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Loans

9 Months Ended

Sep. 30, 2019

(3)

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

	At September 30, 2019			At December 31, 2018

Residential real estate	$	26,683		$	27,204
Multi-family real estate		4,172			8,195
Commercial real estate		51,997			34,971
Land and construction		2,077			3,661
Commercial		4,674			4,997
Consumer		4,548			260

Total loans		94,151			79,288

Add (deduct):
Net deferred loan fees, costs and premiums		34			155
Allowance for loan losses		(2,104	)		(2,243	)

Loans, net	$	92,081		$	77,200

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 September 30, 2019:*

Beginning balance	$	537		$	41		$	658		$	7		$	558		$	11		$	241		$	2,053
(Credit) provision for loan losses		(5	)		—			87			7			32			165			(241	)		45
Charge-offs		—			—			—			—			—			—			—			—
Recoveries		—			—			—			6			—			—			—			6

Ending balance	$	532		$	41		$	745		$	20		$	590		$	176		$	—		$	2,104

*Three Months Ended September 30, 2018:*
Beginning balance	$	665		$	53		$	706		$	59		$	266		$	42		$	108		$	1,899
(Credit) provision for loan losses		(118	)		36			(208	)		(34	)		(4	)		(12	)		340			—
Charge-offs		—			—			—			—			—			—			—			—
Recoveries		—			—			—			6			—			—			—			6

Ending balance	$	547		$	89		$	498		$	31		$	262		$	30		$	448		$	1,905

*Nine Months Ended September 30, 2019:*

Beginning balance	$	544		$	88		$	545		$	37		$	850		$	25		$	154		$	2,243
(Credit) provision for loan losses		(12	)		(47	)		395			(35	)		(260	)		158			(154	)		45
Charge-offs		—			—			(195	)		—			—			(7	)		—			(202	)
Recoveries		—			—			—			18			—			—			—			18

Ending balance	$	532		$	41		$	745		$	20		$	590		$	176		$	—		$	2,104

*Nine Months Ended September 30, 2018:*
Beginning balance	$	641		$	59		$	725		$	56		$	55		$	86		$	2,369		$	3,991
(Credit) provision for loan losses		(94)			30			(227	)		(43	)		207			(52	)		(1,921	)		(2,100	)
Charge-offs		—			—			—			—			—			(12	)		—			(12	)
Recoveries		—			—			—			18			—			8			—			26

Ending balance	$	547		$	89		$	498		$	31		$	262		$	30		$	448		$	1,905

	Residential Real Estate		Multi- Family Real Estate		Commercial Real Estate		Land and Construction		Commercial		Consumer		Unallocated		Total
*At September 30, 2019:*
Individually evaluated for impairment:
Recorded investment	$	948	$	—	$	2,219	$	—	$	812	$	—	$	—	$	3,979
Balance in allowance for loan losses	$	262	$	—	$	—	$	—	$	556	$	—	$	—	$	818

Collectively evaluated for impairment:
Recorded investment	$	25,735	$	4,172	$	49,778	$	2,077	$	3,862	$	4,548	$	—	$	90,172
Balance in allowance for loan losses	$	270	$	41	$	745	$	20	$	34	$	176	$	—	$	1,286

*At December 31, 2018:*
Individually evaluated for impairment:
Recorded investment	$	954	$	—	$	3,861	$	—	$	1,928	$	—	$	—	$	6,743
Balance in allowance for loan losses	$	268	$	—	$	162	$	—	$	814	$	—	$	—	$	1,244

Collectively evaluated for impairment:
Recorded investment	$	26,250	$	8,195	$	31,110	$	3,661	$	3,069	$	260	$	—	$	72,545
Balance in allowance for loan losses	$	276	$	88	$	386	$	36	$	36	$	25	$	152	$	999

	The Company has divided the loan portfolio into six portfolio segments, each with different risk characteristics and methodologies for assessing risk. All loans are underwritten based upon standards set forth in the policies approved by the Company’s Board of Directors (the “Board”). The Company identifies the portfolio segments as follows: *Residential Real Estate, Multi-Family Real Estate, Commercial Real Estate, Land and Construction.* Residential real estate loans are underwritten based on repayment capacity and source, value of the underlying property, credit history and stability. The Company offers first and second one-to-four family mortgage loans; the collateral for these loans is generally the clients’ owner-occupied residences. Although these types of loans present lower levels of risk than commercial real estate loans, risks do still exist because of possible fluctuations in the value of the real estate collateral securing the loan, as well as changes in the borrowers’ financial condition. 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 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 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 September 30, 2019:*
Residential real estate	$	25,735	$	—	$	948	$	—	$	—	$	26,683
Multi-family real estate		4,172		—		—		—		—		4,172
Commercial real estate		49,334		444		2,219		—		—		51,997
Land and construction		823		1,254		—		—		—		2,077
Commercial		3,042		820		812		—		—		4,674
Consumer		4,548		—		—		—		—		4,548

Total	$	87,654	$	2,518	$	3,979	$	—	$	—	$	94,151

*At December 31, 2018:*
Residential real estate	$	26,250	$	—	$	954	$	—	$	—	$	27,204
Multi-family real estate		8,195		—		—		—		—		8,195
Commercial real estate		30,697		413		3,861		—		—		34,971
Land and construction		2,351		1,310		—		—		—		3,661
Commercial		2,362		707		1,928		—		—		4,997
Consumer		260		—		—		—		—		260

Total	$	70,115	$	2,430	$	6,743	$	—	$	—	$	79,288

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 net 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 effected in the future. The Company charges off any loan classified as Doubtful.

	Loss – a loan classified as 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 September 30, 2019:*
Residential real estate	$	—	$	—	$	—	$	—	$	26,683	$	—	$	26,683
Multi-family real estate		—		—		—		—		4,172		—		4,172
Commercial real estate		—		—		—		—		51,997		—		51,997
Land and construction		—		—		—		—		2,077		—		2,077
Commercial		—		—		—		—		3,862		812		4,674
Consumer		—		—		—		—		4,548		—		4,548

Total	$	—	$	—	$	—	$	—	$	93,339	$	812	$	94,151

	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 December 31, 2018:*
Residential real estate		$	—	$	—	$	—	$	—	$	27,204	$	—	$	27,204
Multi-family real estate			—		—		—		—		8,195		—		8,195
Commercial real estate			—		—		—		—		33,591		1,380		34,971
Land and construction			—		—		—		—		3,661		—		3,661
Commercial			—		—		—		—		4,997		—		4,997
Consumer			—		—		—		—		260		—		260

Total		$	—	$	—	$	—	$	—	$	77,908	$	1,380	$	79,288

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

	At September 30, 2019						At December 31, 2018
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial real estate	$	2,219	$	2,219	$	—	$	2,259	$	2,259	$	—
Commercial		—		—		—		1,114		1,114		—
With related allowance recorded:
Residential real estate		948		948		262		954		954		268
Commercial real estate		—		—		—		1,602		1,602		162
Commercial		812		812		556		814		814		814
Total:
Residential real estate	$	948	$	948	$	262	$	954	$	954	$	268
Commercial real estate	$	2,219	$	2,219	$	—	$	3,861	$	3,861	$	162
Commercial	$	812	$	812	$	556	$	1,928	$	1,928	$	814
Total	$	3,979	$	3,979	$	818	$	6,743	$	6,743	$	1,244

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

	Three Months Ended September 30,
	2019						2018
	Average		Interest		Interest		Average		Interest		Interest
	Recorded		Income		Income		Recorded		Income		Income
	Investment		Recognized		Received		Investment		Recognized		Received

Residential real estate	$	950	$	19	$	19	$	962	$	19	$	19
Commercial real estate	$	2,280	$	27	$	27	$	223	$	3	$	3
Commercial	$	812	$	—	$	—	$	2,058	$	26	$	15
Total	$	4,042	$	46	$	46	$	3,243	$	48	$	37

	Nine Months Ended September 30,
	2019						2018
	Average		Interest		Interest		Average		Interest		Interest
	Recorded		Income		Income		Recorded		Income		Income
	Investment		Recognized		Received		Investment		Recognized		Received

Residential real estate	$	950	$	56	$	56	$	988	$	57	$	57
Commercial real estate	$	2,808	$	88	$	86	$	449	$	18	$	18
Commercial	$	1,327		43	$	39	$	1,541		60	$	60
Total	$	5,085	$	187	$	181	$	2,978	$	135	$	135

The restructuring of a loan constitutes a troubled debt restructuring (“TDR”) if the creditor grants a concession to the debtor that it would not otherwise consider in the normal course of business. A concession may include an extension of repayment terms which would not normally be granted, a reduction in interest rate or the forgiveness of principal and/or accrued interest. All TDRs are evaluated individually for impairment on a quarterly basis as part of the allowance for loan losses calculation. The Company entered into two new TDRs during the three and nine months ended September 30, 2019.

	Three Months Ended September 30,
	2019								2018
			Pre-		Post-		Current				Pre-		Post-		Current
			Modification		Modification		Modification				Modification		Modification		Modification
	Number		Outstanding		Outstanding		Outstanding		Number		Outstanding		Outstanding		Outstanding
	of		Recorded		Recorded		Recorded		of		Recorded		Recorded		Recorded
	Contracts		Investment		Investment		Investment		Contracts		Investment		Investment		Investment
( dollars in thousands)
*Troubled Debt Restructurings -*
Modified principal
Commercial real estate		-	$	-	$	-	$	-		-	$	-	$	-	$	-
Residential and home equity		-		-		-		-		-		-		-		-
Commercial		2		812		812		812		-		-		-		-
Total		2	$	812	$	812	$	812		-	$	-	$	-	$	-

	Nine Months Ended September 30,
	2019								2018
			Pre-		Post-		Current				Pre-		Post-		Current
			Modification		Modification		Modification				Modification		Modification		Modification
	Number		Outstanding		Outstanding		Outstanding		Number		Outstanding		Outstanding		Outstanding
	of		Recorded		Recorded		Recorded		of		Recorded		Recorded		Recorded
	Contracts		Investment		Investment		Investment		Contracts		Investment		Investment		Investment
( dollars in thousands)
*Troubled Debt Restructurings -*
Modified principal
Commercial real estate		-	$	-	$	-	$	-		-	$	-	$	-	$	-
Residential and home equity		-		-		-		-		-		-		-		-
Commercial		2		812		812		812		-		-		-		-
Total		2	$	812	$	812	$	812		-	$	-	$	-	$	-

At September 30, 2019, the Company has $812,000 in loans identified as TDRs. The TDRs entered into during the past 12 months did not subsequently default during the three and nine month periods ended September 30, 2019 and 2018.