		1
Total impaired loans	$	8,844	$	6,718	$	6,209	$	509	$	504	$	7,425	$	167

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 September 30, 2022 or December 31, 2021.

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, 2022
	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	$	15		$	114		$	-		$	129		$	195		$	324		$	205,142
Construction and land loans		-			-			-			-			195			195			17,924
Commercial real estate loans		65			-			-			65			2,124			2,189			226,480
Commercial loans		4			-			-			4			860			864			143,718
Paycheck protection program loans		-			389			-			389			-			389			21
Agriculture loans		20			-			-			20			1,430			1,450			84,664
Municipal loans		-			-			-			-			-			-			2,036
Consumer loans		1			49			-			50			19			69			25,842
Total	$	105		$	552		$	-		$	657		$	4,823		$	5,480		$	705,827

Percent of gross loans		0.01	%		0.08	%		0.00	%		0.09	%		0.68	%		0.77	%		99.23	%

(Dollars in thousands)	As of December 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	$	20		$	125		$	-		$	145		$	417		$	562		$	165,519
Construction and land loans		-			-			-			-			681			681			26,963
Commercial real estate loans		-			-			-			-			2,214			2,214			196,258
Commercial loans		289			340			-			629			593			1,222			130,932
Paycheck protection program loans		-			-			-			-			-			-			17,179
Agriculture loans		1,189			-			-			1,189			1,325			2,514			91,753
Municipal loans		-			-			-			-			-			-			2,050
Consumer loans		18			9			-			27			-			27			24,514
Total	$	1,516		$	474		$	-		$	1,990		$	5,230		$	7,220		$	655,168

Percent of gross loans		0.23	%		0.07	%		0.00	%		0.30	%		0.79	%		1.09	%		98.91	%

Under the original terms of the Company’s non-accrual loans, interest earned on such loans for the nine months ended September 30, 2022 and 2021 would have increased interest income by $155,000 and $635,000, respectively. No interest income related to non-accrual loans was included in interest income for the nine months ended September 30, 2022 and 2021.

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:

(Dollars in thousands)	Nonclassified		Classified		Nonclassified		Classified
	As of September 30, 2022				As of December 31, 2021
(Dollars in thousands)	Nonclassified		Classified		Nonclassified		Classified

One-to-four family residential real estate loans	$	205,122	$	344	$	165,299	$	782
Construction and land loans		17,924		195		26,963		681
Commercial real estate loans		223,334		5,335		193,669		4,803
Commercial loans		135,739		8,843		123,609		8,545
Paycheck protection program loans		410		-		17,179		-
Agriculture loans		84,684		1,430		91,036		3,231
Municipal loan		2,036		-		2,050		-
Consumer loans		25,892		19		24,541		-
Total	$	695,141	$	16,166	$	644,346	$	18,042

At September 30, 2022, the Company had seven loan relationships consisting of 11 outstanding loans that were previously classified as TDRs. No loans were classified as TDRs during the three or nine months ending September 30, 2022. During the second quarter of 2022, a $7,000 commercial loan paid off after being classified as a TDR in 2018. During the first quarter of 2022, two construction and land loans totaling $599,000 were paid off. These loans were originally classified as TDRs in 2012. A commercial loan totaling $32,000 was paid off in the first quarter of 2022 after being classified as a TDR in the first quarter of 2021. An agriculture loan totaling $250,000 was also paid off in the first quarter of 2022 after being classified as a TDR in the third quarter of 2021. During the three and nine months ended September 30, 2021, an agriculture loan paid off that was previously classified as a TDR in 2016. During the nine months ended September 30, 2021, a commercial loan relationship consisting of five loans was modified after 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.

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, 2022 and 2021. The Company did not record any charge-offs against loans classified as TDRs in the first nine months of 2022 or 2021. No provision was recorded against TDRs in the three months ended September 30, 2022 as compared to a credit provision of $2,000 during the same period of 2021. A credit provision for loan losses of $2,000 and $7,000 was recorded against TDRs in the nine months ended September 30, 2022 and 2021, respectively. The Company had no allowance for loan losses recorded against loans classified as TDRs at September 30, 2022 compared to $2,000 at December 31, 2021.

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

(Dollars in thousands)

As of September 30, 2022 As of December 31, 2021

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 $ - $ 157 2 $ - $ 161

Construction and land loans 1 195 - 3 681 113

Commercial real estate loans 2 1,224 - 2 1,224 -

Commercial loans 2 33 245 4 33 436

Agriculture loans 3 - 447 4 - 742

Municipal loan 1 - 36 1 - 36

Total 11 $ 1,452 $ 885 16 $ 1,938 $ 1,488