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6. Loans and Allowance For Loan Losses

9 Months Ended

Sep. 30, 2017

6. Loans andAllowance for Loan Losses

The composition of the Bank’s loan portfolio is as follows:

(in 000’s)	September 30, 2017	December 31, 2016
Commercial and industrial	$2,291	$ 2,149
Commercial real estate	20,591	21,488
Consumer real estate	1,841	2,232
Consumer loans other	807	966
Total loans	$25,530	$ 26,835

At December 31, 2016, the unearned discount totaled$11,000and is included in the related loan accounts.There were no unearned discounts at September 30, 2017.

The determination of the allowance for loan losses involves a higher degree of judgment and complexity than its other significant accounting policies. The allowance is the accumulation of three components that are calculated based on various independent methodologies that are based on management’s estimates. The three components are as follows:

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Specific Loan Evaluation Component – Includes the specific evaluation of impaired loans.

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Historical Charge-Off Component – Applies an eight-quarter rolling historical charge-off rate to all pools of non-classified loans.

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Qualitative Factors Component – The loan portfolio is broken down into multiple homogenous sub classifications, upon which multiple factors (such as delinquency trends, economic conditions, concentrations, growth/volume trends, and management/staff ability) are evaluated, resulting in an allowance amount for each of the sub classifications. The sum of these amounts comprises the Qualitative Factors Component.

All of these factors may be susceptible to significant change. During the nine months ended September 30, 2017, the Bank did not change any of its qualitative factors in any segment of the loan portfolio. In addition, the average historical loss factorswere relatively unchanged as there were no charge-offs during the quarter.Credits to the provision for the nine months ended September 30, 2017 and 2016 were primarily related to the decreases in the balance of commercial real estate loans as the origination of SBA loans that are accounted for at fair value are not included in the calculation of the allowance for loan losses. In addition, there was improvement in the eight-quarter rolling historical charge-offs related to commercial and industrial loans that resulted in a reduction in the required general allowance. To the extent actual outcomes differ from management’s estimates, additional provisions for loan losses may be required that would adversely affect earnings in future periods.

The following table presents an analysis of the allowance for loan losses.

(in 000's)		For the Three months ended September 30, 2017
	Commercial and industrial	Commercial real estate	Consumer real estate	Consumer loans Other	Unallocated	Total
Beginning balance	$ 74	$ 170	$ 8	$ 10	$ (10)	$ 252
Provision (credit) for loan losses	(65)	18	-	-	32	(15)

Charge-offs	-	-	-	(1)	-	(1)
Recoveries	1	2	-	-	-	3
Net (charge-offs) recoveries	1	2	-	(1)	-	2

Ending balance	$ 10	$ 190	$ 8	$ 9	$ 22	$239

(in 000's)		For the Three months ended September 30, 2016
	Commercial and industrial	Commercial real estate	Consumer real estate	Consumer loans Other	Unallocated	Total
Beginning balance	$ 87	$ 245	$ 13	$ 10	$ -	$ 355
Provision (credit) for loan losses	41	(75)	(11)	-	-	(45)

Charge-offs	-	(1)	-	-	-	(1)
Recoveries	1	-	6	1	-	8
Net (charge-off) recoveries	1	(1)	6	1	-	7

Ending balance	$ 129	$ 169	$ 8	$ 11	$ -	$ 317

(in 000's)		For the Nine months ended September 30, 2017
	Commercial and industrial	Commercial real estate	Consumer real estate	Consumer loans Other	Unallocated	Total
Beginning balance	$ 68	$ 179	$ 10	$ 11	$ 32	$ 300
Provision (credit) for loan losses	(61)	(16)	(3)	(1)	(10)	(91)

Charge-offs	-	-	-	(4)	-	(4)
Recoveries	3	27	1	3	-	34
Net (charge-offs) recoveries	3	27	1	(1)	-	30

Ending balance	$ 10	$ 190	$ 8	$ 9	$ 22	$ 239

(in 000's)		For the Nine months ended September 30, 2016
	Commercial and industrial		Commercial real estate	Consumer real estate	Consumer loans Other	Total
Beginning balance	$ 151		$ 250	$ 8	$ 9	$ 418
Provision (credit) for loan losses	(25)		(39)	14	-	(50)

Charge-offs	-		(42)	(22)	(3)	(67)
Recoveries	3		-	8	5	16
Net (charge-offs)recoveries	3		(42)	(14)	2	(51)

Ending balance	$ 129		$ 169	$ 8	$ 11	$ 317

(in 000's)			September 30, 2017
	Commercial and industrial	Commercial real estate		Consumer real estate	Consumer loans Other	Unallocated	Total

Period-end amount allocated to:

Loans individually evaluated for impairment	$ -	$ 70		$ -	$ -	$-	$ 70
Loans collectively evaluated for impairment	10	120		8	9	22	169
	$ 10	$ 197		$ 8	$ 9	$ 22	$ 239

Loans, ending balance:
Loans individually evaluated for impairment	$ 319	$ 1,719		$ -	$ -	$ -	$ 2,038
Loans collectively evaluated for impairment	1,972	18,872		1,841	807	-	21,322
Total	$ 2,291	$ 20,591		$ 1,841	$ 807	$ -	$ 25,530

(in 000’s)			December 31, 2016
	Commercial and industrial	Commercial real estate	Consumer real estate	Consumer loans Other	Unallocated	Total

Period-end amount allocated to:

Loans individually evaluated for impairment	$ -	$ 54	$ -	$ -	$ -	$ 54
Loans collectively evaluated for impairment	68	125	10	11	32	246
	$ 68	$ 179	$ 10	$ 11	$ 32	$ 300

Loans, ending balance:
Loans individually evaluated for impairment	$ 352	$ 1,731	$ -	$ -	$ -	$ 2,083
Loans collectively evaluated for impairment	1,797	19,757	2,232	966	-	24,752
Total	$ 2,149	$ 21,488	$ 2,232	$ 966	$ -	$ 26,835

Nonperforming and Nonaccrual and Past Due Loans

An age analysis of past due loans, segregated by class of loans, as of September 30, 2017 is as follows:

		Accruing	Nonaccrual
	Loans	Loans 90 or	Loans 90 or
(In 000's)	30-89 Days	More Days	More Days	Total Past	Current
	Past Due	Past Due	Past Due	Due Loans	Loans	Total Loans
Commercial and industrial:
Commercial	$ 26	$ -	$ -	$ 26	$ 823	$ 849
SBA loans	-	-	-	-	41	41
Asset-based	-	-	319	319	1,082	1,401
Total Commercial and industrial	26	-	319	345	1,946	2,291

Commercial real estate:
Commercial mortgages	661	-	1,280	1,941	9,105	11,046
SBA loans	-	-	244	244	210	454
Construction	-	-	-	-	406	406
Religious organizations	41	-	189	230	8,455	8,685
Total Commercial real estate	702	-	1,713	2,415	18,176	20,591

Consumer real estate:
Home equity loans	-	123	308	341	321	752
Home equity lines of credit	-	-	-	-	17	17
1-4 family residential mortgages	32	-	-	32	1,040	1,072
Total consumer real estate	32	123	308	463	1,378	1,841

Total real estate	734	123	2,021	2,878	19,554	22,432

Consumer and other:
Student loans	89	69	-	158	551	709
Other	-	2	-	2	96	98
Total consumer and other	89	71	-	160	647	807

Total loans	$ 849	$ 194	$ 2,340	$ 3,383	$ 22,147	$ 25,530

An age analysis of past due loans, segregated by class of loans, as of December 31, 2016 is as follows:

		Accruing	Nonaccrual
	Loans	Loans 90 or	Loans 90 or
	30-89 Days	More Days	More Days	Total Past	Current
(In 000's)	Past Due	Past Due	Past Due	Due Loans	Loans	Total Loans
Commercial and industrial:
Commercial	$ -	$ -	$ 33	$ 33	$ 857	$ 890
Asset-based	27	243	75	345	914	1,259
Total Commercial and industrial	27	243	108	378	1.771	2,149

Commercial real estate:
Commercial mortgages	-	11	1,270	1,281	10,104	11,385
SBA loans	-	162	93	255	-	255
Construction	-	-	-	-	542	542
Religious organizations	-	-	196	306	9,000	9,306
Total Commercial real estate	110	173	1,559	1,842	19,646	21,488

Consumer real estate:
Home equity loans	-	153	345	498	301	799
Home equity lines of credit	-	-	-	-	19	19
1-4 family residential mortgages	59	-	75	134	1,280	1,414
Total consumer real estate	59	153	420	632	1,600	2,232

Total real estate	169	326	1,979	2,474	21,246	23,720

Consumer and other:
Student loans	38	61	-	99	756	855
Other	-	1	-	1	110	111
Total consumer and other	38	62	-	100	866	966

Total loans	$ 234	$ 631	$ 2,087	$ 2,952	$ 23,883	$ 26,835

Loan Origination/Risk Management. The Bank has lending policies and procedures in place to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with periodic reports related to loan origination, asset quality, concentrations of credit, loan delinquencies and non-performing and emerging problem loans. Diversification in the portfolio is a means of managing risk with fluctuations in economic conditions.

Credit Quality Indicators. For commercial loans, management uses internally assigned risk ratings as the best indicator of credit quality. Each loan’s internal risk weighting is assigned at origination and updated at least annually and more frequently if circumstances warrant a change in risk rating. The Bank uses a 1 through 8 loan grading system that follows regulatory accepted definitions as follows:

Risk ratings of “1” through “3” are used for loans that are performing and meet and are expected to continue to meet all of the terms and conditions set forth in the original loan documentation and are generally current on principal and interest payments. Loans with these risk ratings are reflected as “Good/Excellent” and “Satisfactory” in the following table.

Risk ratings of “4” are assigned to “Pass/Watch” loans which may require a higher degree of regular, careful attention. Borrowers may be exhibiting weaker balance sheets and positive but inconsistent cash flow coverage. Borrowers in this classification generally exhibit a higher level of credit risk and are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Loans with this rating would not normally be acceptable as new credits unless they are adequately secured and/or carry substantial guarantors. Loans with this rating are reflected as “Pass” in the following table.

Risk ratings of “5” are assigned to “Special Mention” loans that do not presently expose the Bank to a significant degree of risks, but have potential weaknesses/deficiencies deserving Management’s closer attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date. No loss of principal or interest is envisioned. Borrower is experiencing adverse operating trends, which potentially could impair debt, services capacity and may necessitate restructuring of credit. Secondary sources of repayment are accessible and considered adequate to cover the Bank's exposure. However, a restructuring of the debt should result in repayment. The asset is currently protected, but is potentially weak. This category may include credits with inadequate loan agreements, control over the collateral or an unbalanced position in the balance sheet which has not reached a point where the liquidation is jeopardized but exceptions are considered material. These borrowers would have limited ability to obtain credit elsewhere.

Risk ratings of “6” are assigned to “Substandard” loans which are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets must have a well-defined weakness. They are characterized by the distinct possibility that some loss is possible if the deficiencies are not corrected. The borrower’s recent performance indicated an inability to repay the debt, even if restructured. Primary source of repayment is gone or severely impaired and the Bank may have to rely upon the secondary source. Secondary sources of repayment (e.g., guarantors and collateral) should be adequate for a full recovery. Flaws in documentation may leave the bank in a subordinated or unsecured position when the collateral is needed for the repayment.

Risk ratings of “7” are assigned to “Doubtful” loans which have all the weaknesses inherent in those classified “Substandard” with the added characteristic that the weakness makes the collection or liquidation in full, on the basis of current existing facts, conditions, and values, highly questionable and improbable. The borrower's recent performance indicates an inability to repay the debt. Recovery from secondary sources is uncertain. The possibility of a loss is extremely high, but because of certain important and reasonably- specific pending factors, its classification as a loss is deferred.

Risk rating of “8” are assigned to “Loss” loans which are considered non-collectible and do not warrant classification as active assets. They are recommended for charge-off if attempts to recover will be long term in nature. This classification does not mean that an asset has no recovery or salvage value, but rather, that it is not practical or desirable to defer writing off the loss, although a future recovery may be possible. Loss should always be taken in the period in which they surface and are identified as non-collectible as a result there is no tabular presentation.

For consumer and residential mortgage loans, management uses performing versus nonperforming as the best indicator of credit quality. Nonperforming loans consist of loans that are not accruing interest (nonaccrual loans) as a result of principal or interest being in default for a period of 90 days or more or when the ability to collect principal and interest according to contractual terms is in doubt. These credit quality indicators are updated on an ongoing basis. A loan is placed on nonaccrual status as soon as management believes there is doubt as to the ultimate ability to collect interest on a loan, but no later than 90 days past due.Interest on loans past due 90 days or more ceases to accrue except for loans that are well collateralized and in the process of collection.

The tables below detail the Bank’s loans by class according to their credit quality indictors discussed above.


(In 000's)				Commercial Loans September 30, 2017
	Good/ Excellent	Satisfactory		Pass	Special Mention	Substandard		Doubtful	Total



Commercial and industrial:
Commercial	$ 260	$ 341		$ 4	$ 26	$ 218		$ -	$ 849
SBA loans	-	-		41	-	-		-	41
Asset-based	-	839		243	-	243		76	1,401
	$ 260	$ 1,180		$ 288	$ 26	$ 461		$ 76	$ 2,291
Commercial real estate:
Commercial mortgages	$ -	$ 6,983		$ 2,253	$ 489	$ 1,092		$ 219	$ 11,046
SBA Loans	-	209		1	-	244		-	454
Construction	-	406		-	-	-		-	406
Religious organizations	53	7,602		736	105	189		-	8,685
	53	$ 15,200		$ 2,990	$ 594	$1,525		$ 219	$ 20,591

Total commercial loans	$ 313	$ 16,380		$ 3,278	$ 620	$ 1,986		$ 295	$ 22,882


(In 000's)			Residential Mortgage and Consumer Loans September 30, 2017
	Performing			Nonperforming			Total

Consumer Real Estate:
Home equity	$ 444			$ 308			$ 752
Home equity line of credit	17			-			17
1-4 family residential mortgages	1,072			-			1,072
	$ 1,533			$ 308			$ 1,841

Consumer Other:
Student loans	$ 709			$ -			$ 709
Other	98			-			98
	$ 807			-			$ 807

Total consumer loans	$ 2,340			$ 308			$ 2,648

(In 000's)			Commercial Loans December 31, 2016
	Good/ Excellent	Satisfactory	Pass	Special Mention		Substandard	Doubtful	Total

Commercial and industrial:
Commercial	$ 260	$ 331	$ 9	$ 38		$ 252	$ -	$ 890
Asset-based	-	742	198	-		243	76	1,259
	260	1,073	207	38		495	76	2,149
Commercial real estate:
Commercial mortgages	-	8,193	1,375	537		1,059	221	11,385
SBA Loans	-	2	-	160		93	-	255
Construction	-	542	-	-		-	-	542
Religious organizations	49	8,201	751	109		196	-	9,306
	49	16,938	2,126	806		1,348	221	21,488

Total commercial loans	$ 312	$ 18,011	$ 2,333	$ 844		$ 1,843	$ 297	$ 23,637

			Residential Mortgage and Consumer Loans December 31, 2016

	Performing		Nonperforming		Total

Consumer Real Estate:
Home equity	$ 494		$ 345		$ 799
Home equity line of credit	19		-		19
1-4 family residential mortgages	1,339		75		1,414
	1,812		420		2,232

Consumer Other:
Consumer Installment	-		-		-
Student loans	855		-		855
Other	111		-		111
	966		-		966

Total consumer loans	$ 2,778		$ 420		$ 3,198

Impaired Loans. The Bank identifies a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. The Bank recognizes interest income on impaired loans under the cash basis when the collateral on the loan is sufficient to cover the outstanding obligation to the Bank. If these factors do not exist, the Bank will record interest payments on the cost recovery basis.

In accordance with guidance provided by ASC 310-10, Accounting by Creditors for Impairment of a Loan, management employs one of three methods to determine and measure impairment: the Present Value of Future Cash Flow Method; the Fair Value of Collateral Method; or the Observable Market Price of a Loan Method. To perform an impairment analysis, the Company reviews a loan’s internally assigned grade, its outstanding balance, guarantors, collateral, strategy, and a current report of the action being implemented. Based on the nature of the specific loans, one of the impairment methods is chosen for the respective loan and any impairment is determined, based on criteria established in ASC 310-10.

The Company makes partial charge-offs of impaired loans when the impairment is deemed permanent and is considered a loss. Specific reserves are allocated to cover “other-than-permanent” impairment for which the underlying collateral value may fluctuate with market conditions. There were no partial charge-offs during the nine months ended September 30, 2017. During the nine months ended September 30, 2016, there was a partial charge-off of $41,000 related to one commercial real estate loan for which there was a decline in the value of the underlying collateral.

Consumer real estate and other loans are not individually evaluated for impairment, but collectively evaluated, because they are pools of smaller balance homogeneous loans.

Impaired loans as ofSeptember 30, 2017 are set forth in the following table.

(In 000's)	Unpaid Contractual	Recorded Investment	Recorded Investment	Total
	Principal	With No	With	Recorded	Related
	Balance	Allowance	Allowance	Investment	Allowance

Commercial and industrial:
Asset-based	$ 319	$ 319	$ -	$ 319	$ -
Total commercial and industrial	319	319	-	319	-

Commercial real estate:
Commercial mortgages	1,279	806	473	1,279	70
SBA Loans	248	248	-	248	-
Religious organizations	192	192	-	192	-
Total commercial real estate	1,719	1, 246	473	1,795	70

Total loans	$ 2,038	$ 1,565	$ 473	$ 2,038	$ 70

Impaired loans as of December 31, 2016 set forth in the following table.

(In 000's)	Unpaid Contractual	Recorded Investment	Recorded Investment	Total
	Principal	With No	With	Recorded	Related
	Balance	Allowance	Allowance	Investment	Allowance

Commercial and industrial:
Commercial	$ 33	$ 33	$ -	$ 33	$ -
Asset-based	319	319	-	319	-
Total commercial and industrial	352	352	-	352	-

Commercial real estate:
Commercial mortgages	1,321	807	473	1,281	54
SBA Loans	255	255	-	255	-
Religious organizations	195	195	-	195	-
Total commercial real estate	1,771	1,258	473	1,731	54

Total loans	$ 2,123	$ 1,610	$ 473	$ 2,083	$ 54

The Bank recognizes interest income on impaired loans under the cash basis when the collateral on the loan is sufficient to cover the outstanding obligation to the Bank. If these factors do not exist, the Bank will record interest payments on the cost recovery basis. The following tables present additional information about impaired loans.

(In 000's)	Three Months Ended September 30, 2017		Three Months Ended September 30, 2016
	Average	Interest recognized	Average	Interest recognized
	Recorded	on impaired	Recorded	on impaired
	Investment	Loans	Investment	Loans

Commercial and industrial:
SBA loans	$ -	$ -	$ 39	$ -
Asset-based	243	-	398	-
Total commercial and industrial	243	-	437	-

Commercial real estate:
Commercial mortgages	1,355	-	1,280	1
SBA loans	245	-	162	-
Religious organizations	189	-	200	-
Total commercial real estate	1,789	-	1,642	1

Total loans	$ 2,032	$ -	$ 2,079	$ 1

(In 000's)	Nine Months Ended September 30, 2017		Nine Months Ended September 30, 2016
	Average	Interest recognized	Average	Interest recognized
	Recorded	on impaired	Recorded	on impaired
	Investment	Loans	Investment	Loans

Commercial and industrial:
SBA loans	$ -	$ -	$ 39	$ -
Asset-based	261	-	398	-
Total commercial and industrial	261	-	437	-

Commercial real estate:
Commercial mortgages	1,355	-	1,422	5
SBA loans	249	-	304	3
Religious organizations	192	-	299	-
Total commercial real estate	1,796	-	2,025	8

Total loans	$2,057	$ -	$ 2,462	$ 8

Troubled debt restructurings (“TDRs”). TDRs occur when a creditor, for economic or legal reasons related to a debtor’s financial condition, grants a concession to the debtor that it would not otherwise consider, such as a below market interest rate, extending the maturity of a loan, or a combination of both. The Company made modifications to certain loans in its commercial loan portfolio that included the term out of lines of credit to begin the amortization of principal. The terms of these loans do not include any financial concessions and are consistent with the current market. Management reviews all loan modifications to determine whether the modification qualifies as a troubled debt restructuring (i.e. whether the creditor has been granted a concession or is experiencing financial difficulties). Based on this review and evaluation, none of the modified loans met the criteria of a troubled debt restructuring. Therefore, the Company had no troubled debt restructurings at September 30, 2017 and December 31, 2016.