Loans and Allowance for Loan Losses | 3. Loans and Allowance for Loan Losses Loans consisted of the following as of the dates indicated below: September 30, December 31, (Dollars in thousands) 2017 2016 One-to-four family residential real estate $ 136,829 $ 136,846 Construction and land 15,898 13,738 Commercial real estate 120,818 118,200 Commercial 50,944 54,506 Agriculture 84,101 78,324 Municipal 3,479 3,884 Consumer 21,985 20,271 Total gross loans 434,054 425,769 Net deferred loan costs and loans in process (236 ) 36 Allowance for loan losses (5,379 ) (5,344 ) Loans, net $ 428,439 $ 420,461 Percent of total One-to-four family residential real estate 31.5 % 32.1 % Construction and land 3.7 % 3.2 % Commercial real estate 27.8 % 27.8 % Commercial loans 11.7 % 12.8 % Agriculture loans 19.4 % 18.4 % Municipal loans 0.8 % 0.9 % Consumer loans 5.1 % 4.8 % Total gross loans 100.0 % 100.0 % The following tables provide information on the Company’s activity in the allowance for loan losses by loan class: (Dollars in thousands) Three and nine months ended September 30, 2017 One-to-four family residential real estate Construction and land Commercial real estate Commercial Agriculture Municipal Consumer Total Allowance for loan losses: Balance at July 1, 2017 $ 499 $ 70 $ 1,709 $ 1,081 $ 1,772 $ 10 $ 185 $ 5,326 Charge-offs - - - - - - (84 ) (84 ) Recoveries 1 - - 10 - 14 12 37 Provision for loan losses - 33 11 (82 ) 87 (15 ) 66 100 Balance at September 30, 2017 500 103 1,720 1,009 1,859 9 179 5,379 Balance at January 1, 2017 $ 504 $ 53 $ 1,777 $ 1,119 $ 1,684 $ 12 $ 195 $ 5,344 Charge-offs (19 ) - (61 ) - - - (249 ) (329 ) Recoveries 9 - - 19 1 14 71 114 Provision for loan losses 6 50 4 (129 ) 174 (17 ) 162 250 Balance at September 30, 2017 500 103 1,720 1,009 1,859 9 179 5,379 (Dollars in thousands) Three and nine months ended September 30, 2016 One-to-four family residential real estate Construction and land Commercial real estate Commercial Agriculture Municipal Consumer Total Allowance for loan losses: Balance at July 1, 2016 $ 584 $ 89 $ 1,776 $ 1,393 $ 1,600 $ 23 $ 187 $ 5,652 Charge-offs (14 ) - - - (215 ) - (89 ) (318 ) Recoveries 3 - - 9 - - 11 23 Provision for loan losses 36 (7 ) (40 ) (28 ) 88 - 101 150 Balance at September 30, 2016 609 82 1,736 1,374 1,473 23 210 5,507 Balance at January 1, 2016 $ 925 $ 77 $ 1,740 $ 1,530 $ 1,428 $ 23 $ 199 $ 5,922 Charge-offs (14 ) - - (306 ) (298 ) - (374 ) (992 ) Recoveries 8 - - 29 - 6 34 77 Provision for loan losses (310 ) 5 (4 ) 121 343 (6 ) 351 500 Balance at September 30, 2016 609 82 1,736 1,374 1,473 23 210 5,507 12 The following tables provide information on the Company’s activity in the allowance for loan losses by loan class and allowance methodology: (Dollars in thousands) As of September 30, 2017 One-to-four family residential real estate Construction and land Commercial real estate Commercial Agriculture Municipal Consumer Total Allowance for loan losses: Individually evaluated for loss 15 36 53 35 111 - - 250 Collectively evaluated for loss 485 67 1,667 974 1,748 9 179 5,129 Total 500 103 1,720 1,009 1,859 9 179 5,379 Loan balances: Individually evaluated for loss 531 2,083 3,999 1,579 883 140 44 9,259 Collectively evaluated for loss 136,298 13,815 116,819 49,365 83,218 3,339 21,941 424,795 Total $ 136,829 $ 15,898 $ 120,818 $ 50,944 $ 84,101 $ 3,479 $ 21,985 $ 434,054 (Dollars in thousands) As of December 31, 2016 One-to-four family residential real estate Construction and land Commercial real estate Commercial Agriculture Municipal Consumer Total Allowance for loan losses: Individually evaluated for loss - - 81 87 89 - 17 274 Collectively evaluated for loss 504 53 1,696 1,032 1,595 12 178 5,070 Total 504 53 1,777 1,119 1,684 12 195 5,344 Loan balances: Individually evaluated for loss 780 1,937 2,445 355 881 258 72 6,728 Collectively evaluated for loss 136,066 11,801 115,755 54,151 77,443 3,626 20,199 419,041 Total $ 136,846 $ 13,738 $ 118,200 $ 54,506 $ 78,324 $ 3,884 $ 20,271 $ 425,769 The Company’s impaired loans increased from $6.7 million at December 31, 2016 to $9.3 million at September 30, 2017. 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, 2017 and December 31, 2016, 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 month periods ended September 30, 2017 and 2016. The following tables present information on impaired loans: (Dollars in thousands) As of September 30, 2017 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 $ 531 $ 531 $ 496 $ 35 $ 15 $ 552 $ 6 Construction and land 3,818 2,083 1,885 198 36 2,030 49 Commercial real estate 3,999 3,999 3,939 60 53 4,017 368 Commercial 1,579 1,579 1,372 207 35 1,660 - Agriculture 1,098 883 486 397 111 992 7 Municipal 140 140 140 - - 209 4 Consumer 44 44 44 - - 47 - Total impaired loans $ 11,209 $ 9,259 $ 8,362 $ 897 $ 250 $ 9,507 $ 434 (Dollars in thousands) As of December 31, 2016 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 $ 780 $ 780 $ 780 $ - $ - $ 798 $ 7 Construction and land 3,672 1,937 1,937 - - 2,068 72 Commercial real estate 2,445 2,445 2,145 300 81 2,587 505 Commercial 355 355 46 309 87 425 2 Agriculture 1,173 881 147 734 89 1,000 2 Municipal 258 258 258 - - 418 - Consumer 72 72 55 17 17 78 13 Total impaired loans $ 8,755 $ 6,728 $ 5,368 $ 1,360 $ 274 $ 7,374 $ 601 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 ninety 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 ninety days delinquent and accruing interest at September 30, 2017 and December 31, 2016. 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, 2017 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 $ 1,163 $ 253 $ - $ 1,416 $ 333 $ 1,749 $ 135,080 Construction and land 86 346 - 432 786 1,218 14,680 Commercial real estate 210 - - 210 1,864 2,074 118,744 Commercial 50 - - 50 1,579 1,629 49,315 Agriculture 588 90 - 678 883 1,561 82,540 Municipal - - - - - - 3,479 Consumer 122 5 - 127 44 171 21,814 Total $ 2,219 $ 694 $ - $ 2,913 $ 5,489 $ 8,402 $ 425,652 Percent of gross loans 0.51 % 0.16 % 0.00 % 0.67 % 1.26 % 1.94 % 98.06 % (Dollars in thousands) As of December 31, 2016 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 $ 215 $ 388 $ - $ 603 $ 595 $ 1,198 $ 135,648 Construction and land - - - - 599 599 13,139 Commercial real estate - - - - 300 300 117,900 Commercial 13 5 - 18 342 360 54,146 Agriculture 55 - - 55 838 893 77,431 Municipal - - - - - - 3,884 Consumer 79 3 - 82 72 154 20,117 Total $ 362 $ 396 $ - $ 758 $ 2,746 $ 3,504 $ 422,265 Percent of gross loans 0.09 % 0.09 % 0.00 % 0.18 % 0.64 % 0.82 % 99.18 % Under the original terms of the Company’s non-accrual loans, interest earned on such loans for the nine months ended September 30, 2017 and 2016 would have increased interest income by $79,000 and $43,000, respectively. No interest income related to non-accrual loans was included in interest income for the nine months ended September 30, 2017 and 2016. 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. Non-classified 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) As of September 30, 2017 As of December 31, 2016 Nonclassified Classified Nonclassified Classified One-to-four family residential real estate $ 136,064 $ 765 $ 135,640 $ 1,206 Construction and land 15,112 786 13,138 600 Commercial real estate 115,000 5,818 111,641 6,559 Commercial 47,685 3,259 51,080 3,426 Agriculture 79,430 4,671 73,564 4,760 Municipal 3,479 - 3,884 - Consumer 21,932 53 20,181 90 Total $ 418,702 $ 15,352 $ 409,128 $ 16,641 At September 30, 2017, the Company had 12 loan relationships consisting of 20 outstanding loans that were classified as TDRs. During the third quarter of 2017, the Company classified one agriculture loan totaling $11,000 as a TDR after refinancing an existing loan to a loan relationship that was classified as a TDR in 2016. The Company also classified a one-to-four family residential real estate totaling $25,000 as a TDR after modifying the terms per a bankruptcy judgement. During the second quarter of 2017, the Company classified two agriculture loans totaling $87,000 as TDRs after renewing loans to an existing loan relationship that was classified as a TDR in 2016. During the first quarter of 2017, the Company classified an $11,000 commercial real estate loan as a TDR after extending the maturity of the loan and classified as a TDR a $15,000 agriculture loan extended to an existing loan relationship that was classified as a TDR in 2016. As of September 30, 2017, no impairments were recorded against the principal balances of loans classified as TDRs during 2017. Since the loans were adequately secured no charge-offs were recorded against the principal balances of loans classified as TDRs during 2017. During the third quarter of 2016, the Company classified a $302,000 agriculture loan relationship consisting of three loans as a TDR after extending the maturities of the loans. The collateral securing the loans was deemed to be insufficient, resulting in a charge-off of $215,000. During the second quarter of 2016, the Company classified two loans as TDRs including an $8,000 commercial loan after modifying the payments to interest only and a $188,000 one-to-four family residential real estate loan after agreeing to a loan modification which adjusted the payment schedule. No loans were classified as TDR in the first quarter of 2016. As of September 30, 2016, an impairment of $2,000 was recorded against loans classified as TDRs. The Company recorded charge-offs of $215,000 against TDRs during the three and nine months ended September 30, 2016. 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, 2017 and 2016. At September 30, 2017, there was a commitment of $32,000 to lend additional funds on one construction and land loan classified as a TDR. The Company did not record any charge-offs against loans classified as TDRs in the first nine months of 2017 or 2016. A credit provision for loan losses of $30,000 related to TDRs was recorded in the nine months ended September 30, 2017 compared to no provision in the same period of 2016. The Company allocated $50,000 and $80,000 of the allowance for loan losses against loans classified as TDRs at September 30, 2017 and December 31, 2016, respectively. The following table presents information on loans that are classified as TDRs: (Dollars in thousands) As of September 30, 2017 As of December 31, 2016 Number of loans Non-accrual balance Accruing balance Number of loans Non-accrual balance Accruing balance One-to-four family residential real estate 2 $ - $ 198 2 $ - $ 185 Construction and land 4 578 1,297 4 588 1,338 Commercial real estate 4 60 2,135 3 64 2,145 Commercial - - - 2 - 13 Agriculture 8 361 - 4 268 44 Municipal 2 - 140 2 - 258 Total troubled debt restructurings 20 $ 999 $ 3,770 17 $ 920 $ 3,983 |