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) 2018 2017 One-to-four family residential real estate $ 136,995 $ 136,215 Construction and land 30,841 19,356 Commercial real estate 128,292 120,624 Commercial 67,898 54,591 Agriculture 91,376 83,008 Municipal 2,990 3,396 Consumer 23,012 22,046 Total gross loans 481,404 439,236 Net deferred loan costs and loans in process (18 ) (34 ) Allowance for loan losses (5,889 ) (5,459 ) Loans, net $ 475,497 $ 433,743 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, 2018 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, 2018 $ 439 $ 109 $ 1,466 $ 1,693 $ 2,005 $ 7 $ 116 $ 5,835 Charge-offs - - - (352 ) - - (49 ) (401 ) Recoveries 1 - - 1 - - 3 5 Provision for loan losses 109 6 (19 ) 191 99 - 64 450 Balance at September 30, 2018 549 115 1,447 1,533 2,104 7 134 5,889 Balance at January 1, 2018 $ 542 $ 181 $ 1,540 $ 1,226 $ 1,812 $ 8 $ 150 $ 5,459 Charge-offs - - - (381 ) - - (126 ) (507 ) Recoveries 3 - 1 3 - 2 28 37 Provision for loan losses 4 (66 ) (94 ) 685 292 (3 ) 82 900 Balance at September 30, 2018 549 115 1,447 1,533 2,104 7 134 5,889 (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 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, 2018 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 $ 190 $ - $ 13 $ 666 $ - $ - $ 1 $ 870 Collectively evaluated for loss 359 115 1,434 867 2,104 7 133 5,019 Total $ 549 $ 115 $ 1,447 $ 1,533 $ 2,104 $ 7 $ 134 $ 5,889 Loan balances: Individually evaluated for loss $ 773 $ 1,616 $ 3,916 $ 2,013 $ 647 $ 58 $ 80 $ 9,103 Collectively evaluated for loss 136,222 29,225 124,376 65,885 90,729 2,932 22,932 472,301 Total $ 136,995 $ 30,841 $ 128,292 $ 67,898 $ 91,376 $ 2,990 $ 23,012 $ 481,404 (Dollars in thousands) As of December 31, 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 $ 73 $ 102 $ 52 $ 391 $ 24 $ - $ - $ 642 Collectively evaluated for loss 469 79 1,488 835 1,788 8 150 4,817 Total $ 542 $ 181 $ 1,540 $ 1,226 $ 1,812 $ 8 $ 150 $ 5,459 Loan balances: Individually evaluated for loss $ 747 $ 2,031 $ 3,973 $ 2,002 $ 833 $ 140 $ 34 $ 9,760 Collectively evaluated for loss 135,468 17,325 116,651 52,589 82,175 3,256 22,012 429,476 Total $ 136,215 $ 19,356 $ 120,624 $ 54,591 $ 83,008 $ 3,396 $ 22,046 $ 439,236 The Company’s impaired loans decreased from $9.8 million at December 31, 2017 to $9.1 million at September 30, 2018. 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, 2018 and December 31, 2017, 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 on impaired loans was immaterial during the three and nine month periods ended September 30, 2018 and 2017. The following tables present information on impaired loans: (Dollars in thousands) As of September 30, 2018 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 $ 773 $ 773 $ 450 $ 323 $ 190 $ 793 $ 7 Construction and land 3,351 1,616 1,616 - - 1,817 42 Commercial real estate 3,916 3,916 3,880 36 13 3,926 365 Commercial 2,013 2,013 2 2,011 666 2,043 - Agriculture 862 647 647 - - 717 39 Municipal 58 58 58 - - 58 1 Consumer 80 80 73 7 1 83 - Total impaired loans $ 11,053 $ 9,103 $ 6,726 $ 2,377 $ 870 $ 9,437 $ 454 (Dollars in thousands) As of December 31, 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 $ 747 $ 747 $ 503 $ 244 $ 73 $ 774 $ 8 Construction and land 3,766 2,031 430 1,601 102 2,033 65 Commercial real estate 3,973 3,973 3,888 85 52 3,989 490 Commercial 2,002 2,002 11 1,991 391 2,082 - Agriculture 1,048 833 545 288 24 912 1 Municipal 140 140 140 - - 192 5 Consumer 34 34 34 - - 35 - Total impaired loans $ 11,710 $ 9,760 $ 5,551 $ 4,209 $ 642 $ 10,017 $ 569 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 or more delinquent and accruing interest at September 30, 2018 or December 31, 2017. The Company is currently in the process of foreclosure on a non-accrual and impaired commercial loan relationship consisting of a $1.8 million commercial real estate loan and $1.8 million of commercial loans. The Company allocated $610,000 of the allowance for loan losses against these loans as of September 30, 2018. 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, 2018 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 $ 129 $ 344 $ - $ 473 $ 588 $ 1,061 $ 135,934 Construction and land 157 116 - 273 671 944 29,897 Commercial real estate 227 - - 227 1,792 2,019 126,273 Commercial 26 93 - 119 2,013 2,132 65,766 Agriculture 294 50 - 344 413 757 90,619 Municipal - - - - - - 2,990 Consumer 35 4 - 39 80 119 22,893 Total $ 868 $ 607 $ - $ 1,475 $ 5,557 $ 7,032 $ 474,372 Percent of gross loans 0.18 % 0.13 % 0.00 % 0.31 % 1.15 % 1.46 % 98.54 % (Dollars in thousands) As of December 31, 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 $ 101 $ 313 $ - $ 414 $ 552 $ 966 $ 135,249 Construction and land - 4 - 4 779 783 18,573 Commercial real estate 22 209 - 231 1,841 2,072 118,552 Commercial - 397 - 397 2,002 2,399 52,192 Agriculture - - - - 833 833 82,175 Municipal - - - - - - 3,396 Consumer 105 204 - 309 34 343 21,703 Total $ 228 $ 1,127 $ - $ 1,355 $ 6,041 $ 7,396 $ 431,840 Percent of gross loans 0.05 % 0.26 % 0.00 % 0.31 % 1.37 % 1.68 % 98.32 % Under the original terms of the Company’s non-accrual loans, interest earned on such loans for the nine months ended September 30, 2018 and 2017 would have increased interest income by $205,000 and $79,000, respectively. No interest income related to non-accrual loans was included in interest income for the nine months ended September 30, 2018 and 2017. 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, 2018 As of December 31, 2017 Non-classified Classified Non-classified Classified One-to-four family residential real estate $ 135,821 $ 1,174 $ 135,475 $ 740 Construction and land 29,896 945 18,577 779 Commercial real estate 118,293 9,999 114,736 5,888 Commercial 59,788 8,110 52,313 2,278 Agriculture 84,344 7,032 76,455 6,553 Municipal 2,990 - 3,396 - Consumer 22,932 80 22,006 40 Total $ 454,064 $ 27,340 $ 422,958 $ 16,278 At September 30, 2018, the Company had 10 loan relationships consisting of 14 outstanding loans that were classified as TDRs. There were no loans classified as TDRs during the third quarter of 2018. An agriculture loan relationship consisting of two loans that were originally classified as TDRs during 2015 and a municipal loan that was classified as a TDR in 2010 were both paid off in the third quarter of 2018. During the second quarter of 2018, the Company classified an agriculture loan totaling $64,000 as a TDR after originating a loan to an existing loan relationship that was classified as a TDR in 2016. As part of the restructuring the borrower paid off three loans previously classified as TDRs. Since the agriculture loan relationship was adequately secured, no impairments were recorded against the principal as of September 30, 2018. The Company also classified a $41,000 commercial loan as a TDR after extending the maturity of the loan during the second quarter of 2018. The commercial loan had a $11,000 impairment recorded against the principal balance as of September 30, 2018. There were no new loans classified as TDRs during the first three months of 2018. 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 loan totaling $25,000 as a TDR after modifying the terms of the loan 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 the loans classified as TDRs during 2017. 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 that were classified as TDRs that defaulted within 12 months of modification during the first nine months of 2018. There was one commercial real estate loan totaling $11,000 that was classified as a TDR during the second quarter of 2017 which defaulted within 12 months of modification. The loan was charged off in the fourth quarter of 2017. The Company did not record any charge-offs against loans classified as TDRs in the first nine months of either 2018 or 2017. A credit provision for loan losses of $25,000 and $17,000 related to TDRs was recorded in the three months ended September 30, 2018 and 2017, respectively. A credit provision for loan losses of $116,000 and $30,000 related to TDRs was recorded in the nine months ended September 30, 2018 and 2017, respectively. The Company allocated $11,000 and $127,000 of the allowance for loan losses against loans classified as TDRs at September 30, 2018 and December 31, 2017, respectively. The following table presents information on loans that are classified as TDRs: (Dollars in thousands) As of September 30, 2018 As of December 31, 2017 Number of loans Non-accrual balance Accruing balance Number of loans Non-accrual balance Accruing balance One-to-four family residential real estate 2 $ - $ 185 2 $ - $ 194 Construction and land 4 527 945 4 575 1,252 Commercial real estate 2 - 2,124 3 45 2,133 Commercial 1 41 - - - - Agriculture 4 63 234 9 471 - Municipal 1 - 58 2 - 140 Total troubled debt restructurings 14 $ 631 $ 3,546 20 $ 1,091 $ 3,719 |