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6. Loans and Allowance For Loan Losses

9 Months Ended

Sep. 30, 2015

6. Loans and Allowance for Loan Losses

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

(Dollars in thousands)	September 30, 2015	December 31, 2014
Commercial and industrial	$3,351	$4,635
Commercial real estate	27,010	31,556
Consumer real estate	2,926	3,297
Consumer loans other	1,268	1,373
Total loans	$34,555	$40,861

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 annualized 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 nine months ended September 30, 2015, the Bank reduced several of its qualitative factors in the commercial real estate segment of the loan portfolio for which it has never experienced losses or charge-offs. In addition, the average historical loss factors increased for the commercial and industrial segment of the portfolio as a result of $212,000 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 September 30, 2015
	Commercial and industrial	Commercial real estate	Consumer real estate	Consumer loans Other	Total
Beginning balance	$320	$236	$23	$17	$596
Provision (credit) for loan losses	100	(9)	(4)	(4)	83

Charge-offs	(212)	-	-	(2)	(214)
Recoveries	2	-	1	1	4
Net (charge-offs) recoveries	(210)	-	1	(1)	(210)

Ending balance	$210	$227	$20	$12	$469

(in 000's)	For the Three months ended September 30, 2014
	Commercial and industrial	Commercial real estate	Consumer real estate	Consumer loans Other	Total
Beginning balance	$297	$295	$52	$13	$657
Provision (credit) for loan losses	74	5	(18)	1	62

Charge-offs	-	-	(19)	(7)	(26)
Recoveries	1	-	3	5	9
Net recoveries	1	-	(16)	(2)	(17)

Ending balance	$372	$300	$18	$12	$702

(in 000's)	For the Nine months ended September 30, 2015
	Commercial and industrial	Commercial real estate	Consumer real estate	Consumer loans Other	Total
Beginning balance	$403	$300	$20	$12	$735
Provision (credit) for loan losses	63	(73)	(4)	(3)	(17)

Charge-offs	(259)	-	-	(15)	(274)
Recoveries	3	-	4	18	25
Net (charge-offs) recoveries	(256)	-	4	3	(249)

Ending balance	$210	$227	$20	$12	$469

(in 000's)	For the Nine months ended September 30, 2014
	Commercial and industrial	Commercial real estate	Consumer real estate	Consumer loans other	Total
Beginning balance	$483	$280	$59	$17	$839
Provision (credit) for loan losses	139	20	(28)	1	132

Charge-offs	(253)	-	(19)	(25)	(297)
Recoveries	3	-	6	19	28
Net (charge-offs)recoveries	(250)	-	(13)	(6)	(269)

Ending balance	$372	$300	$18	$12	$702

(in 000's)	September 30, 2015
	Commercial and industrial	Commercial real estate	Consumer real estate	Consumer loans other	Total

Period-end amount allocated to:

Loans individually evaluated for impairment	$9	$47	$-	$-	$56
Loans collectively evaluated for impairment	201	180	20	12	413
	$210	$227	$20	$12	$469

Loans, ending balance:
Loans individually evaluated for impairment	$196	$1,491	$-	$-	$1,687
Loans collectively evaluated for impairment	3,155	25,519	2,926	1,268	32,868
Total	$3,351	$27,010	$2,926	$1,268	$34,555

	December 31, 2014
	Commercial and industrial	Commercial real estate	Consumer real estate	Consumer loans other	Total

Period-end amount allocated to:

Loans individually evaluated for impairment	$247	$27	$-	$-	$274
Loans collectively evaluated for impairment	156	273	20	12	461
	$403	$300	$20	$12	$735

Loans, ending balance:
Loans individually evaluated for impairment	$382	$1,623	$-	$-	$2,005
Loans collectively evaluated for impairment	4,253	29,933	3,297	1,373	38,856
Total	$4,635	$31,556	$3,297	$1,373	$40,861

Nonperforming and Nonaccrual and Past Due Loans

An age analysis of past due loans, segregated by class of loans, as of September 30, 2015 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	$-	$-	$110	$110	$1,532	$1,642
SBA loans	-	-	-	-	151	151
Asset-based	-	-	-	-	1,558	1,558
Total Commercial and industrial	-	-	110	110	3,241	3,351

Commercial real estate:
Commercial mortgages	606	54	969	1,629	11,770	13,399
SBA loans	-	-	109	109	564	673
Construction	-	-	-	-	2,529	2,529
Religious organizations	-	-	488	488	9,921	10,409
Total Commercial real estate	606	54	1,566	2,226	24,784	27,010

Consumer real estate:
Home equity loans	83	126	359	568	381	949
Home equity lines of credit	-	-	-	-	21	21
1-4 family residential mortgages	55	-	75	130	1,826	1,956
Total consumer real estate	138	126	434	698	2,228	2,926

Total real estate	744	180	2,000	2,924	27,012	29,936

Consumer and other:
Consumer installment	-	-	-	-	-	-
Student loans	55	91	-	146	995	1,141
Other	-	-	-	-	127	127
Total consumer and other	55	91	-	146	1,122	1,268

Total loans	$799	$271	$2,110	$3,180	$31,376	$34,555

An age analysis of past due loans, segregated by class of loans, as of December 31, 2014 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	$-	$-	$248	$248	$2,315	$2,563
SBA loans	-	-	48	48	120	168
Asset-based	-	-	-	-	1,904	1,904
Total Commercial and industrial	-	-	296	296	4,339	4,635

Commercial real estate:
Commercial mortgages	17	83	985	1,085	14,385	15,470
SBA loans	-	-	118	118	407	525
Construction	-	-	-	-	3,423	3,423
Religious organizations	-	-	520	520	11,618	12,138
Total Commercial real estate	17	83	1,623	1,723	29,833	31,556

Consumer real estate:
Home equity loans	246	-	368	614	433	1,047
Home equity lines of credit	-	-	-	-	22	22
1-4 family residential mortgages	-	-	194	194	2,034	2,228
Total consumer real estate	246	-	562	808	2,489	3,297

Total real estate	263	83	2,185	2,531	32,322	34,853

Consumer and other:
Consumer installment	-	-	-	-	7	7
Student loans	136	88	-	224	997	1,221
Other	12	-	-	12	133	145
Total consumer and other	148	88	-	236	1,137	1,373

Total loans	$411	$171	$2,481	$3,063	$37,798	$40,861

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 September 30, 2015
	Good/ Excellent	Satisfactory	Pass	Special Mention	Substandard	Doubtful	Total



Commercial and industrial:
Commercial	$250	$1,120	$18	$-	$254	$-	$1,642
SBA loans	-	8	103	-	40	-	151
Asset-based	-	1,312	124	-	46	76	1,558
	250	2,440	245	-	340	76	3,351
Commercial real estate:
Commercial mortgages	-	10,718	1,114	620	724	223	13,399
SBA Loans	-	399	165	-	109	-	673
Construction	-	2,529	-	-	-	-	2,529
Religious organizations	-	7,427	2,057	722	203	-	10,409
	-	21,073	3,336	1,342	1,036	223	27,010

Total commercial loans	$250	$23,513	$3,581	$1,342	$1,376	$299	$30,361


	Residential Mortgage and Consumer Loans September 30, 2015
	Performing	Nonperforming	Total

Consumer Real Estate:
Home equity	$500	$359	$949
Home equity line of credit	21	-	21
1-4 family residential mortgages	1,881	75	1,956
	2,492	434	2,926

Consumer Other:
Consumer Installment	-	-	-
Student loans	1,141	-	1,141
Other	127	-	127
	1,268	-	1,268

Total consumer loans	$3,760	$434	$4,194

Total loans				$34,555


(In 000's)	Commercial Loans, December 31, 2014
	Good/ Excellent	Satisfactory	Pass	Special Mention	Substandard	Doubtful	Total

Commercial and industrial:
Commercial	$300	$1,321	$474	$220	$113	$135	$2,563
SBA loans	-	80	-	-	88	-	168
Asset-based	-	1,734	124	-	46	-	1,904
	300	3,135	598	220	247	135	4,635
Commercial real estate:
Commercial mortgages	-	13,024	724	57	1,348	317	15,470
SBA Loans	-	237	170	-	118	-	525
Construction	-	3,423	-	-	-	-	3,423
Religious organizations	-	9,730	1,185	703	520	-	12,138
	-	26,414	2,079	760	1,986	317	31,556

Total commercial loans	$300	$29,549	$2,677	$980	$2,233	$452	$36,191


	Residential Mortgage and Consumer Loans December 31, 2014
	Performing	Nonperforming	Total

Consumer Real Estate:
Home equity	$679	$368	$1,047
Home equity line of credit	22	-	22
1-4 family residential mortgages	2,034	194	2,228
	2,735	562	3,297

Consumer Other:
Consumer Installment	7	-	7
Student loans	1,221	-	1,221
Other	145	-	145
	1,373	-	1,373

Total consumer loans	$4,108	$562	$4,670

Total loans				$40,861

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.

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, 2015 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	$322	$110	$-	$110	$-
SBA Loans	40	40	-	40	-
Asset-based	46	-	46	46	9
Total commercial and industrial	408	150	46	196	9

Commercial real estate:
Commercial mortgages	894	505	389	894	41
SBA Loans	109	-	109	109	6
Religious organizations	488	488	-	488	-
Total commercial real estate	1,491	996	498	1,491	47

Total loans	$1,899	$1,143	$544	$1,687	$56

Impaired loans as of December 31, 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	$501	$38	$210	$248	$199
SBA loans	94	46	48	94	48
Asset-based	40	40	-	40	-
Total commercial and industrial	635	124	258	382	247

Commercial real estate:
Commercial mortgages	985	616	369	985	27
SBA Loans	118	118	-	118	-
Religious organizations	520	520	-	520	-
Total commercial real estate	1,623	1,254	369	1,623	27

Total loans	$2,258	$1,378	$627	$2,005	$274

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, 2015		Three Months Ended September 30, 2014
	Average	Interest recognized	Average	Interest recognized
	Recorded	on impaired	Recorded	on impaired
	Investment	Loans	Investment	Loans

Commercial and industrial:
Commercial	$160	$-	$204	$3
SBA loans	40	1	48	-
Asset-based	46	1	-	-
Total commercial and industrial	246	2	252	3

Commercial real estate:
Commercial mortgages	976	-	995	-
SBA loans	110	-	122	-
Religious organizations	488	-	610	-
Total commercial real estate	1,574	-	1,727	-

Total loans	$1,820	$2	$1,979	$3


(In 000's)	Nine Months Ended September 30, 2015		Nine Months Ended September 30, 2014
	Average	Interest recognized	Average	Interest recognized
	Recorded	on impaired	Recorded	on impaired
	Investment	Loans	Investment	Loans

Commercial and industrial:
Commercial	$188	$-	$231	$3
SBA loans	58	2	48	-
Asset-based	36	2	-	-
Total commercial and industrial	282	4	279	3

Commercial real estate:
Commercial mortgages	971	-	931	3
SBA loans	112	-	125	1
Religious organizations	496	2	617	2
Total commercial real estate	1,579	2	1,673	6

Total loans	$1,861	$6	$1,952	$9

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, 2015 and December 31, 2014.