Loans and Allowance for Loan Losses | 3. Loans and Allowance for Loan Losses Loans consisted of the following as of the dates indicated below: March 31, December 31, (Dollars in thousands) 2019 2018 One-to-four family residential real estate $ 135,871 $ 136,895 Construction and land 18,386 20,083 Commercial real estate 141,148 138,967 Commercial 79,103 74,289 Agriculture 94,905 96,632 Municipal 2,922 2,953 Consumer 24,160 25,428 Total gross loans 496,495 495,247 Net deferred loan costs and loans in process 116 (109 ) Allowance for loan losses (5,938 ) (5,765 ) Loans, net $ 490,673 $ 489,373 The following tables provide information on the Company’s allowance for loan losses by loan class and allowance methodology: Three months ended March 31, 2019 (Dollars in thousands) One-to-four family residential real estate Construction and land Commercial real estate Commercial Agriculture Municipal Consumer Total Allowance for loan losses: Balance at January 1, 2019 $ 449 $ 168 $ 1,686 $ 1,051 $ 2,238 $ 7 $ 166 $ 5,765 Charge-offs - - - - - - (49 ) (49 ) Recoveries 1 - - 1 - 6 14 22 Provision for loan losses 24 (12 ) 185 113 (110 ) (6 ) 6 200 Balance at March 31, 2019 $ 474 $ 156 $ 1,871 $ 1,165 $ 2,128 $ 7 $ 137 $ 5,938 Three months ended March 31, 2018 (Dollars in thousands) One-to-four family residential real estate Construction and land Commercial real estate Commercial Agriculture Municipal Consumer Total Allowance for loan losses: Balance at January 1, 2018 $ 542 $ 181 $ 1,540 $ 1,226 $ 1,812 $ 8 $ 150 $ 5,459 Charge-offs - - - - - - (33 ) (33 ) Recoveries 1 - 1 1 - 2 13 18 Provision for loan losses (66 ) (60 ) 21 257 55 (3 ) (4 ) 200 Balance at March 31, 2018 $ 477 $ 121 $ 1,562 $ 1,484 $ 1,867 $ 7 $ 126 $ 5,644 As of March 31, 2019 (Dollars in thousands) 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 $ 115 $ 97 $ 223 $ 20 $ - $ - $ - $ 455 Collectively evaluated for loss 359 59 1,648 1,145 2,128 7 137 5,483 Total $ 474 $ 156 $ 1,871 $ 1,165 $ 2,128 $ 7 $ 137 $ 5,938 Loan balances: Individually evaluated for loss $ 958 $ 1,766 $ 3,986 $ 1,567 $ 1,609 $ 58 $ 41 $ 9,985 Collectively evaluated for loss 134,913 16,620 137,162 77,536 93,296 2,864 24,119 486,510 Total $ 135,871 $ 18,386 $ 141,148 $ 79,103 $ 94,905 $ 2,922 $ 24,160 $ 496,495 As of December 31, 2018 (Dollars in thousands) 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 $ 100 $ 103 $ 67 $ 27 $ 13 $ - $ - $ 310 Collectively evaluated for loss 349 65 1,619 1,024 2,225 7 166 5,455 Total $ 449 $ 168 $ 1,686 $ 1,051 $ 2,238 $ 7 $ 166 $ 5,765 Loan balances: Individually evaluated for loss $ 623 $ 1,808 $ 3,912 $ 1,528 $ 717 $ 58 $ 45 $ 8,691 Collectively evaluated for loss 136,272 18,275 135,055 72,761 95,915 2,895 25,383 486,556 Total $ 136,895 $ 20,083 $ 138,967 $ 74,289 $ 96,632 $ 2,953 $ 25,428 $ 495,247 The Company recorded net loan charge-offs of $27,000 during the first quarter of 2019 compared to net loan charge-offs of $15,000 during the first quarter of 2018. The Company’s impaired loans increased from $8.7 million at December 31, 2018 to $10.0 million at March 31, 2019. 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 March 31, 2019 and December 31, 2018, 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 months ended March 31, 2019 and 2018. The following tables present information on impaired loans: (Dollars in thousands) As of March 31, 2019 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 $ 958 $ 958 $ 681 $ 277 $ 115 $ 961 $ 3 Construction and land 3,501 1,766 1,341 425 97 1,782 10 Commercial real estate 3,986 3,986 2,023 1,963 223 3,992 118 Commercial 1,567 1,567 1,441 126 20 1,570 - Agriculture 1,824 1,609 1,609 - - 1,641 12 Municipal 58 58 58 - - 58 - Consumer 41 41 41 - - 43 - Total impaired loans $ 11,935 $ 9,985 $ 7,194 $ 2,791 $ 455 $ 10,047 $ 143 (Dollars in thousands) As of December 31, 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 $ 623 $ 623 $ 413 $ 210 $ 100 $ 640 $ 10 Construction and land 3,543 1,808 1,383 425 103 2,689 53 Commercial real estate 3,912 3,912 2,120 1,792 67 3,928 487 Commercial 1,528 1,528 1,446 82 27 1,537 - Agriculture 932 717 529 188 13 844 52 Municipal 58 58 58 - - 58 1 Consumer 45 45 45 - - 49 - Total impaired loans $ 10,641 $ 8,691 $ 5,994 $ 2,697 $ 310 $ 9,745 $ 603 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 March 31, 2019 or December 31, 2018. The following tables present information on the Company’s past due and non-accrual loans by loan class: (Dollars in thousands) As of March 31, 2019 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 $ 728 $ 30 $ - $ 758 $ 779 $ 1,537 $ 134,334 Construction and land 223 - - 223 946 1,169 17,217 Commercial real estate 264 632 - 896 1,962 2,858 138,290 Commercial 188 73 - 261 1,567 1,828 77,275 Agriculture 23 - - 23 1,393 1,416 93,489 Municipal - - - - - - 2,922 Consumer 61 2 - 63 41 104 24,056 Total $ 1,487 $ 737 $ - $ 2,224 $ 6,688 $ 8,912 $ 487,583 Percent of gross loans 0.30 % 0.15 % 0.00 % 0.45 % 1.35 % 1.79 % 98.21 % (Dollars in thousands) As of December 31, 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 $ 131 $ 206 $ - $ 337 $ 442 $ 779 $ 136,116 Construction and land - 134 - 134 948 1,082 19,001 Commercial real estate 465 - - 465 1,791 2,256 136,711 Commercial 398 20 - 418 1,528 1,946 72,343 Agriculture 100 88 - 188 482 670 95,962 Municipal - - - - - - 2,953 Consumer 106 23 - 129 45 174 25,254 Total $ 1,200 $ 471 $ - $ 1,671 $ 5,236 $ 6,907 $ 488,340 Percent of gross loans 0.24 % 0.10 % 0.00 % 0.34 % 1.06 % 1.40 % 98.60 % Under the original terms of the Company’s non-accrual loans, interest earned on such loans for the three months ended March 31, 2019 and 2018 would have increased interest income by $124,000 and $76,000, respectively. No interest income related to non-accrual loans was included in interest income for the three months ended March 31, 2019 and 2018. 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) As of March 31, 2019 As of December 31, 2018 Nonclassified Classified Nonclassified Classified One-to-four family residential real estate $ 134,626 $ 1,245 $ 135,947 $ 948 Construction and land 17,440 946 19,135 948 Commercial real estate 129,045 12,103 126,619 12,348 Commercial 71,275 7,828 66,490 7,799 Agriculture 86,279 8,626 86,917 9,715 Municipal 2,922 - 2,953 - Consumer 24,119 41 25,383 45 Total $ 465,706 $ 30,789 $ 463,444 $ 31,803 At March 31, 2019, the Company had nine loan relationships consisting of thirteen outstanding loans that were classified as TDRs. There were no loans classified as TDRs during the first three months of 2018 or 2019. 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 March 31, 2019 and 2018. The Company did not record any charge-offs against loans classified as TDRs in the first quarter of 2019 or 2018. No provision was recorded in the three months ended March 31, 2019 compared to a credit provision of $33,000 related to TDRs recorded in the three months ended March 31, 2018. The Company had $10,000 allowance for loan losses recorded against loans classified as TDRs at March 31, 2019 and December 31, 2018. The following table presents information on loans that are classified as TDRs: (Dollars in thousands) As of March 31, 2019 As of December 31, 2018 Number of loans Non-accrual balance Accruing balance Number of loans Non-accrual balance Accruing balance One-to-four family residential real estate 2 $ - $ 179 2 $ - $ 181 Construction and land 4 521 820 4 523 860 Commercial real estate 1 - 2,024 2 - 2,121 Commercial 1 32 - 1 36 - Agriculture 4 6 216 4 23 235 Municipal 1 - 58 1 - 58 Total troubled debt restructurings 13 $ 559 $ 3,297 14 $ 582 $ 3,455 |