Loans and Allowance for Loan Losses

6 Months Ended

Jun. 30, 2019

Loans and Allowance for Loan Losses

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)	June 30, 2019		December 31, 2018
Commercial and industrial	$	1,385	$	1,545
Commercial real estate		15,192		17,038
Consumer real estate		1,120		1,226
Consumer loans other		697		734
Total loans	$	18,394	$	20,543

There was no unearned discount at June 30, 2019 and December 31, 2018.

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 six months ended June 30, 2019, the Bank did not change any of its qualitative factors in any segment of the loan portfolio; however, the average historical loss factor increased significantly for commercial and industrial loans because of net charge-offs that resulted in an increase in general reserves. Credits to the provision for the six months ended June 30, 2019 were primarily related to decreases in the balance of 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. During the six months ended June 30, 2019, there was an increase in the commercial real estate reserve allocation because of the modification of an impaired commercial industrial loan to become secured by real estate.  Specific reserves allocated to this loan were reclassified to commercial real estate. 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 June 30, 2019
	Commercial and  industrial			Commercial real estate			Consumer real estate			Consumer loans  Other			Unallocated			Total
Beginning balance	$	85		$	101		$	4		$	-		$	33		$	223
(Credit) provision for loan losses		(32	)		97			(3	)		1			(33	)		30
Charge-offs		(5	)		(21	)		(12	)		(6	)		-			(44	)
Recoveries		1			8			13			5			-			27
Net (charge-offs) recoveries		(4	)		(13	)		1			(1	)		-			(17	)
Ending balance	$	49		$	185		$	2		$	-		$	-		$	236

(in 000's)	For the Three months ended June 30, 2018
	Commercial and industrial			Commercial real Estate			Consumer real estate			Consumer loans Other			Unallocated			Total
Beginning balance	$	8		$	158		$	6		$	10		$	20		$	202
Provision (credit) for loan losses		4			8			(2	)		-			(5	)		5
Charge-offs		(10	)		(18	)		-			(2	)		-			(30	)
Recoveries		1			2			-			-			-			3
Net charge-offs		(9	)		(16	)		-			(2	)		-			(27	)
Ending balance	$	3		$	150		$	4		$	8		$	15		$	180

(in 000's)	For the Six months ended June 30, 2019
	Commercial and  industrial			Commercial real  estate			Consumer real  estate			Consumer loans Other			Unallocated			Total
Beginning balance	$	102		$	139		$	4		$	-		$	33		$	278
(Credit) provision for loan losses		(37	)		59			(10	)		(1	)		(33	)		(22	)
Charge-offs		(19	)		(21	)		(12	)		(6	)		-			(58	)
Recoveries		3			8			20			7			-			38
Net (charge-offs) recoveries		(16	)		(13	)		8			1			-			(20	)
Ending balance	$	49		$	185		$	2		$	-		$	-		$	236

(in 000's)	For the Six months ended June 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		4			11			(6	)		1			15		25
Charge-offs		(10	)		(18	)		-			(7	)		-		(35	)
Recoveries		2			2			-			6			-		10
Net charge-offs		(8	)		(16	)		-			(1	)		-		(25	)
Ending balance	$	3		$	150		$	4		$	8		$	15	$	180

(in 000's)			June 30, 2019
	Commercial and industrial		Commercial real Estate		Consumer real estate		Consumer loans Other		Unallocated		Total
Period-end amount allocated to:
Loans individually evaluated for impairment	$	-	$	99	$	-	$	-	$	-	$	99
Loans collectively evaluated for impairment		49		86		2		-		-		137
	$	49	$	185	$	2	$	-	$	-	$	236
Loans, ending balance:
Loans individually evaluated for impairment	$	76	$	1,141	$	-	$	-	$	-	$	1,217
Loans collectively evaluated for impairment		1,309		14,051		1,120		697		-		17,177
Total	$	1,385	$	15,192	$	1,120	$	697	$	-	$	18,394

(in 000's)	December 31, 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	$	95	$	44	$	-	$	-	$	-	$	139
Loans collectively evaluated for impairment		7		95		4		-		33		139
	$	102	$	139	$	4	$	-	$	33	$	278
Loans, ending balance:
Loans individually evaluated for impairment	$	289	$	1,148	$	-	$	-	$	-	$	1,437
Loans collectively evaluated for impairment		1,256		15,890		1,226		734		-		19,106
Total	$	1,545	$	17,038	$	1,226	$	734	$	-	$	20,543

Nonperforming and Nonaccrual and Past Due Loans

An age analysis of past due loans, segregated by class of loans, as of June 30, 2019 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	$	-	$	-	$	-	$	-	$	1,050	$	1,050
SBA loans		-		-		-		-		-		-
Asset-based		-		-		76		76		259		335
Total Commercial and industrial		-		-		76		76		1,309		1,385
Commercial real estate:
Commercial mortgages		212		-		839		1,051		6,920		7,971
SBA loans		-		-		63		-		172		235
Construction		-		-		-		-		-		-
Religious organizations		289		-		179		468		6,518		6,986
Total Commercial real estate		501		-		1,081		1,519		13,610		15,192
Consumer real estate:
Home equity loans		-		149		250		399		160		559
Home equity lines of credit		-		-		-		-		14		14
1-4 family residential mortgages		-		-		-		-		547		547
Total consumer real estate		-		149		250		399		721		1,120
Total real estate		501		149		1,331		1,918		14,331		16,312
Consumer and other:
Student loans		19		31		-		50		566		616
Other		-		2		-		2		79		81
Total consumer and other		19		33		-		52		645		697
Total loans	$	520	$	182	$	1,407	$	2,109	$	16,285	$	18,394

An age analysis of past due loans, segregated by class of loans, as of December 31, 2018 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	$	-	$	-	$	-	$	-	$	1,055	$	1,055
SBA Loans		-		-		18		18		-		18
Asset-based		-		-		76		76		396		472
Total Commercial and industrial		-		-		94		94		1,451		1,545
Commercial real estate:
Commercial mortgages		-		45		902		947		8,585		9,532
SBA loans		-		-		69		69		179		248
Construction		-		-		-		-		-		-
Religious organizations		-		-		179		179		7,078		7,257
Total Commercial real estate		-		45		1,150		1,195		15,843		17,038
Consumer real estate:
Home equity loans		-		150		281		431		197		628
Home equity lines of credit		-		-		-		-		15		15
1-4 family residential mortgages		-		-		85		85		498		583
Total consumer real estate		-		150		366		516		710		1,226
Total real estate		-		195		647		1,711		16,553		18,264
Consumer and other:
Student loans		14		57		-		71		551		622
Other		1		-		-		1		111		112
Total consumer and other		15		57		-		72		662		734
Total loans	$	15	$	252	$	1,661	$	1,928	$	18,615	$	20,543

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 June 30, 2019
	Good/ Excellent		Satisfactory		Pass		Special Mention		Substandard		Doubtful		Total
Commercial and industrial:
Commercial	$	250	$	586	$	-	$	2	$	212	$	-	$	1,050
SBA loans		-		-		-		-		-		-		-
Asset-based		-		259		-		-		-		76		335
		250		845		-		2		212		76		1,385
Commercial real estate:
Commercial mortgages		-		5,551		1,733		-		489		198		7,971
SBA Loans		-		172		-		-		63		-		235
Construction		-		-		-		-		-		-		-
Religious organizations		13		4,587		2,055		-		331		-		6,986
		13		10,310		3,788		-		883		198		15,192
Total commercial loans	$	263	$	11,155	$	3,788	$	2	$	1,095	$	274	$	16,577

	Residential Mortgage and Consumer Loans June 30, 2019
	Performing		Nonperforming		Total
Consumer Real Estate:
Home equity	$	160	$	399	$	559
Home equity line of credit		14		-		14
1-4 family residential mortgages		547		-		547
		721		399		1,120
Consumer Other:
Student loans		585		31		616
Other		81		-		81
		666		31		697
Total consumer loans	$	1,387	$	430	$	1,817

(In 000's)	Commercial Loans,  December 31, 2018
	Good/ Excellent		Satisfactory		Pass		Special Mention		Substandard		Doubtful		Total
Commercial and industrial:
Commercial	$	250	$	592	$	-	$	-	$	213	$	-	$	1,055
SBA loans		-		-		-		-		-		-		18
Asset-based		-		272		124		-		18		76		472
		250		964		124		-		231		76		1,545
Commercial real estate:
Commercial mortgages		-		5,814		2,759		52		703		204		9,532
SBA Loans		-		179		-		-		69		-		248
Construction		-		-		-		-		-		-		-
Religious organizations		24		5,041		2,013		-		180		-		7,258
		24		11,034		4,772		52		952		204		17,038
Total commercial loans	$	274	$	11,898	$	4,896	$	52	$	1,183	$	280	$	18,583

	Residential Mortgage and Consumer Loans December 31, 2018
	Performing		Nonperforming		Total
Consumer Real Estate:
Home equity	$	197	$	431	$	628
Home equity line of credit		15		-		15
1-4 family residential mortgages		498		85		583
		710		516		1,226
Consumer Other:
Student loans		565		57		622
Other		112		-		112
		677		57		734
Total  consumer loans	$	1,387	$	573	$	1,960

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 for the six months ended June 30, 2019. 

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 June 30, 2019 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 loans		-		-		-		-		-
Asset-based		76		-		76		76		-
Total commercial and industrial		76		-		76		76		-
Commercial real estate:
Commercial mortgages		899		533		366		899		99
SBA Loans		63		63		-		63		-
Religious organizations		179		179		-		179		-
Total commercial real estate		1,141		775		366		1,141		99
Total loans	$	1,217	$	775	$	442	$	1,217	$	99

Impaired loans as of December 31, 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	$	213	$	-	$	213	$	213	$	81
SBA		-		-		-		-		-
Asset based		76		-		76		76		14
Total Commercial and industrial		289		-		289		289		95
Commercial real estate:
Commercial mortgages		898		739		159		898		13
SBA Loans		71		71		-		71		-
Religious Organizations		179		-		179		179		31
Total Commercial real estate		1,148		810		338		1,148		44
Total loans	$	1,437	$	810	$	627	$	1,437	$	139

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  June 30, 2019				Three Months Ended  June 30, 2018
	Average		Interest recognized		Average		Interest recognized
	Recorded		on impaired		Recorded		on impaired
	Investment		Loans		Investment		Loans
Commercial and industrial:
Commercial	$	-	$	-	$	-	$	-
SBA loans		-		-		-		-
Asset-based	76			-		76		-
Total commercial and industrial		76				76		-
Commercial real estate:
Commercial mortgages		921		2		958		-
SBA loans		64		-		76		-
Religious organizations		179		-		182		-
Total commercial real estate		1,164		2		1,216		-
Total loans	$	1,240	$	2	$	1,292	$	-

(In 000's)	Six Months Ended  June 30, 2019				Six Months Ended  June 30, 2018
	Average		Interest recognized		Average		Interest recognized
	Recorded		on impaired		Recorded		on impaired
	Investment		Loans		Investment		Loans
Commercial and industrial:
Commercial	$	-	$	-	$	-	$	-
SBA loans		-		-				-
Asset-based		76		-		76		-
Total commercial and industrial		76		-		76		-
Commercial real estate:
Commercial mortgages		921		5		951		-
SBA loans		64		-		77		-
Religious organizations		179		-		184		-
Total commercial real estate		1,164		5		1,212		-
Total loans	$	1,240	$	5	$	1,288	$	-

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 June 30, 2019 and December 31, 2018.