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6. Loans and Allowance For Loan Losses

9 Months Ended

Sep. 30, 2016

6. Loans and Allowance for Loan Losses

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

(in 000’s)	September 30, 2016	December 31, 2015
Commercial and industrial	$ 2,292	$ 3,062
Commercial real estate	22,442	26,414
Consumer real estate	2,517	2,841
Consumer loans other	1,054	1,202
Total loans	$28,305	$ 33,519

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 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, 2016, 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 and for improvement in credit quality during the year resulting in a credit to the provision 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, 2016
	Commercial and industrial			Commercial real estate		Consumer real estate	Consumer loans Other	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-offs) recoveries	1			(1)		6	1	7

Ending balance	$ 129			$ 169		$ 8	$ 11	$ 317
(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-off) recoveries	(210)		-		1		(1)	(210)

Ending balance	$ 210		$ 227		$ 20		$ 12	$ 469
(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)		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)		September 30, 2016
	Commercial and industrial		Commercial real estate	Consumer real estate	Consumer loans Other	Total

Period-end amount allocated to:

Loans individually evaluated for impairment	$ -		$ 71	$ -	$ -	$ 71
Loans collectively evaluated for impairment	129		98	8	11	246
	$ 129		$ 169	$ 8	$ 11	$ 317

Loans, ending balance:
Loans individually evaluated for impairment	$ 437		$ 1,738	$ -	$ -	$ 2,175
Loans collectively evaluated for impairment	1,855		20,704	2,517	1,054	26,130
Total	$ 2,292		$ 22,442	$ 2,517	$ 1,054	$ 28,305

(in 000's)			December 31, 2015
	Commercial and industrial	Commercial real estate	Consumer real estate	Consumer loans Other	Total

Period-end amount allocated to:

Loans individually evaluated for impairment	$ -	$ 91	$ -	$ -	$ 91
Loans collectively evaluated for impairment	151	159	8	9	327
	$ 151	$ 250	$ 8	$ 9	$ 418

Loans, ending balance:
Loans individually evaluated for impairment	$ 439	$ 2,076	$ -	$ -	$ 2,515
Loans collectively evaluated for impairment	2,623	24,338	2,841	1,202	31,004
Total	$ 3,062	$ 26,414	$ 2,841	$ 1,202	$ 33,519

Nonperforming and Nonaccrual and Past Due Loans

An age analysis of past due loans, segregated by class of loans, as of September 30, 2016 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	$ 30	$ -	$ 109	$ 139	$ 820	$ 959
SBA loans	-	-	39	39	-	39
Asset-based	-	-	289	289	1,005	1,294
Total Commercial and industrial	30	-	437	467	1,825	2,292

Commercial real estate:
Commercial mortgages	-	14	1,280	1,294	10,608	11,902
SBA loans	-	-	259	259	162	421
Construction	-	-	-	-	843	843
Religious organizations	-	-	199	199	9,077	9,276
Total Commercial real estate	-	14	1,738	1,752	20,690	22,442

Consumer real estate:
Home equity loans	30	147	323	500	311	811
Home equity lines of credit	-	-	-	-	19	19
1-4 family residential mortgages	34	-	136	170	1,517	1,687
Total consumer real estate	64	147	459	670	1,847	2,517

Total real estate	64	161	2,197	2,422	22,537	24,959

Consumer and other:
Student loans	85	38	-	123	741	864
Other	1	1	-	2	188	190
Total consumer and other	86	39	-	125	929	1,054

Total loans	$ 180	$ 200	$ 2,634	$ 3,014	$ 25,291	$ 28,305

An age analysis of past due loans, segregated by class of loans, as of December 31, 2015 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	$ -	$ -	$ 110	$ 110	$ 1,425	$ 1,535
SBA loans	-	-	40	40	-	40
Asset-based	11	-	289	300	1,187	1,487
Total Commercial and industrial	11	-	439	450	2,612	3,062

Commercial real estate:
Commercial mortgages	169	39	1,335	1,543	12,231	13,774
SBA loans	-	-	271	271	82	353
Construction	-	-	-	-	2,175	2,175
Religious organizations	-	-	471	471	9,641	10,112
Total Commercial real estate	169	39	2,077	2,285	24,129	26,414

Consumer real estate:
Home equity loans	56	125	358	539	358	897
Home equity lines of credit	-	-	-	-	20	20
1-4 family residential mortgages	35	-	129	164	1,760	1,924
Total consumer real estate	91	125	487	703	2,138	2,841

Total real estate	260	164	2,564	2,988	26,267	29,255

Consumer and other:
Student loans	66	129	-	195	886	1,081
Other	2	-	-	2	119	121
Total consumer and other	68	129	-	197	1,005	1,202

Total loans	$ 339	$ 293	$ 3,003	$ 3,635	$ 29,884	$ 33,519

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, 2016
	Good/ Excellent	Satisfactory		Pass	Special Mention	Substandard		Doubtful	Total



Commercial and industrial:
Commercial	$ 250	$ 344		$ 70	$ 43	$ 252		$ -	$ 959
SBA loans	-				-	39			39
Asset-based	-	727		202	-	289		76	1,294
	250	1,071		272	43	580		76	2,292
Commercial real estate:
Commercial mortgages	-	8,664		1,389	554	1,074		221	11,902
SBA Loans	-	162		-	-	259		-	421
Construction	-	843		-	-	-		-	843
Religious organizations	53	8,098		61	865	199		-	9,276
	53	17,767		1,450	1,419	1,532		221	22,442

Total commercial loans	$ 303	$ 18,838		$ 1,722	$ 1,462	$ 2,112		$ 297	$ 24,734


(In 000's)			Residential Mortgage and Consumer Loans September 30, 2016
	Performing			Nonperforming			Total

Consumer Real Estate:
Home equity	$ 488			$ 323			$ 811
Home equity line of credit	19			-			19
1-4 family residential mortgages	1,551			136			1,687
	2,058			459			2,517

Consumer Other:
Consumer Installment	-			-			-
Student loans	864			-			864
Other	190			-			190
	1,054			-			1,054

Total consumer loans	$ 3,112			$ 459			$ 3,571

(In 000's)			Commercial Loans, December 31, 2015
	Good/ Excellent	Satisfactory	Pass	Special Mention	Substandard	Doubtful	Total

Commercial and industrial:
Commercial	$ 285	$ 922	$ 16	$ 58	$ 254	$ -	$ 1,535
SBA loans	-	-	-	-	40	-	40
Asset-based	-	900	222	-	289	76	1,487
	285	1,822	238	58	583	76	3,062
Commercial real estate:
Commercial mortgages	-	10,689	1,098	613	1,151	223	13,774
SBA Loans	-	82	-	-	271	-	353
Construction	-	2,175	-	-	-	-	2,175
Religious organizations	-	7,624	1,131	886	471	-	10,112
	-	20,570	2,229	1,499	1,893	223	26,414

Total commercial loans	$ 285	$ 22,393	$ 2,467	$ 1,557	$ 2,476	$ 299	$ 29,476


			Residential Mortgage and Consumer Loans December 31, 2015

	Performing		Nonperforming		Total

Consumer Real Estate:
Home equity	$ 539		$ 358		$ 897
Home equity line of credit	20		-		20
1-4 family residential mortgages	1,795		129		1,924
	2,354		487		2,841

Consumer Other:
Consumer Installment	-		-		-
Student loans	1,081		-		1,081
Other	121		-		121
	1,202		-		1,202

Total consumer loans	$ 3,556		$ 487		$ 4,043

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, 2016 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	$ 109	$ 109	$ -	$ 109	$ -
SBA Loans	39	39	-	39	-
Asset-based	289	289	-	289	-
Total commercial and industrial	437	437	-	437	-

Commercial real estate:
Commercial mortgages	1,280	806	474	1,280	67
SBA Loans	259	162	97	259	4
Religious organizations	199	199	-	199	-
Total commercial real estate	1,738	1,167	571	1,738	71

Total loans	$ 2,175	$ 1,604	$ 571	$ 2,175	$ 71

Impaired loans as of December 31, 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	$ 818	$ 353	$ -	$ 353	$ -
SBA loans	46	46	-	46	-
Asset-based	40	40	-	40	-
Total commercial and industrial	904	439	-	439	-

Commercial real estate:
Commercial mortgages	1,334	810	524	1,334	91
SBA Loans	271	271	-	271	-
Religious organizations	471	471	-	471	-
Total commercial real estate	2,076	1,552	524	2,076	91

Total loans	$2,980	$ 1,991	$ 524	$ 2,515	$ 91

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, 2016		Three Months Ended September 30, 2015
	Average	Interest recognized	Average	Interest recognized
	Recorded	on impaired	Recorded	on impaired
	Investment	Loans	Investment	Loans

Commercial and industrial:
Commercial	$ 109	$ -	$ 160	$ -
SBA loans	39	-	40	1
Asset-based	289	-	46	1
Total commercial and industrial	437	-	246	2

Commercial real estate:
Commercial mortgages	1,280	1	976	-
SBA loans	162	-	110	-
Religious organizations	200	-	488	-
Total commercial real estate	1,642	1	1,574	-

Total loans	$ 2,079	$ 1	$ 1,820	$ 2

(In 000's)	Nine Months Ended September 30, 2016		Nine Months Ended September 30, 2015
	Average	Interest recognized	Average	Interest recognized
	Recorded	on impaired	Recorded	on impaired
	Investment	Loans	Investment	Loans

Commercial and industrial:
Commercial	$ 109	$ -	$ 188	$ -
SBA loans	39	-	58	2
Asset-based	289	-	36	2
Total commercial and industrial	437	-	282	4

Commercial real estate:
Commercial mortgages	1,422	5	971	-
SBA loans	304	3	112	-
Religious organizations	299	-	496	2
Total commercial real estate	2,025	8	1,579	2

Total loans	$ 2,462	$ 8	$ 1,861	$ 6

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, 2016 and December 31, 2015.