6. Loans and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2018

Notes

6. Loans and Allowance for Loan Losses

6. Loans and Allowance for Loan Losses

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

(in 000’s)	September 30, 2018	December 31, 2017
Commercial and industrial	$ 1,790	$ 1,798
Commercial real estate	18,325	21,389
Consumer real estate	1,252	1,729
Consumer loans other	708	809
Total loans	$ 22,075	$ 25,725

At September 30, 2018, there was no unearned discount.  At December 31, 2017, the unearned discount totaled $10,858 respectively, and is included in the related loan accounts.

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:

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

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

·Qualitative Factors Component – The loan portfolio is broken down into portfolio segments, 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, 2018 the Bank did not change any of its qualitative factors in any segment of the loan portfolio.  In addition, the average historical loss factors were relatively unchanged as there were minimal net recoveries during the quarter. The increase in provision for commercial and industrial loans for the nine months ended September 30, 2018 is related to a specific reserve required for one impaired loan.  Credits to the provision for commercial real estate loans during 2018 was related to a decrease in balance in outstanding loans as well as the origination of SBA loans that are accounted for at fair value and are not included in the calculation of the allowance for loan losses.  To the extent actual outcomes differ from management’s estimates, additional provisions for loan losses may be required that would adversely impact 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, 2018
	Commercial and industrial	Commercial real estate	Consumer real estate	Consumer loans Other	Unallocated	Total
Beginning balance	$ 3	$ 150	$ 4	$ 8	$ 15	$ 180
Provision (credit) for loan losses	80	(37)	-	(8)	(15)	20
Charge-offs	-	-	-	(1)	-	(1)
Recoveries	1	1	-	1	-	3
Net recoveries	1	1	-	-	-	2
Ending balance	$ 84	$ 114	$ 4	$ -	$ -	$ 202

(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 recoveries	1	2	-	(1)	-	2

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

(in 000's)	For the Nine months ended September 30, 2018
	Commercial and industrial	Commercial real estate	Consumer real estate	Consumer loans Other	Unallocated	Total
Beginning balance	$ 7	$ 155	$ 10	$ 8	$ -	$ 180
Provision (credit) for loan losses	84	(26)	(6)	(7)	-	45
Charge-offs	(10)	(18)	-	(8)	-	(36)
Recoveries	3	3	-	7		13
Net (charge-offs) recoveries	(7)	(15)	-	(1)	-	(23)
Ending balance	$ 84	$ 114	$ 4	$ -	$ -	$ 202

(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)	September 30, 2018
	Commercial and industrial	Commercial real Estate	Consumer real estate	Consumer loans Other	Unallocated	Total
Period-end amount allocated to:
Loans individually evaluated for impairment	$ 76	$ -	$ -	$ -	$ -	$ 76
Loans collectively evaluated for impairment	8	114	4	-	-	126
	$ 84	$ 114	$ 4	$ -	$ -	$ 202
Loans, ending balance:
Loans individually evaluated for impairment	$ 152	$ 1,359	$ -	$ -	$ -	$ 1,511
Loans collectively evaluated for impairment	1,638	16,966	1,252	708	-	20,564
Total	$ 1,790	$ 18,325	$ 1,252	$ 708	$ -	$ 22,075

(in 000's)	December 31, 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	$ -	$ -	$ -	$ -	$ -	$ -
Loans collectively  evaluated for impairment	7	155	10	8	-	180
	$ 7	$ 155	$ 10	$ 8	$ -	$ 180
Loans, ending balance:
Loans individually evaluated for impairment	$ 76	$ 1,201	$ -	$ -	$ -	$ 1,277
Loans collectively  evaluated for impairment	1,722	20,188	1,729	809	-	24,448

Total  $ 1,798  $ 21,389  $ 1,729  $ 809  $ -  $ 25,725

Nonperforming and Nonaccrual and Past Due Loans

An age analysis of past due loans, segregated by class of loans, as of September 30, 2018 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	$ 70	$ -	$ 76	146	636	$ 782
SBA loans	-	-	-	-	-	-
Asset-based	-	-	125	125	883	1,008
Total Commercial and industrial	70	-	201	271	1,519	1,790
Commercial real estate:
Commercial mortgages	144	-	1,108	1,252	9,000	10,252
SBA loans	-	-	72	72	179	251
Construction	-	-	-	-	305	305
Religious organizations	-	126	179	305	7,212	7,517
Total Commercial real estate	144	126	1,359	1,629	16,696	18,325
Consumer real estate:
Home equity loans	-	150	283	433	205	638
Home equity lines of credit	-	-	-	-	15	15
1-4 family residential mortgages	31	-	26	57	542	599
Total consumer real estate	31	150	309	490	762	1,252
Total real estate	175	276	1,668	2,119	17,458	19,577
Consumer and other:
Student loans	42	17	-	59	563	622
Other	5	1	-	6	80	86
Total consumer and other	47	18	-	65	643	708
Total loans	$ 292	$ 294	$ 1,869	$ 2,455	$ 19,620	$ 22,075

An age analysis of past due loans, segregated by class of loans, as of December 31, 2017 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	$ -	$ -	$ -	$ -	$ 909	$ 909
SBA Loans	-	-	-	-	19	19
Asset-based	-	-	76	76	794	870
Total Commercial and industrial	-	-	76	76	1,722	1,798
Commercial real estate:
Commercial mortgages	50	208	935	1,193	10,478	11,671
SBA loans	-	-	81	81	588	669
Construction	-	-	-	-	419	419
Religious organizations	-	-	187	187	8,443	8,630
Total Commercial real estate	50	208	1,203	1,461	19,928	21,389
Consumer real estate:
Home equity loans	38	123	289	450	191	641
Home equity lines of credit	-	-	-	-	17	17
1-4 family residential mortgages	64	-	48	112	959	1,071
Total consumer real estate	102	123	337	561	1,168	1,729
Total real estate
Consumer and other:

Student loans	32	55	-	87	613	700
Other	6	1	-	7	102	109
Total consumer and other	38	56	-	94	715	809
Total loans	$ 190	$ 387	$ 1,616	$ 2,192	$ 23,533	$ 25,725

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 as well as loans that are 90 days or more past due and have not been placed on nonaccrual.  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.  

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, 2018
	Good/ Excellent	Satisfactory	Pass	Special Mention	Substandard	Doubtful	Total
Commercial and industrial:
Commercial	$ -	$ 492	$ -	$ -	$ 214	$ 76	$ 782
SBA loans	-	-	-	-	-	-	-
Asset-based	250	537	-	9	136	76	1,008
	250	1,029	-	9	350	152	1,790
Commercial real estate:
Commercial mortgages	-	7372	1,768	-	901	211	10,252
SBA Loans	-	178	-	-	73	-	251
Construction	-	305	-	-	-	-	305
Religious organizations	30	5,195	2,113	-	179	-	7,517
	30	13,050	3,881	-	1,153	211	18,325
Total commercial loans	$ 280	$ 14,079	$ 3,881	$ 9	$ 1,503	$ 363	$ 20,115

	Residential Mortgage and Consumer Loans September 30, 2018
	Performing	Nonperforming	Total
Consumer Real Estate:
Home equity	$     205	$     433	$     638
Home equity line of credit	15	-	15
1-4 family residential mortgages	573	26	599
	793	459	1,252
Consumer Other:
Student loans	605	17	622
Other	85	1	86
	690	18	708
Total  consumer loans	$  1,483	$     477	$    1,960

(In 000's)	Commercial Loans,   December 31, 2017
	Good/ Excellent	Satisfactory	Pass	Special Mention	Substandard	Doubtful	Total

Commercial and industrial:
Commercial	$ 250	$ 423	$ -	$ 19	$ 217	$ -	$ 909
SBA loans	-	-	19	-	-	-	19
Asset-based	-	549	152	-	93	76	870
	250	972	171	19	310	76	1,798
Commercial real estate:
Commercial mortgages	-	7,876	2,764	17	797	217	11,671
SBA Loans	-	588	-	-	81	-	669
Construction	-	419	-	-	-	-	419
Religious organizations	48	7,560	835	-	187	-	8,630
	48	16,443	3,599	17	1,065	217	21,389
Total commercial loans	$ 298	$ 17,415	$ 3,770	$ 36	$ 1,375	$ 293	$ 23,187

	Residential Mortgage and Consumer Loans December 31, 2017
	Performing	Nonperforming	Total
Consumer Real Estate:
Home equity	$ 352	$ 289	$ 641
Home equity line of credit	17	-	17
1-4 family residential mortgages	1,023	48	1,071
	1,392	337	1,729
Consumer Other:
Student loans	700	-	700
Other	109	-	109
	809	-	809
Total  consumer loans	$ 2,201	$ 337	$ 2,538

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 was one commercial real estate partial charge-off totaling $18,000 for the nine months ended September 30, 2018.

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 of September 30, 2018 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:
Commercial	$ 76	$ -	$ 76	$ 76	$ 76
SBA loans	-	-	-	-	-
Asset-based	76	76	-	76	-
Total commercial and industrial	152	76	76	152	76
Commercial real estate:
Commercial mortgages	1,108	1,108	-	1,108	-
SBA Loans	72	72	-	72	-
Religious organizations	179	179	-	179	-
Total commercial real estate	1,359	1,359	-	1,359	-
Total loans	$ 1,511	$ 1,435	$ 76	$ 1,511	$ 76

Impaired loans as of December 31, 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:
Commercial	$ -	$ -	$ -	$ -	$ -
SBA	-	-	-	-	-
Asset based	76	76	-	76	-
Total Commercial and industrial	76	76	-	76	-
Commercial real estate:
Commercial mortgages	933	933	-	933	-
SBA Loans	81	81	-	81	-
Religious Organizations	187	187	-	187	-
Total Commercial real estate	1,201	1,201	-	1,201	-
Total loans	$ 1,277	$ 1,277	$ -	$ 1,277	-

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, 2018		Three Months Ended September 30, 2017
	Average	Interest recognized	Average	Interest recognized
	Recorded	on impaired	Recorded	on impaired
	Investment	Loans	Investment	Loans
Commercial and industrial:
Commercial	$ 25	$ -	$ -	$ -
SBA loans	-	-	-	-
Asset-based	76	-	243	-
Total commercial and industrial	101	-	265	-
Commercial real estate:
Commercial mortgages	936	1	1,355	-
SBA loans	73	-	245	-
Religious organizations	180	-	189	-
Total Commercial real estate	1,189	-	1,789	-
Total loans	$ 1,290	$ 1	$ 2,032	$ -

(In 000's)	Nine Months Ended September 30, 2018		Nine Months Ended September 30, 2017
	Average	Interest recognized	Average	Interest recognized
	Recorded	on impaired	Recorded	on impaired
	Investment	Loans	Investment	Loans

Commercial and industrial:
Commercial	$ 8	$ 2	$ -	$ -
SBA  loans	-	-	-	-
Asset-based	76	-	261	-
Total commercial and industrial	84	2	270	-
Commercial real estate:
Commercial mortgages	946	1	1,355	-
SBA loans	76	-	249	-
Religious organizations	182	-	192	-
Total commercial real estate	1,204	-	1,796	-
Total loans	$ 1,288	$ 3	$ 2,057	$ -

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 not 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, 2018 and December 31, 2017.