| Loans and Allowance for Loan Losses | Loans and Allowance for Loan Losses The composition of net loans is as follows: September 30, 2019 December 31, 2018 Real estate secured: Residential 1-4 family $ 161,939 $ 165,109 Multifamily 23,758 18,378 Construction and land loans 24,587 21,029 Commercial, owner occupied 96,224 96,224 Commercial, non-owner occupied 38,166 39,869 Second mortgages 3,151 4,054 Equity lines of credit 28,528 30,221 Farmland 9,523 12,149 Total real estate secured 385,876 387,033 Non-real estate secured Personal 11,627 12,754 Commercial 53,401 46,202 Agricultural 2,967 2,830 Total non-real estate secured 67,995 61,786 Gross loans 453,871 448,819 Less: Allowance for loan losses 4,168 4,373 Net deferred fees 632 698 Loans, net $ 449,071 $ 443,748 The following table is an analysis of past due loans as of September 30, 2019 : Past Due 30-89 days 90 days and over Total Current Total > 90 Days and Accruing Real estate secured Residential 1-4 family $ 1,368 $ 780 $ 2,148 $ 159,791 $ 161,939 $ — Equity lines of credit 105 18 123 28,405 28,528 — Multifamily — — — 23,758 23,758 — Farmland — — — 9,523 9,523 — Construction, land development, other land loans 50 69 119 24,468 24,587 — Commercial real estate: Owner-occupied 690 1,244 1,934 94,290 96,224 — Non-owner-occupied 84 — 84 38,082 38,166 — Second mortgages — — — 3,151 3,151 — Non-real estate secured Personal 91 23 114 11,513 11,627 — Commercial 657 32 689 52,712 53,401 168 Agricultural 10 — 10 2,957 2,967 — Total $ 3,055 $ 2,166 $ 5,221 $ 448,650 $ 453,871 $ 168 The following table is an analysis of past due loans as of December 31, 2018 : Past Due 30-89 days 90 days and over Total Current Total > 90 Days and Accruing Real estate secured Residential 1-4 family $ 1,481 $ 819 $ 2,300 $ 162,809 $ 165,109 $ 105 Equity lines of credit 218 75 293 29,928 30,221 — Multifamily 402 — 402 17,976 18,378 — Farmland 754 — 754 11,395 12,149 — Construction, land development, other land loans 16 — 16 21,013 21,029 — Commercial real estate: Owner-occupied 9 756 765 95,459 96,224 — Non-owner-occupied — 1,859 1,859 38,010 39,869 — Second mortgages — — — 4,054 4,054 — Non-real estate secured Personal 186 4 190 12,564 12,754 — Commercial 82 114 196 46,006 46,202 2 Agricultural — — — 2,830 2,830 — Total $ 3,148 $ 3,627 $ 6,775 $ 442,044 $ 448,819 $ 107 Loans are considered delinquent when payments have not been made according to the terms of the contract. The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Additionally, in certain instances, loans that have been restructured or modified may also be classified as non-accrual per regulatory guidance until a satisfactory payment history has been established. Credit card loans and other personal loans are typically charged off no later than 180 days past due. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. The following is a summary of non-accrual loans at September 30, 2019 and December 31, 2018 : September 30, 2019 December 31, 2018 Real estate secured Residential 1-4 family $ 873 $ 1,196 Multifamily — — Construction and land loans 352 8 Commercial real estate: Owner-occupied 2,493 2,038 Non-owner-occupied — 2,004 Equity lines of credit 18 75 Farmland 940 142 Non-real estate secured Personal 28 26 Commercial and agricultural 651 431 Total $ 5,355 $ 5,920 The following is a summary of residential real estate currently in the process of foreclosure as well as foreclosed residential real estate as of September 30, 2019 . Number Balance Real estate in the process of foreclosure 5 $ 736 Foreclosed residential real estate 6 753 The following tables represent a summary of credit quality indicators of the Company's loan portfolio at September 30, 2019 and December 31, 2018 . The grades are assigned and/or modified by the Company's credit review and credit analysis departments based on the creditworthiness of the borrower and the overall strength of the loan. The following tables provide the credit risk profile by internally assigned grade as of September 30, 2019 and December 31, 2018 : September 30, 2019 Residential 1-4 Family Multifamily Farmland Construction, Land Loans Commercial Real Estate- Owner Occupied Commercial Real Estate Non-Owner Occupied Quality $ 11,542 $ — $ — $ 561 $ 1,292 $ 336 Satisfactory 93,155 8,348 2,077 4,855 31,743 11,404 Acceptable 51,432 13,390 2,714 15,763 51,094 21,253 Special Mention 674 2,020 395 2,954 4,818 3,663 Substandard 5,136 — 4,337 454 7,277 1,510 Doubtful — — — — — — Total $ 161,939 $ 23,758 $ 9,523 $ 24,587 $ 96,224 $ 38,166 December 31, 2018 Residential 1-4 Family Multifamily Farmland Construction, Land Loans Commercial Real Estate- Owner Occupied Commercial Real Estate Non-Owner Occupied Quality $ 12,991 $ — $ — $ 724 $ 1,632 $ 131 Satisfactory 107,925 4,276 2,736 5,314 39,679 13,046 Acceptable 37,036 13,700 3,617 13,349 47,963 21,073 Special Mention 1,696 402 — 1,565 2,720 3,615 Substandard 5,461 — 5,796 77 4,230 2,004 Doubtful — — — — — — Total $ 165,109 $ 18,378 $ 12,149 $ 21,029 $ 96,224 $ 39,869 Explanation of credit grades: Quality -This grade is reserved for the Bank's top quality loans. These loans have excellent sources of repayment, with no significant identifiable risk of collection. Generally, loans assigned this rating will demonstrate the following characteristics: • Conformity in all respects with Bank policy, guidelines, underwriting standards, and Federal and State regulations (no exceptions of any kind). • Documented historical cash flow that meets or exceeds required minimum Bank guidelines, or that can be supplemented with verifiable cash flow from other sources. • Adequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor. For existing loans, all of the requirements above apply plus all payments have been made as agreed, current financial information on all borrowers and guarantors has been obtained and analyzed, and overall business operating trends are either stable or improving. Satisfactory -This grade is given to performing loans. These loans have adequate sources of repayment, with little identifiable risk of collection. Loans assigned this rating will demonstrate the following characteristics: • General conformity to the Bank's policy requirements, product guidelines and underwriting standards. Any exceptions that are identified during the underwriting and approval process have been adequately mitigated by other factors. • Documented historical cash flow that meets or exceeds required minimum Bank guidelines, or that can be supplemented with verifiable cash flow from other sources. • Adequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor. For existing loans, all of the requirements outlined above will apply, plus all payments have been made as agreed, current financial information on all borrowers and guarantors has been obtained and analyzed, and overall business operating trends are stable with any declines considered minor and temporary. Acceptable -This grade is given to loans that show signs of weakness in either adequate sources of repayment or collateral, but have demonstrated mitigating factors that minimize the risk of delinquency or loss. Loans assigned this rating may demonstrate some or all of the following characteristics: • Additional exceptions to the Bank's policy requirements, product guidelines or underwriting standards that present a higher degree of risk to the Bank. Although the combination and/or severity of identified exceptions is greater, all exceptions have been properly mitigated by other factors. • Unproved, insufficient or marginal primary sources of repayment that appear sufficient to service the debt at this time. Repayment weaknesses may be due to minor operational issues, financial trends, or reliance on projected (not historic) performance. • Marginal or unproven secondary sources to liquidate the debt, including combinations of liquidation of collateral and liquidation value to the net worth of the borrower or guarantor. For existing loans, payments have generally been made as agreed with only minor and isolated delinquencies. Special Mention -This grade is given to Watch List loans that include the following characteristics: • Loans with underwriting guideline tolerances and/or exceptions with no identifiable mitigating factors. • Extending loans that are currently performing satisfactorily but with potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Bank's position at some future date. Potential weaknesses are the result of deviations from prudent lending practices. • Loans where adverse economic conditions that develop subsequent to the loan origination do not jeopardize liquidation of the debt, but do substantially increase the level of risk may also warrant this rating. Substandard -Loans in this category are characterized by deterioration in quality exhibited by any number of well-defined weaknesses requiring corrective action. A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. The weaknesses may include, but are not limited to: • High debt to worth ratios and or declining or negative earnings trends • Declining or inadequate liquidity • Improper loan structure or questionable repayment sources • Lack of well-defined secondary repayment source, and • Unfavorable competitive comparisons. Such loans are no longer considered to be adequately protected due to the borrower's declining net worth, lack of earnings capacity, declining collateral margins and/or unperfected collateral positions. A possibility of loss of a portion of the loan balance cannot be ruled out. The repayment ability of the borrower is marginal or weak and the loan may have exhibited excessive overdue status or extensions and/or renewals. Doubtful -Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. The ability of the borrower to service the debt is extremely weak, overdue status is constant, the debt has been placed on non-accrual status, and no definite repayment schedule exists. However, these loans are not yet rated as loss because certain events may occur which would salvage the debt. Among these events are: • Injection of capital • Alternative financing • Liquidation of assets or the pledging of additional collateral. Credit Risk Profile based on payment activity as of September 30, 2019 : Consumer - Non Real Estate Equity Line of Credit /Second Mortgages Commercial - Non Real Estate Agricultural - Non Real Estate Performing $ 11,604 $ 31,661 $ 53,369 $ 2,967 Nonperforming (>90 days past due) 23 18 32 — Total $ 11,627 $ 31,679 $ 53,401 $ 2,967 Credit Risk Profile based on payment activity as of December 31, 2018 : Consumer - Non Real Estate Equity Line of Credit /Second Mortgages Commercial - Non Real Estate Agricultural - Non Real Estate Performing $ 12,750 $ 34,200 $ 46,088 $ 2,830 Nonperforming (>90 days past due) 4 75 114 — Total $ 12,754 $ 34,275 $ 46,202 $ 2,830 The following tables reflect the Bank's impaired loans at September 30, 2019 : September 30, 2019 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized With no related allowance Real estate secured Residential 1-4 family $ 4,081 $ 4,081 $ — $ 4,409 $ 144 Equity lines of credit — — — 2 — Multifamily — — — 101 — Farmland 4,228 4,228 — 4,998 76 Construction, land development, other land loans 1,968 1,968 — 1,801 92 Commercial real estate- owner occupied 4,818 4,818 — 4,397 214 Commercial real estate- non owner occupied 62 62 — 16 — Second mortgages 429 429 — 204 — Non-real estate secured Personal 42 42 — 22 98 Commercial and agricultural 283 283 — 530 29 Total $ 15,911 $ 15,911 $ — $ 16,480 $ 653 September 30, 2019 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized With an allowance recorded Real estate secured Residential 1-4 family $ 588 $ 588 $ 96 $ 481 $ — Equity lines of credit — — — 33 — Multifamily — — — 206 — Farmland 116 116 2 462 — Construction, land development, other land loans — — — 15 — Commercial real estate- owner occupied 3,822 3,822 856 2,571 — Commercial real estate- non owner occupied 1,527 1,527 302 2,520 — Second mortgages 34 34 4 17 — Non-real estate secured Personal 4 4 3 16 — Commercial and agricultural 1,041 1,041 784 988 13 Total $ 7,132 $ 7,132 $ 2,047 $ 7,309 $ 13 The following tables reflect the Bank's impaired loans at December 31, 2018 : December 31, 2018 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized With no related allowance Real estate secured Residential 1-4 family $ 4,325 $ 4,325 $ — $ 5,862 $ 134 Equity lines of credit 7 7 — 28 — Multifamily 402 402 — 201 — Farmland 5,681 5,681 — 3,084 10 Construction, land development, other land loans 1,635 1,635 — 1,700 2 Commercial real estate- owner occupied 5,332 5,332 — 3,442 9 Commercial real estate- non owner occupied — — — 32 — Second mortgages 100 100 — 155 — Non real estate secured Personal — — — 48 9 Commercial and agricultural 317 317 — 411 20 Total $ 17,799 $ 17,799 $ — $ 14,963 $ 184 December 31, 2018 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized With an allowance recorded Real estate secured Residential 1-4 family $ 631 $ 631 $ 191 $ 353 $ 307 Equity lines of credit 105 105 80 53 6 Multifamily — — — — — Farmland 122 122 2 927 — Construction, land development, other land loans — — — — — Commercial real estate- owner occupied 1,704 1,704 351 1,789 — Commercial real estate- non owner occupied 3,686 3,686 844 3,789 45 Second mortgages 35 35 7 18 — Non real estate secured Personal 18 18 7 10 — Commercial and agricultural 1,161 1,161 880 832 — Total $ 7,462 $ 7,462 $ 2,362 $ 7,771 $ 358 The following tables present the balance in the allowance for loan losses and the recorded investment in loans by loan category and is segregated by impairment evaluation method as of and for the three- and nine-month periods ended September 30, 2019 and September 30, 2018 . Nine months ended September 30, 2019 Residential 1-4 Family Multifamily Construction and Land Loans Commercial Owner Occupied Commercial Non-Owner Occupied Second Mortgages Equity Line of Credit Farmland Personal and Overdrafts Commercial and Agricultural Unallocated Total Allowance for loan losses: Balance at December 31, 2018 $ 492 $ 25 $ 27 $ 1,022 $ 895 $ 13 $ 127 $ 11 $ 114 $ 957 $ 690 $ 4,373 Provision expense (credit) for credit losses 221 349 14 225 497 122 51 2 172 524 (690 ) 1,487 Charge-offs 170 202 — — 657 89 75 — 262 501 — 1,956 Recoveries (23 ) — (6 ) — (2 ) (3 ) — (2 ) (78 ) (150 ) — (264 ) Net charge-offs (recoveries) 147 202 (6 ) — 655 86 75 (2 ) 184 351 — 1,692 Balance at September 30, 2019 $ 566 $ 172 $ 47 $ 1,247 $ 737 $ 49 $ 103 $ 15 $ 102 $ 1,130 $ — $ 4,168 Allowance allocated by impairment method: Individually evaluated $ 96 $ — $ — $ 856 $ 302 $ 4 $ — $ 2 $ 3 $ 784 $ — $ 2,047 Collectively evaluated 470 172 47 391 435 45 103 13 99 346 — 2,121 Loan balances by impairment method used: Individually evaluated $ 4,670 $ — $ 1,968 $ 8,640 $ 1,590 $ 464 $ — $ 4,343 $ 45 $ 1,324 $ — $ 23,044 Collectively evaluated 157,269 23,758 22,619 87,584 36,576 2,687 28,528 5,180 11,582 55,044 — 430,827 Balance at September 30, 2019 $ 161,939 $ 23,758 $ 24,587 $ 96,224 $ 38,166 $ 3,151 $ 28,528 $ 9,523 $ 11,627 $ 56,368 — $ 453,871 Three months ended September 30, 2019 Residential 1-4 Family Multifamily Construction and Land Loans Commercial Owner Occupied Commercial Non-Owner Occupied Second Mortgages Equity Line of Credit Farmland Personal and Overdrafts Commercial and Agricultural Unallocated Total Allowance for loan losses: Balance at June 30, 2019 $ 663 $ 173 $ 55 $ 1,073 $ 757 $ 14 $ 148 $ 13 $ 112 $ 971 $ 264 $ 4,243 Provision for credit losses (106 ) 201 (10 ) 174 (20 ) 123 (45 ) — 131 364 (264 ) 548 Charge-offs — 202 — — 1 89 — — 172 227 — 691 Recoveries (9 ) — (2 ) — (1 ) (1 ) — (2 ) (31 ) (22 ) — (68 ) Net charge-offs (recoveries) (9 ) 202 (2 ) — — 88 — (2 ) 141 205 — 623 Balance at September 30, 2019 $ 566 $ 172 $ 47 $ 1,247 $ 737 $ 49 $ 103 $ 15 $ 102 $ 1,130 $ — $ 4,168 Nine months ended September 30, 2018 Residential 1-4 Family Multifamily Construction and Land Loans Commercial Owner Occupied Commercial Non-Owner Occupied Second Mortgages Equity Line of Credit Farmland Personal and Overdrafts Commercial and Agricultural Unallocated Total Allowance for loan losses: Balance at December 31, 2017 $ 133 $ — $ 1 $ 1,636 $ 955 $ 12 $ — $ 54 $ 265 $ 383 $ 515 $ 3,954 Provision for credit losses 254 — (5 ) (86 ) (108 ) (11 ) 490 (51 ) 18 (68 ) 109 542 Charge-offs 80 — — 123 — 5 — 1 224 231 — 664 Recoveries (38 ) — (5 ) (18 ) — (5 ) (1 ) (2 ) (127 ) (198 ) — (394 ) Net charge-offs (recoveries) 42 — (5 ) 105 — — (1 ) (1 ) 97 33 — 270 Balance at September 30, 2018 $ 345 $ — $ 1 $ 1,445 $ 847 $ 1 $ 491 $ 4 $ 186 $ 282 $ 624 $ 4,226 Allowance allocated by impairment method: Individually evaluated $ 202 $ — $ — $ 354 $ 847 $ — $ 165 $ 4 $ 1 $ 264 $ — $ 1,837 Collectively evaluated 143 — 1 1,091 — 1 326 — 185 18 624 2,389 Loan balances by impairment method used: Individually evaluated $ 6,907 $ — $ 1,667 $ 6,149 $ 3,539 $ — $ 110 $ 2,744 $ 1 $ 1,720 $ — $ 22,837 Collectively evaluated 170,707 17,311 20,807 84,703 32,972 4,332 31,382 9,791 13,469 44,939 — 430,413 Balance at September 30, 2018 $ 177,614 $ 17,311 $ 22,474 $ 90,852 $ 36,511 $ 4,332 $ 31,492 $ 12,535 $ 13,470 $ 46,659 — $ 453,250 Three months ended September 30, 2018 Residential 1-4 Family Multifamily Construction and Land Loans Commercial Owner Occupied Commercial Non-Owner Occupied Second Mortgages Equity Line of Credit Farmland Personal and Overdrafts Commercial and Agricultural Unallocated Total Allowance for loan losses: Balance at June 30, 2018 $ 230 $ — $ 58 $ 993 $ 397 $ 1 $ 357 $ 296 $ 216 $ 643 $ 947 $ 4,138 Provision for credit losses 166 — (60 ) 478 450 (1 ) 134 (292 ) 20 (374 ) (323 ) 198 Charge-offs 55 — — 27 — — — — 91 4 — 177 Recoveries (4 ) — (3 ) (1 ) — (1 ) — — (41 ) (17 ) — (67 ) Net charge-offs (recoveries) 51 — (3 ) 26 — (1 ) — — 50 (13 ) — 110 Reclassification of reserve for unfunded commitments — — — — — — — — — — — — Balance at September 30, 2018 $ 345 $ — $ 1 $ 1,445 $ 847 $ 1 $ 491 $ 4 $ 186 $ 282 $ 624 $ 4,226 The Company's credit administration personnel and senior financial officers are responsible for tracking, coding, and monitoring loans that become Troubled Debt Restructurings ("TDRs"). Concessions are made to existing borrowers in the form of modified interest rates and / or payment terms. The loans are segregated for regulatory and external reporting. Each specific TDR is reviewed to determine if the accrual of interest should be discontinued and also reviewed for impairment. The Company's senior credit officer performs this analysis on a quarterly basis in addition to determining any other loans that are impaired within the loan portfolio. The Company had a total of $8,516 and $11,546 of loans categorized as troubled debt restructurings as of September 30, 2019 and December 31, 2018 , respectively. Interest is accrued on TDRs if the loan is otherwise not impaired and the full collection of principal and interest under the modified terms is still deemed probable. In the determination of the allowance for loan losses, management considers troubled debt restructurings and subsequent defaults in these restructurings by adjusting the loan grades of such loans. Defaults resulting in charge-offs affect the historical loss experience ratios which are a component of the allowance calculation. Additionally, specific reserves may be established on restructured loans evaluated individually. The following table identifies restructurings completed during the nine -month period ended September 30, 2019 that represent new TDRs. Number Pre-Modification Recorded Investment Post-Modification Recorded Investment Below Market Rate Farmland 1 $ 754 $ 754 Commercial real estate-owner occupied 2 1,258 1,258 Commercial 4 449 449 Total 7 $ 2,461 $ 2,461 The following table identifies restructurings completed during the nine -month period ended September 30, 2018 that represented new TDRs. Below Market Rate Residential 1-4 family 3 $ 549 $ 549 Farmland 1 115 115 Commercial real estate-owner occupied 2 1,023 1,023 Commercial Real Estate-non owner occupied 4 2,524 2,524 Total 10 $ 4,211 $ 4,211 There were no defaults in the nine -month periods ending September 30, 2019 and September 30, 2018 of TDRs modified in the previous 12 months. The Bank has engaged an external third party to perform its loan review function in order to identify weaknesses within the loan portfolio. The review, which seeks to cover 25 percent of loan balances each year, considers collateral, repayment history, guarantor strength, debt service coverage, and other relevant information on an individual and global level. These reviews consider borrower cash flow capacity, using financial statements, income tax returns and internally prepared interim statements for borrowers and guarantors. Debt service coverage (DSC) is calculated on each individual customer, or guarantor, as well as the aggregate or global DSC. Collateral evaluation includes an inspection of the collateral file to determine if the Bank is properly secured. Collateral is discounted, when appropriate, to determine a stressed loan to value (LTV) ratio. The Company also seeks to identify potential problem relationships through watch list reviews, which include reviews of past due data and other information that might be helpful in evaluating a particular loan relationship that is exhibiting stress. Watch list relationships display distinct characteristics including, but not limited to, late payments greater than 60 days , a low DSC calculation, bankruptcy filings, casualty losses, or other issues that would cause a perceived increase in the risk of loss to the Bank. The segments of the Company's loan portfolio are disaggregated to a level that allows management to monitor risk and performance. In reviewing risk, management has determined there to be several different risk categories within the loan portfolio. The allowance for loan losses consists of amounts applicable to: (i) the commercial loan portfolio; (ii) the commercial real estate loan portfolio; (iii) the construction loan portfolio; (iv) the consumer loan portfolio; and, (v) the residential loan portfolio. The commercial real estate ("CRE") loan segment is further disaggregated into two classes. Non-owner occupied CRE loans, which include loans secured by non-owner occupied nonfarm nonresidential properties, generally have a greater risk profile than all other CRE loans, which include multifamily structures and owner-occupied commercial structures. The construction loan segment is further disaggregated into two classes. One-to-four family residential construction loans are generally made to individuals for the acquisition of and/or construction on a lot or lots on which a residential dwelling is to be built. Commercial construction loans are generally made to developers or investors for the purpose of acquiring, developing and constructing residential or commercial structures. Construction lending is generally considered to involve a higher degree of credit risk than long-term permanent financing. The following describes the Company's basic methodology for computing its ALLL. On a quarterly basis, the ALLL methodology begins with the identification of loans subject to ASC 310. All loans that are rated "7" (Doubtful) are assessed as impaired based on the expectation that the full collection of principal and interest is in doubt. All loans that are rated "6" (Substandard) or are expected to be downgraded to "6", require additional analysis to determine whether they may be impaired under ASC 310. All loans that are rated "5" (Special Mention) are presumed not to be impaired. However, "5" rated loans, together with any Troubled Debt Restructured (TDR) loan, may warrant further analysis before completing an assessment of impairment. A loan is considered impaired and an allowance for loan losses is established on loans for which it is probable that the full collection of principal and interest is in doubt. Once a loan is identified as individually impaired, management measures impairment using one of several methods, including collateral value based on a recent appraisal, liquidation value and/or discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At September 30, 2019 and December 31, 2018 , all impaired loans were evaluated based on either the fair value of the collateral or the discounted cash flows. For impaired loans valued based on collateral value, the collateral value is adjusted for age and condition of the security, and, for real estate, adjusted for condition, location, and age of the most current appraisal. If the adjusted value of the collateral is less than the current principal balance, the difference is designated as direct exposure for loan loss calculations. The total balance of unsecured loans is considered as direct exposure. For all other loans, including individual loans determined not to be impaired under ASC 310, the associated ALLL is calculated in accordance with ASC 450 that provides for estimated credit losses likely to be realized on groups of loans with similar risk characteristics. The Company uses standard call report categories to segregate loans into groups with similar risk characteristics. Estimated credit losses reflect significant factors that affect the collectability of the portfolio as of the evaluation date. Key factors that influence risk within the Company's loan portfolio are divided into three major categories: • Historical loss factors - To calculate the anticipated loan loss in each call report category for ASC 450 loans, the Company begins with the net loss in each category for each of the last twelve quarters. The Company uses a rolling twelve quarter weighted historical loss average where the most recent quarters are weighted heavier than the earlier quarters so that the calculation reflects current risk trends within the portfolio. The weighting used by the Company is similar to the Rule of 78's with the net losses of the most recent quarter weighted at 12/78ths and those in the first quarter in the twelve quarter period weighted at 1/78th. Therefore, the net losses of the most recent year represent approximately 54% of the calculation compared with 33% if a simple average of losses over the three -year period was used. The total of weighted factors for each call report category is applied to the current outstanding loan balance in each category to calculate expected loss based on historical data for a group of loans with similar risk characteristics. The same weighting is applied to all loan types. • External economic factors - Economic conditions have a significant impact on Company's loan portfolio because deteriorating conditions can adversely impact both collateral values and the customer's ability to service debt. Management has selected the following external factors as indicators of economic conditions: a. National GDP growth rate b. Local unemployment rates c. Prime interest rate The values for external factors are updated on a quarterly basis based on current data. • Internal process factors - Internal factors that influence loss rates as a result of risk management and control practices include the following: a. Past-due loans b. Non-accrual loans c. Commercial real estate concentrations d. Loan volume e. Level and trend of classified loans The values for internal factors are updated on a quarterly basis based on current portfolio metrics. Once the quarterly ALLL is computed, the calculations are reviewed by the Company's management. The ALLL is then reviewed and approved by the Board of Directors. Loans Held for Sale The Company's mortgage division originates certain single family, residential first mortgage loans for sale to a third party broker. Loan sale activity is summarized below. Loans are typically sold to investors within 20 days of closing. Management has concluded that the carrying amounts approximate the fair values of loans held for sale. Nine months ended September 30, 2019 2018 Loans held for sale at end of period $ 233 $ 1,614 Proceeds from sales of mortgage loans originated for sale 5,485 13,855 Gain on sales of mortgage loans originated for sale 150 268 |
