Loans | (4) LOANS The Company uses the following loan segments as described below: • One-to-four closed-end non-owner • Home equity lines of credit may be first or second mortgages secured by one-to-four • Junior liens are closed-end one-to-four • Multi-family loans are closed-end • Constructions loans may consist of residential or commercial properties and carry a fixed or variable rate for the term of the construction period. Construction loans have a maturity of between twelve and twenty-four months depending on the type of property. After the construction period, loans are amortized over a twenty-year period. All construction loans are under written under the Company’s commercial loan underwriting guidelines for the type of property being constructed. • Land loans consist of properties currently under development, land held for future development and land held for recreational purposes. Land loans used for recreational purposes are amortized for twenty years and typically carry a fixed rate of interest for one-to-five • Non-residential non-owner non-residential • Loans classified as farmland by the Company include properties that are used exclusively for the production of grain, livestock, poultry or swine. Loans secured by farmland have a maturity of up to twenty years and carry a fixed rate of interest for five to ten years. Loans secured by farmland are under-written under the Company’s commercial loan underwriting guidelines. • The Company originates secured and unsecured consumer loans. Collateral for consumer loans may include deposits, brokerage accounts, automobiles and other personal items. Consumer loans are typically fixed for a term of one to five years and are under-written using the Company’s consumer loan policy. • The Company originates unsecured and secured commercial loans. Secured commercial loans may have business inventory, accounts receivable and equipment as collateral. The typical customer may include all forms of manufacturing, retail and wholesale sales, professional services and various forms of agri-business interest. Commercial loans may be fixed or variable rate and typically have terms between one and five years. Set forth below is selected data relating to the composition of the loan portfolio by type of loan at March 31, 2019 and December 31, 2018. March 31, 2019 December 31, 2018 (Dollars in Thousands) Real estate loans: One-to-four $ 174,274 $ 175,638 Home equity lines of credit 31,407 32,781 Junior liens 995 1,037 Multi-family 26,377 26,067 Construction 36,723 38,700 Land 18,745 12,175 Non-residential 248,285 242,390 Farmland 33,242 34,041 Total mortgage loans 570,048 562,829 Consumer loans 8,060 8,442 Commercial loans 93,090 92,466 Total other loans 101,150 100,908 Total loans 671,198 663,737 Deferred loan fees, net of cost (395 ) (419 ) Less allowance for loan losses (4,553 ) (4,536 ) Loans receivable, net $ 666,250 $ 658,782 Although the Company has a diversified loan portfolio, 84.9% and 84.8% of the portfolio was concentrated in loans secured by real estate at March 31, 2019 and December 31, 2018, respectively. At March 31, 2019 and December 31, 2018, the majority of these loans are located within the Company’s general operating area. Risk Grade Classifications The Company utilizes a credit grading system that provides a uniform framework for establishing and monitoring credit risk in the loan portfolio. Under this system, each loan is graded based on pre-determined Excellent - Very Good - Satisfactory - Acceptable - Watch - All commercial loans with a risk classification of watch or better are considered a pass credit. Special Mention - Non-financial Substandard - Doubtful - work-out work-out Loss The following credit risk standards are assigned to consumer loans: Satisfactory - open-end closed-end Substandard - open-end closed-end Loss - closed-end open-end 120-day 180-day The following table provides a detail of the Company’s activity in the allowance for loan loss account by loan type for the three-month period ended March 31, 2019: Balance Charge offs Recoveries Provision Ending (Dollars in Thousands) One-to-four $ 992 — 3 (60 ) 935 Home equity line of credit 168 — — (14 ) 154 Junior liens 4 — — — 4 Multi-family 172 — — (26 ) 146 Construction 171 — — — 171 Land 797 — — 218 1,015 Non-residential 1,293 — 2 (49 ) 1,246 Farmland 152 — — (11 ) 141 Consumer loans 112 (73 ) 18 100 157 Commercial loans 675 — 7 (98 ) 584 Total $ 4,536 (73 ) 30 60 4,553 The following table provides a detail of the Company’s activity in the allowance for loan loss account by loan type for the year ended December 31, 2018: Balance Charge offs Recoveries Provision Ending (Dollars in Thousands) One-to-four $ 747 (6 ) 13 238 992 Home equity line of credit 189 — 9 (30 ) 168 Junior liens 5 — — (1 ) 4 Multi-family 314 — — (142 ) 172 Construction 161 — — 10 171 Land 1,223 (40 ) — (386 ) 797 Non-residential 789 (23 ) 14 513 1,293 Farmland 367 (2 ) 1 (214 ) 152 Consumer loans 184 (329 ) 80 177 112 Commercial loans 847 (307 ) 12 123 675 Total $ 4,826 (707 ) 129 288 4,536 The table below presents gross loan balance at March 31, 2019 by loan classification allocated between past due, performing and non-accrual: Currently 30 - 89 Non-accrual Total One-to-four 173,754 502 18 174,274 Home equity line of credit 31,158 153 96 31,407 Junior liens 991 — 4 995 Multi-family 26,377 — — 26,377 Construction 36,571 — 152 36,723 Land 18,745 — — 18,745 Non-residential 247,963 — 322 248,285 Farmland 32,667 575 — 33,242 Consumer loans 8,051 8 1 8,060 Commercial loans 91,918 701 471 93,090 Total 668,195 1,939 1,064 671,198 The table below presents gross loan balance at December 31, 2018 by loan classification allocated between past due, performing and non-accrual: Currently 30 – 89 Non-accrual Total One-to-four $ 174,962 614 62 $ 175,638 Home equity line of credit 32,525 158 98 32,781 Junior liens 1,033 — 4 1,037 Multi-family 26,067 — — 26,067 Construction 38,548 — 152 38,700 Land 12,175 — — 12,175 Non-residential 241,809 — 581 242,390 Farmland 34,041 — — 34,041 Consumer loans 8,408 26 8 8,442 Commercial loans 91,930 11 525 92,466 Total $ 661,498 809 1,430 663,737 The following table presents the balance in the allowance for loan losses and the recorded investment in loans as of March 31, 2019 and December 31, 2018 by portfolio segment and based on the impairment method. Commercial Land Commercial Residential Consumer Total (Dollars in Thousands) March 31, 2019: Allowance for loan losses: Ending allowance balance attributable to loans: Individually evaluated for impairment $ 122 15 — 12 91 $ 240 Collectively evaluated for impairment 463 1,171 1,533 1,080 66 4,313 Total ending allowance balance $ 585 1,186 1,533 1,092 157 4,553 Loans: Loans individually evaluated for impairment $ 5,654 152 9,462 273 363 $ 15,904 Loans collectively evaluated for impairment 87,436 55,316 298,403 206,403 7,697 655,294 Total ending loans balance $ 93,090 55,468 307,904 206,676 8,060 $ 671,198 Commercial Land Commercial Residential Consumer Total (Dollars in Thousands) December 31, 2018: Allowance for loan losses: Ending allowance balance attributable to loans: Individually evaluated for impairment $ 141 — — 13 52 $ 206 Collectively evaluated for impairment 534 969 1,616 1,151 60 4,330 Total ending allowance balance $ 675 969 1,616 1,164 112 $ 4,536 Loans: Loans individually evaluated for impairment $ 3,593 — 9,174 274 208 $ 13,249 Loans collectively evaluated for impairment 88,873 50,875 293,324 209,182 8,234 650,488 Total ending loans balance $ 92,466 50,875 302,498 209,456 8,442 $ 663,737 The determination of the allowance for loan losses is based on management’s analysis, performed on a quarterly basis. Various factors are considered, including the growth and composition of the loan portfolio, the relationship of the allowance for loan losses to outstanding loans, historical loss experience, delinquency trends and prevailing economic conditions and the market value of the underlying collateral. Although management believes its allowance for loan losses is adequate, there can be no assurance that additional allowances will not be required or that losses on loans will not be incurred. A loan is considered to be impaired when management determines that it is probable that the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. The value of individually impaired loans is measured based on the present value of expected payments or using the fair value of the collateral less cost to sell if the loan is collateral dependent. Currently, it is management’s practice to classify all substandard or doubtful loans as impaired. Loans by classification type and credit risk indicator at March 31, 2019 were as follows: Pass Special Substandard Doubtful Total (Dollars in Thousands) One-to-four $ 173,575 — 699 — 174,274 Home equity line of credit 31,311 — 96 — 31,407 Junior liens 991 — 4 — 995 Multi-family 26,377 — — — 26,377 Construction 36,571 152 — — 36,723 Land 18,745 — — — 18,745 Non-residential 238,712 19 9,554 — 248,285 Farmland 33,011 231 — — 33,242 Consumer loans 7,697 — 363 — 8,060 Commercial loans 86,295 879 5,916 — 93,090 Total $ 653,285 1,281 16,632 — 671,198 Loans by classification type and credit risk indicator at December 31, 2018 were as follows: Pass Special Substandard Doubtful Total (Dollars in Thousands) One-to-four $ 174,973 — 665 — 175,638 Home equity line of credit 32,684 — 97 — 32,781 Junior liens 1,033 — 4 — 1,037 Multi-family 26,067 — — — 26,067 Construction 38,548 152 — — 38,700 Land 12,175 — — — 12,175 Non-residential 232,289 596 9,505 — 242,390 Farmland 33,808 233 — — 34,041 Consumer loans 8,233 — 209 — 8,442 Commercial loans 85,433 3,190 3,843 — 92,466 Total $ 645,243 4,171 14,323 — 663,737 Impaired loans by classification type and the related valuation allowance amounts at March 31, 2019 were as follows: For the three-month period At March 31, 2019 ended March 31, 2019 Recorded Unpaid Related Average Interest (Dollars in Thousands) Impaired loans with no specific allowance One-to-four $ — — — — — Home equity line of credit — — — — — Junior liens — — — — — Multi-family — — — — — Construction — — — — — Land — — — — — Non-residential 9,462 9,462 — 9,318 172 Farmland — — — — — Consumer loans — — — — — Commercial loans 5,533 5,533 — 4,492 89 Total 14,995 14,995 — 13,810 261 Impaired loans with a specific allowance One-to-four 273 273 13 273 2 Home equity line of credit — — — — — Junior liens — — — — — Multi-family — — — — — Construction 152 152 15 76 — Land — — — — — Non-residential — — — — — Farmland — — — — — Consumer loans 363 363 91 286 — Commercial loans 121 121 131 131 5 Total 909 909 240 766 7 Total $ 15,904 15,904 240 14,576 268 Impaired loans by classification type and the related valuation allowance amounts at December 31, 2018 were as follows: For the year ended At December 31, 2018 December 31, 2018 Unpaid Average Interest Recorded Principal Related Recorded Income Investment Balance Allowance Investment Recognized (Dollars in Thousands) Impaired loans with no specific allowance One-to-four $ — — — 710 27 Home equity line of credit — — — 261 4 Junior liens — — — 2 — Multi-family — — — — — Construction — — — — — Land — — — 312 — Non-residential 9,174 9,174 — 5,973 693 Farmland — — — 111 — Consumer loans — — — 5 — Commercial loans 3,452 3,452 — 2,333 234 Total 12,626 12,626 — 9,707 958 Impaired loans with a specific allowance One-to-four $ 274 274 13 55 12 Home equity line of credit — — — — — Junior liens — — — — — Multi-family — — — — — Construction — — — — — Land — — — — — Non-residential — — — 1,115 — Farmland — — — — — Consumer loans 208 208 52 284 — Commercial loans 141 141 141 793 23 Total 623 623 206 2,247 35 Total impaired loans $ 13,249 13,249 206 11,954 993 At March 31, 2019 non-accrual non-accrual non-accrual 03/31/2019 12/31/2018 (Dollars in Thousands) One-to-four $ 18 $ 62 Home equity lines of credit 96 98 Junior lien 4 4 Construction 152 152 Land — — Non-residential 322 581 Farmland — — Consumer loans 1 8 Commercial loans 471 525 Total non-accrual $ 1,064 $ 1,430 The following table provides the number of loans remaining in each category as of March 31, 2019 and December 31, 2018 that the Company had previously modified in a TDR: Number of Pre-Modification Post Modification March 31, 2019 Non-residential 3 $ 3,409,331 3,409,331 Commercial 3 192,905 192,905 December 31, 2018 Non-residential 3 $ 3,422,085 3,422,085 Commercial 2 $ 107,535 107,535 For the three-month period ended March 31, 2019, the Company identified one additional commercial loan as a TDR. The loan is secured by a Company’s accounts receivable. The TDR classification is the result of the borrower’s declining financial condition and substandard collateral position, prompting the Company to lengthen the amortization period of the loan to five years, which exceeds our standard amortization period of three years. There were no loans as of March 31, 2019 that have been modified as TDRs and that subsequently defaulted within twelve months on their modified terms. At March 31, 2019, there are no commitments to lend additional funds to any borrower whose loan terms have been modified in a TDR. |