(4)

LOANS

The Company uses the following loan segments as described below:

•

One-to-four family first mortgages are closed-end loans secured by residential housing. Loans may be either owner or non-owner occupied properties. If the loan is owner-occupied, the loan is analyzed and under-written as a consumer loan. Loan terms may be up to 30 years.

•

Home equity lines of credit may be first or second mortgages secured by one-to-four family properties. Home equity loans carry a variable rate and typically are open ended for a period not to exceed ten years with a fifteen year final maturity. Loans secured by home equity lines of credit are under-written under the Company’s consumer loan guidelines.

•

Junior liens are closed-end loans secured by one-to-four family residences with a fixed or variable rate. Typically, the collateral for these loans are owner occupied units with a subordinate lien. Loans secured by junior liens are under-written under the Company’s consumer loan guidelines.

•

Multi-family loans are closed-end loans secured by residential housing with five or more units in a single building. Multi-family loans may carry a variable rate of interest or the interest rate on the loan is a fixed rate (usually five years). After the initial fixed rate period, the loan reverts to a variable rate or has balloon maturity. Multi-family loans have amortization terms of up to twenty years and are under-written under the Company’s commercial loan underwriting guidelines.

•

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 years with a balloon maturity or floating rate period to follow and are under-written under the Company’s commercial loan underwriting guidelines.

•

Non-residential real estate loans are secured by commercial real estate properties and may be either owner or non-owner occupied. The loans typically have a twenty year maturity and may be fixed for a period of five to ten years. After the initial fixed rate period, the note will either revert to a one year adjustable rate loan or have a balloon maturity. Loans secured by non-residential real estate are under-written under the Company’s commercial loan underwriting standards.

•

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 family first mortgages	$	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 real estate		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 risk metrics and categorized into one of the risk grades discussed below. The Company uses the following risk grade definitions for commercial loans:

Excellent - Loans in this category are to persons or entities of unquestioned financial strength, a highly liquid financial position, with collateral that is liquid and well margined. These borrowers have performed without question on past obligations, and the Bank expects their performance to continue. Internally generated cash flow covers current maturities of long-term debt by a substantial margin. Loans secured by Bank certificates of deposit and savings accounts, with appropriate holds placed on the accounts, are to be rated in this category.

Very Good - These are loans to persons or entities with strong financial condition and above-average liquidity who have previously satisfactorily handled their obligations with the Bank. Collateral securing the Bank’s debt is margined in accordance with policy guidelines. Internally generated cash flow covers current maturities of long-term debt more than adequately. Unsecured loans to individuals supported by strong financial statements and on which repayment is satisfactory may be included in this classification.

Satisfactory - Assets of this grade conform to substantially all the Bank’s underwriting criteria and evidence an average level of credit risk; however, such assets display more susceptibility to economic, technological or political changes since they lack the above average financial strength of credits rated Very Good. Borrower’s repayment capacity is considered to be adequate. Credit is appropriately structured and serviced; payment history is satisfactory.

Acceptable - Assets of this grade conform to most of the Bank’s underwriting criteria and evidence an acceptable, though higher than average, level of credit risk; however, these loans have certain risk characteristics which could adversely affect the borrower’s ability to repay given material adverse trends. Loans in this category require an above average level of servicing and show more reliance on collateral and guaranties to preclude a loss to the Bank should material adverse trends develop. If the borrower is a company, its earnings, liquidity and capitalization are slightly below average when compared to its peers.

Watch - These loans are characterized by borrowers who have marginal cash flow, marginal profitability, or have experienced an unprofitable year and a declining financial condition. The borrower has in the past satisfactorily handled debts with the Bank, but in recent months has either been late, delinquent in making payments, or made sporadic payments. While the Bank continues to be adequately secured, margins have decreased or are decreasing, despite the borrower’s continued satisfactory condition. Other characteristics of borrowers in this class include inadequate credit information, weakness of financial statement and repayment capacity, but with collateral that appears to limit exposure. This classification includes loans to established borrowers that are reasonably margined by collateral, but where potential for improvement in financial capacity appears limited.

All commercial loans with a risk classification of watch or better are considered a pass credit.

Special Mention - Loans in this category have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deteriorating prospects for the asset or in the institution’s credit position at some future date. Borrowers may be experiencing adverse operating trends or market conditions. Non-financial reasons for rating a credit exposure Special Mention include, but are not limited to: management problems, pending litigations, ineffective loan agreement and/or inadequate loan documentation, structural weaknesses and/or lack of control over collateral.

Substandard - A substandard asset is inadequately protected by the current sound worth or paying capacity of the debtor or the collateral pledged. There exists one or more well defined weaknesses that jeopardize the liquidation of the debt. There is a distinct possibility the Bank will experience some loss if the deficiencies are not corrected.

Doubtful - A loan classified as doubtful has all the weaknesses inherent in a loan classified as substandard, with 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. These are poor quality loans in which neither the collateral, if any, nor the financial condition of the borrower presently ensure collectability in full in a reasonable period of time; in fact, there is permanent impairment in the collateral securing the Bank’s loan. These loans are in a work-out status and have a defined work-out strategy.

Loss - Loans classified as loss are considered uncollectible and of such little value that their continuance as Bankable assets is not warranted. The Bank takes losses in the period in which they become uncollectible.

The following credit risk standards are assigned to consumer loans:

Satisfactory - All consumer open-end and closed-end retail loans shall have an initial risk grade assigned of 3 - Satisfactory. All consumer loans classified as satisfactory are considered a pass credit.

Substandard - All consumer open-end and closed-end retail loans past due 90 cumulative days from the contractual date will be classified as 7 - Substandard. If a consumer/retail loan customer files bankruptcy, the loan will be classified as 7 - Substandard regardless of payment history.

Loss - All closed-end retail loans that become past due 120 cumulative days and open-end retail loans that become past due 180 cumulative days from the contractual due date will be charged off as loss assets. The charge off will be taken by the end of the month in which the 120-day or 180-day time period elapses. All losses in retail credit will be recognized when the affiliate becomes aware of the loss, but in no case should the charge off exceed the time frames stated within this policy.

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 12/31/2018		Charge offs 2019			Recoveries 2019		Provision 2019			Ending Balance 03/31/2019
	(Dollars in Thousands)
One-to-four family mortgages	$	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 real estate		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 12/31/2017		Charge offs 2018			Recoveries 2018		Provision 2018			Ending Balance 12/31/2018
	(Dollars in Thousands)
One-to-four family mortgages	$	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 real estate		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 Performing		30 - 89 Days Past Due		Non-accrual Loans		Total
One-to-four family mortgages		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 real estate		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 Performing		30 – 89 Days Past Due		Non-accrual Loans		Total
One-to-four family mortgages	$	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 real estate		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 Development / Construction		Commercial Real Estate		Residential Real Estate		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 Development / Construction		Commercial Real Estate		Residential Real Estate		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 Mention		Substandard		Doubtful		Total
	(Dollars in Thousands)
One-to-four family mortgages	$	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 real estate		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 Mention		Substandard		Doubtful		Total
	(Dollars in Thousands)
One-to-four family mortgages	$	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 real estate		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 Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(Dollars in Thousands)
Impaired loans with no specific allowance
One-to-four family mortgages	$	—		—		—		—		—
Home equity line of credit		—		—		—		—		—
Junior liens		—		—		—		—		—
Multi-family		—		—		—		—		—
Construction		—		—		—		—		—
Land		—		—		—		—		—
Non-residential real estate		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 family mortgages		273		273		13		273		2
Home equity line of credit		—		—		—		—		—
Junior liens		—		—		—		—		—
Multi-family		—		—		—		—		—
Construction		152		152		15		76		—
Land		—		—		—		—		—
Non-residential real estate		—		—		—		—		—
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 family mortgages	$	—		—		—		710		27
Home equity line of credit		—		—		—		261		4
Junior liens		—		—		—		2		—
Multi-family		—		—		—		—		—
Construction		—		—		—		—		—
Land		—		—		—		312		—
Non-residential real estate		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 family mortgages	$	274		274		13		55		12
Home equity line of credit		—		—		—		—		—
Junior liens		—		—		—		—		—
Multi-family		—		—		—		—		—
Construction		—		—		—		—		—
Land		—		—		—		—		—
Non-residential real estate		—		—		—		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 loans totaled $1.1 million, or 0.16% of total loans compared to $1.4 million, or 0.22% of total loans, at December 31, 2018. At March 31, 2019, the Company is not obligated to lend additional funds to borrowers who have been placed in non-accrual status. There are no loans accruing interest that are past due more than 90 days at March 31, 2019 and December 31, 2018. At March 31, 2019 and December 31, 2018, the Company’s balances in non-accrual loans by loan type is as follows:


	03/31/2019		12/31/2018
	(Dollars in Thousands)
One-to-four family first mortgages	$	18	$	62
Home equity lines of credit		96		98
Junior lien		4		4
Construction		152		152
Land		—		—
Non-residential real estate		322		581
Farmland		—		—
Consumer loans		1		8
Commercial loans		471		525

Total non-accrual loans	$	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 Loans		Pre-Modification Outstanding Record Investment		Post Modification Outstanding Record Investment, net of related allowance
March 31, 2019
Non-residential real estate		3	$	3,409,331		3,409,331
Commercial		3		192,905		192,905
December 31, 2018
Non-residential real estate		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.