6. Loans and Allowance For Loan Losses

6 Months Ended

Jun. 30, 2014

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:

(Dollars in thousands)	June 30, 2014	December 31, 2013
Commercial and industrial	$4,703	$4,310
Commercial real estate	33,266	32,962
Consumer real estate	3,726	3,909
Consumer loans other	1,404	1,530
Total loans	$43,099	$42,711

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 pools of non-classified loans.

·       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 quarter ended June 30, 2014, 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 no significant charge-offs during the quarter. 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, 2014
	Commercial and industrial	Commercial real estate	Consumer real estate	Consumer loans other	Total
Beginning balance	$296	$297	$20	$13	$626
Provision for loan losses	1	(2)	31	-	30
Charge-offs	-	-	-	(11)	(11)
Recoveries	-	-	1	11	12
Net recoveries	-	-	1	-	1
Ending balance	$297	$295	$52	$13	$657

(in 000's)	For the Three months ended June 30, 2013
	Commercial and industrial	Commercial real estate	Consumer real estate	Consumer loans other	Total
Beginning balance	$614	$275	$48	$-	$937
Provision (credit) for loan losses	15	(65)	(6)	1	(55)
Charge-offs	(184)	-	-	(4)	(188)
Recoveries	1	78	2	3	84
Net (charge-offs) recoveries	(183)	78	2	(1)	(104)
Ending balance	$446	$288	$44	$-	$778

(in 000's)	For the Six months ended June 30, 2014
	Commercial and industrial	Commercial real estate	Consumer real estate	Consumer loans Other	Total
Beginning balance	$483	$280	$59	$17	$839
Provision for loan losses	65	15	(10)	-	70
Charge-offs	(253)	-	-	(18)	(271)
Recoveries	2	-	3	14	19
Net recoveries	(251)	-	3	(4)	(252)
Ending balance	$297	$295	$52	$13	$657

(in 000's)	For the Six months ended June 30, 2013
	Commercial and industrial	Commercial real estate	Consumer real estate	Consumer loans other	Total
Beginning balance	$891	$308	$5	$-	$1,204
Provision for loan losses	77	(98)	35	1	15
Charge-offs	(524)	-	-	(4)	(528)
Recoveries	2	78	4	3	87
Net (charge-offs) recoveries	(522)	78	4	(1)	(441)
Ending balance	$446	$288	$44	$-	$778

(in 000's)	June 30, 2014
	Commercial and industrial	Commercial real estate	Consumer real estate	Consumer loans other	Total
Period-end amount allocated to:
Loans individually evaluated for impairment	$121	$27	$-	$-	$148
Loans collectively  evaluated for impairment	176	268	52	13	509
	297	295	52	13	$657
Loans, ending balance:
Loans individually evaluated for impairment	$229	$1,737	$-	$-	$1,966
Loans collectively  evaluated for impairment	4,474	31,529	3,726	1,404	41,133
Total	$4,703	$33,266	$3,726	$1,404	$43,099

	December 31, 2013
	Commercial and industrial	Commercial real estate	Consumer real estate	Consumer loans other	Total
Period-end amount allocated to:
Loans indivdually evaluated for impairment	$378	$-	$-	$-	$378
Loans collectively  evaluated for impairment	105	280	59	17	461
	483	$280	$59	$17	$839
Loans, ending balance:
Loans indivdually evaluated for impairment	$492	$1,390	$-	$-	$1,882
Loans collectively  evaluated for impairment	3,818	31,572	3,909	1,530	40,829
Total	$4,310	$32,962	$3,909	$1,530	$42,711

Nonperforming and Nonaccrual and Past Due Loans

An age analysis of past due loans, segregated by class of loans, as of June 30, 2014 is as follows:

		Accruing
	Loans	Loans 90 or
(In 000's)	30-89 Days	More Days		Total Past	Current
	Past Due	Past Due	Nonaccrual	Due Loans	Loans	Total Loans
Commercial and industrial:
Commercial	$75	$-	$181	$256	$1,827	$2,083
SBA loans	-	-	48	48	604	652
Asset-based	-	-	-	-	1,968	1,968
Total Commercial and industrial	75	-	229	304	4,399	4,703
Commercial real estate:
Commercial mortgages	20	-	997	1,017	15,532	16,549
SBA loans	-	-	124	124	427	551
Construction	-	-	-	-	4,191	4,191
Religious organizations	-	-	616	616	11,359	11,975
Total Commercial real estate	20	-	1,737	1,757	31,509	33,266
Consumer real estate:
Home equity loans	-	-	413	413	712	1,125
Home equity lines of credit	-	-	-	-	23	23
1-4 family residential mortgages	-	-	309	309	2,269	2,578
Total consumer real estate	-	-	722	722	3,004	3,726
Total real estate	20	-	2,459	2,479	34,513	36,992
Consumer and other:
Consumer installment	-	-	-	-	9	9
Student loans	113	122	-	235	1,023	1,258
Other	3	-	-	3	134	137
Total consumer and other	116	122	-	238	1,166	1,404
Total loans	$211	$122	$2,688	$3,021	$40,078	$43,099

An age analysis of past due loans, segregated by class of loans, as of December 31, 2013 is as follows:

		Accruing
	Loans	Loans 90 or
	30-89 Days	More Days		Total Past	Current
(In 000's)	Past Due	Past Due	Nonaccrual	Due Loans	Loans	Total Loans
Commercial and industrial:
Commercial	$-	$-	$444	$444	$1,214	$1,658
SBA loans	-	-	130	130	455	585
Asset-based	-	-	-	-	2,067	2,067
Total Commercial and industrial	-	-	574	574	3,736	4,310
Commercial real estate:
Commercial mortgages	2	442	630	1,094	16,249	17,343
SBA loans	184	-	-	184	382	566
Construction	-	-	-	-	2,456	2,456
Religious organizations	-	-	629	629	11,968	12,597
Total Commercial real estate	206	442	1,259	1,907	31,055	32,962
Consumer real estate:
Home equity loans	209	147	115	471	705	1,176
Home equity lines of credit	-	-	-	-	24	24
1-4 family residential mortgages	125	-	242	367	2,342	2,709
Total consumer real estate	334	147	357	838	3,071	3,909
Total real estate	540	589	1,616	2,745	34,126	36,871
Consumer and other:
Consumer installment	-	-	-	-	16	16
Student loans	87	141	-	228	1,138	1,366
Other	5	-	-	5	143	148
Total consumer and other	92	141	-	233	1,297	1,530
Total loans	$632	$730	$2,190	$3,552	$39,159	$42,711

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.

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, 2014
	Good/Excellent	Satisfactory	Pass	Special Mention	Substandard	Doubtful	Total
Commercial and industrial:
Commercial	$250	$1,432	$220	$-	$43	$138	$2,083
SBA loans	-	564	-	40	48	-	652
Asset-based	-	1,797	125	46	-	-	1,968
	250	3,793	345	86	91	138	4,703
Commercial real estate:
Commercial mortgages	-	14,053	845	58	1,278	316	16,550
SBA Loans	-	256	171	-	124	-	551
Construction	-	4,191	-	-	-	-	4,191
Religious organizations	-	9,829	910	619	616	-	11,974
	-	28,329	1,926	677	2,018	316	33,266
Total commercial loans	$250	$32,122	$2,271	$763	$2,109	$454	$37,969

	Residential Mortgage and Consumer Loans June 30, 2014
	Performing	Nonperforming	Total
Consumer Real Estate:
Home equity	$712	$413	$1,125
Home equity line of credit	23	-	23
1-4 family residential mortgages	2,269	309	2,578
	3,004	722	3,726
Consumer Other:
Consumer Installment	9	-	9
Student loans	1,258	-	1,258
Other	137	-	137
	1,404	-	1,404
Total  consumer loans	$4,408	$722	$5,130
Total loans				$    43,099

(In 000's)	Commercial Loans, December 31, 2013
	Good/ Excellent	Satisfactory	Pass	Special Mention	Substandard	Doubtful	Total
Commercial and industrial:
Commercial	$250	$743	$220	$-	$52	$393	$1,658
SBA loans	-	497	-	40	48	-	585
Asset-based	-	1,897	124	46	-	-	2,067
	250	3,137	344	86	100	393	4,310
Commercial real estate:
Commercial mortgages	-	15,232	883	-	912	316	17,343
SBA Loans	-	265	171	-	150	-	566
Construction	-	2,456	-	-	-	-	2,456
Religious organizations	-	10,414	931	623	629	-	12,597
	-	28,367	1,985	623	1,671	316	32,962
Total commercial loans	$250	$31,504	$2,329	$709	$1,771	$709	$37,272

	Residential Mortgage and Consumer Loans December 31, 2013
	Performing	Nonperforming	Total
Consumer Real Estate:
Home equity	$1,061	$115	$1,176
Home equity line of credit	24	-	24
1-4 family residential mortgages	2,467	242	2,709
	3,552	357	3,909
Consumer Other:
Consumer Installment	16	-	16
Student loans	1,366	-	1,366
Other	148	-	148
	1,530	-	1,530
Total  consumer loans	$5,082	$357	$5,439
Total loans				$42,711

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. In March 2014, the Bank charged off approximately $253,000 related to one impaired loan for which specific reserves had been previously allocated. There were no other partial charge-offs.

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, 2014 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	$181	$44	$137	$181	$73
SBA Loans	48	-	48	48	48
Total commercial and industrial	229	44	185	229	121
Commercial real estate:
Commercial mortgages	997	621	376	997	27
SBA Loans	124	124	-	124	-
Religious organizations	616	616	-	616	-
Total commercial real estate	1,737	1,361	376	1,737	27
Total loans	$1,966	$1,405	$561	$1,966	$148

Impaired loans as of December 31, 2013 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	$444	$47	$397	$444	$330
SBA loans	48	-	48	48	48
Total commercial and industrial	492	47	445	492	378
Commercial real estate:
Commercial mortgages	630	630	-	630	-
SBA Loans	130	130	-	130	-
Religious organizations	630	630	-	630	-
Total commercial real estate	1,390	1,390	-	1,390	-
Total loans	$1,882	$1,437	$445	$1,882	$378

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.

		Three Months Ended		Three Months Ended
(In 000's)		June 30, 2014		June 30, 2013
	Average	Interest recognized	Average	Interest recognized
	Recorded	on impaired	Recorded	on impaired
	Investment	Loans	Investment	Loans
Commercial and industrial:
Commercial	$182	$-	$512	$-
SBA  loans	48	-	49	-
Asset-based	-	-	88	-
Total commercial and industrial	230	-	649	-
Commercial real estate:
Commercial mortgages	998	-	639	4
SBA loans	125	-	-	-
Religious organizations	617	-	657	-
Total commercial real estate	1,740	-	1,296	4
Total loans	$1,970	$-	$1,945	$4

		Six Months Ended		Six Months Ended
(In 000's)		June 30, 2014		June 30, 2013
	Average	Interest recognized	Average	Interest recognized
	Recorded	on impaired	Recorded	on impaired
	Investment	Loans	Investment	Loans
Commercial and industrial:
Commercial	$269	$-	$626	$-
SBA  loans	48	-	49	1
Asset-based	-	-	99	-
Total commercial and industrial	317	-	649	1
Commercial real estate:
Commercial mortgages	875	-	640	-
SBA loans	126	-	-	-
Religious organizations	620	2	614	-
Total commercial real estate	1,621	2	1,254	-
Total loans	$1,938	$2	$2,028	$1

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 June 30, 2014 and December 31, 2013.