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Loans

3 Months Ended

Mar. 31, 2018

(3)

Loans. The components of loans are as follows (in thousands):

	At March 31, 2018			At December 31, 2017

Residential real estate	$	26,996		$	26,054
Multi-family real estate		7,934			7,356
Commercial real estate		30,450			32,152
Land and construction		1,363			1,051
Commercial		5,518			4,522
Consumer		606			794

Total loans		72,867			71,929

Add (deduct):
Net deferred loan fees, costs and premiums		226			282
Allowance for loan losses		(3,993	)		(3,991	)

Loans, net	$	69,100		$	68,220

An analysis of the change in the allowance for loan losses follows (in thousands):

	Residential Real Estate			Multi-Family Real Estate		Commercial Real Estate			Land and Construction			Commercial			Consumer			Unallocated			Total
*Three Months Ended March 31, 2018:*

Beginning balance	$	641		$	59	$	759		$	22		$	55		$	86		$	2,369		$	3,991
Provision (credit) for loan losses		6			8		(47	)		—			224			(23	)		(168	)		—
Charge-offs		—			—		—			—			—			(9	)		—			(9	)
Recoveries		—			—		—			6			—			5			—			11

Ending balance	$	647		$	67	$	712		$	28		$	279		$	59		$	2,201		$	3,993

*Three Months Ended March 31, 2017:*
Beginning balance	$	310		$	58	$	787		$	120		$	188		$	165		$	2,287		$	3,915
(Credit) provision for loan losses		(8	)		15		31			(61	)		(62	)		(7	)		92			—
Charge-offs		—			—		—			—			—			(9	)		—			(9	)
Recoveries		—			—		—			6			—			3			—			9

Ending balance	$	302		$	73	$	818		$	65		$	126		$	152		$	2,379		$	3,915

	Residential Real Estate		Multi- Family Real Estate		Commercial Real Estate		Land and Construction		Commercial		Consumer		Unallocated		Total
*At March 31, 2018:*
Individually evaluated for impairment:
Recorded investment	$	973	$	—	$	228	$	—	$	2,375	$	—	$	—	$	3,576
Balance in allowance for loan losses	$	324	$	—	$	89	$	—	$	227	$	—	$	—	$	640

Collectively evaluated for impairment:
Recorded investment	$	26,023	$	7,934	$	30,222	$	1,363	$	3,143	$	606	$	—	$	69,291
Balance in allowance for loan losses	$	323	$	67	$	623	$	28	$	52	$	59	$	2,201	$	3,353

*At December 31, 2017:*
Individually evaluated for impairment:
Recorded investment	$	1,172	$	—	$	975	$	—	$	—	$	—	$	—	$	2,147
Balance in allowance for loan losses	$	330	$	—	$	83	$	—	$	—	$	—	$	—	$	413

Collectively evaluated for impairment:
Recorded investment	$	24,882	$	7,356	$	31,177	$	1,051	$	4,522	$	794	$	—	$	69,782
Balance in allowance for loan losses	$	311	$	59	$	676	$	22	$	55	$	86	$	2,369	$	3,578

	*Residential Real Estate, Multi-Family Real Estate, Commercial Real Estate, Land and Construction.* All loans are underwritten in accordance with policies set forth and approved by the Board of Directors (the “Board”), including repayment capacity and source, value of the underlying property, credit history and stability. Multi-family and commercial real estate loans are secured by the subject property and are underwritten based upon standards set forth in the policies approved by the Company’s Board. Such standards include, among other factors, loan to value limits, cash flow coverage and general creditworthiness of the obligors. Construction loans to borrowers finance the construction of owner occupied and leased properties. These loans are categorized as construction loans during the construction period, later converting to commercial or residential real estate loans after the construction is complete and amortization of the loan begins. Real estate development and construction loans are approved based on an analysis of the borrower and guarantor, the viability of the project and on an acceptable percentage of the appraised value of the property securing the loan. Real estate development and construction loan funds are disbursed periodically based on the percentage of construction completed. The Company carefully monitors these loans with on-site inspections and requires the receipt of lien waivers on funds advanced. Development and construction loans are typically secured by the properties under development or construction, and personal guarantees are typically obtained. Further, to assure that reliance is not placed solely on the value of the underlying property, the Company considers the market conditions and feasibility of proposed projects, the financial condition and reputation of the borrower and guarantors, the amount of the borrower’s equity in the project, independent appraisals, cost estimates and pre-construction sales information. The Company also makes loans on occasion for the purchase of land for future development by the borrower. Land loans are extended for future development for either commercial or residential use by the borrower. The Company carefully analyzes the intended use of the property and the viability thereof.

	*Commercial.* Commercial business loans and lines of credit consist of loans to small- and medium-sized companies in the Company’s market area. Commercial loans are generally used for working capital purposes or for acquiring equipment, inventory or furniture. Primarily all of the Company’s commercial loans are secured loans, along with a small amount of unsecured loans. The Company’s underwriting analysis consists of a review of the financial statements of the borrower, the lending history of the borrower, the debt service capabilities of the borrower, the projected cash flows of the business, the value of the collateral, if any, and whether the loan is guaranteed by the principals of the borrower. These loans are generally secured by accounts receivable, inventory and equipment. Commercial loans are typically made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business, which makes them of higher risk than residential loans and the collateral securing loans may be difficult to appraise and may fluctuate in value based on the success of the business. The Company seeks to minimize these risks through its underwriting standards.

	*Consumer.* Consumer loans are extended for various purposes, including purchases of automobiles, recreational vehicles, and boats. Also offered are home improvement loans, lines of credit, personal loans, and deposit account collateralized loans. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Loans to consumers are extended after a credit evaluation, including the creditworthiness of the borrower(s), the purpose of the credit, and the secondary source of repayment. Consumer loans are made at fixed and variable interest rates. Risk is mitigated by the fact that the loans are of smaller individual amounts.

The following summarizes the loan credit quality (in thousands):

	Pass		OLEM (Other Loans Especially Mentioned)		Sub- standard		Doubtful		Loss		Total
*At March 31, 2018:*
Residential real estate	$	26,023	$	—	$	973	$	—	$	—	$	26,996
Multi-family real estate		7,934		—		—		—		—		7,934
Commercial real estate		28,525		1,697		228		—		—		30,450
Land and construction		1,363		—		—		—		—		1,363
Commercial		2,440		703		2,375		—		—		5,518
Consumer		606		—		—		—		—		606

Total	$	66,891	$	2,400	$	3,576	$	—	$	—	$	72,867

*At December 31, 2017:*
Residential real estate	$	22,315	$	2,494	$	1,245	$	—	$	—	$	26,054
Multi-family real estate		7,356		—		—		—		—		7,356
Commercial real estate		24,704		6,473		975		—		—		32,152
Land and construction		1,051		—		—		—		—		1,051
Commercial		2,304		2,218		—		—		—		4,522
Consumer		794		—		—		—		—		794

Total	$	58,524	$	11,185	$	2,220	$	—	$	—	$	71,929

Internally assigned loan grades are defined as follows:

	Pass – a Pass loan’s primary source of loan repayment is satisfactory, with secondary sources very likely to be realized if necessary. These are loans that conform in all aspects to bank policy and regulatory requirements, and no repayment risk has been identified.

	OLEM – an Other Loan Especially Mentioned has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or the Company’s credit position at some future date.

	Substandard – a Substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Included in this category are loans that are current on their payments, but the Bank is unable to document the source of repayment. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

	Doubtful – a loan classified as Doubtful has all the weaknesses inherent in one classified as Substandard, with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future. The Company charges off any loan classified as Doubtful.

	Loss – a loan classified Loss is considered uncollectible and of such little value that continuance as a bankable asset is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future. The Company fully charges off any loan classified as Loss.

Age analysis of past-due loans is as follows (in thousands):

	Accruing Loans
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Nonaccrual Loans		Total Loans
*At March 31, 2018:*
Residential real estate	$	—	$	—	$	—	$	—	$	26,996	$	—	$	26,996
Multi-family real estate		—		—		—		—		7,934		—		7,934
Commercial real estate		—		—		—		—		30,450		—		30,450
Land and construction		—		—		—		—		1,363		—		1,363
Commercial		—		—		—		—		5,518		—		5,518
Consumer		—		—		—		—		606		—		606

Total	$	—	$	—	$	—	$	—	$	72,867	$	—	$	72,867

At December 31, 2017, no loans were past due more than thirty days and no loans were on nonaccrual.

The following summarizes the amount of impaired loans (in thousands):

	At March 31, 2018						At December 31, 2017
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Residential real estate	$	—	$	—	$	—	$	194	$	217	$	—
Commercial real estate		—		—		—		231		231		—
Commercial		1,436		1,436		—
With related allowance recorded:
Residential real estate	$	973		973		324		978		978		330
Commercial real estate	$	228		228		89		744		744		83
Commercial		939		939		227		—		—		—
Total
Residential real estate	$	973	$	973	$	324	$	1,172	$	1,195	$	330
Commercial real estate	$	228	$	228	$	89	$	975	$	975	$	83
Commercial		2,375		2,375		227	$	—	$	—	$	—
Total	$	3,576	$	3,576	$	640	$	2,147	$	2,170	$	413

The average net investment in impaired loans and interest income recognized and received on impaired loans are as follows (in thousands):

	For the Period Ended						For the Period Ended
	March 31, 2018						March 31, 2017
	Average Recorded Investment		Interest Income Recognized		Interest Income Received		Average Recorded Investment		Interest Income Recognized		Interest Income Received

Residential real estate	$	696	$	19	$	19	$	372	$	12	$	12
Commercial real estate	$	702	$	12	$	13	$	895	$	13	$	13
Commercial	$	537	$	17	$	17	$	—	$	—	$	—

Total	$	1,935	$	48	$	49	$	1,267	$	25	$	25

No loans have been determined to be troubled debt restructurings (TDR’s) during the three months ended March 31, 2018 or 2017. At March 31, 2018 and 2017, there were no loans modified and entered into TDR’s within past twelve months, that subsequently defaulted during the three months period ended March 31, 2018 or 2017.