Note

Loans and Allowance for Loan Losses

The Company

’s loan and allowance for loan losses policies are as follows:

Loans Receivable

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the allowance for loan losses and any unamortized deferred fees or costs on originated loans.

For loans amortized at cost, interest income is accrued based on the unpaid princip

al balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.

The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is

days past due unless the credit is well-secured and

in process of collection. Past-due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but

not

collected for loans that are placed on nonaccrual or charged off

is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when ma

nagement believes the non-collectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management

’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that

may

affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired,

an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical charge-off experience and expected loss given default derived from the Bank’s internal risk rating process.

Other adjustments

may

be made to

the allowance for pools of loans after an assessment of internal or external influences on credit quality that are

not

fully reflected in the historical loss or risk rating data.

Classes of loans

June 30, 2017

and

December 31, 2016

include:

	June 30,			December 31,
	2017			2016
	(Unaudited)
	(In thousands)
Real estate loans
Residential	$	43,989		$	43,036
Commercial		38,077			32,175
Construction and land		9,669			9,543
Commercial business		1,428			383
Consumer and other		654			776

Total loans		93,817			85,913

Less:
Net deferred loan fees, premiums and discounts		(237	)		(70	)
Undisbursed loans in process		(1,663	)		(1,772	)
Allowance for loan losses		(1,086	)		(1,063	)

Net loans	$	90,831		$	83,008

Residential

Real Estate:

The residential real estate loans are generally secured by owner-occupied

family residences. The Bank’s portfolio of home equity loans totaled

$4.5

million and

$4.7

million at

June 30, 2017

and

December 31, 2016,

respectively, the majority of which were secured by

first

liens, or by

second

liens on properties where the Bank also holds the

first

lien. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers. Credit risk in these loans can be impacted by economic conditions within the Bank’s market areas that might impact either property values or a borrower’s personal income. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Commercial Real Estate:

Commercial real estate loans typically involve larger principal amounts, and repayment of these loans is generally dependent on the successful operations of the property securing the loan or the business conducted on the property securing the loan. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Credit risk in these loans

may

be impacted by the creditworthiness of a borrower, property values and the local economy in the Bank’s market area.

Construction and Land:

Construction and land loans are usually based upon estimates of costs and estimated value of the completed project and include independent appraisal reviews and a financial analysis of the developers and property owners. Sources of repayment of these loans

may

include permanent loans, sales of developed property or an interim loan commitment from the Bank until permanent financing is obtained. These loans are considered to be higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. Credit risk in these loans

may

be impacted by the creditworthiness of a borrower, property values and the local economy in the Bank’s market area.

Commercial

Business

The commercial business loan portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation. Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations.

Consumer:

The consumer loan portfolio consists of various term and line of credit loans such as automobile loans and loans for other personal purposes. Repayment for these types of loans will come from a borrower’s income sources that are typically independent of the loan purpose. Credit risk is driven by consumer economic factors (such as unemployment and general economic conditions in the Bank’s market area) and the creditworthiness of a borrower.

The following table

s present by portfolio segment, the activity in the allowance for loan losses for the

three

and

six

months ended

June 30, 2017

and

2016:

	For the Three Months Ended June 30, 2017
	Real Estate
						Construction			Commercial
	Residential			Commercial		and Land			Business		Consumer		Total
	(In thousands)

Allowance for loan losses:
Balance, April 1, 2017	$	578		$	365	$	78		$	13	$	8	$	1,042
Provision (credit) for loan losses		(33	)		64		(2	)		2		-		31
Charge-offs		-			-		-			-		-		-
Recoveries		-			13		-			-		-		13

Balance, June 30, 2017	$	545		$	442	$	76		$	15	$	8	$	1,086

	For the Six Months Ended June 30, 2017
Allowance for loan losses:
Balance, January 1, 2017	$	656		$	326	$	72	$	4	$	5	$	1,063
Provision (credit) for loan losses		(99	)		112		4		11		3		31
Charge-offs		(12)			(9)		-		-		-		(21	)
Recoveries		-			13		-		-		-		13

Balance, June 30, 2017	$	545		$	442	$	76	$	15	$	8	$	1,086

	For the Three Months Ended June 30, 2016
Allowance for loan losses:	(In thousands)
Balance, April 1, 2016	$	739	$	311	$	91		$	7		$	7		$	1,155
Provision for loan losses		27		20		(44	)		(1	)		(2	)		-
Charge-offs		-		-		-			-			-			-
Recoveries		-		-		41			-			-			41

Balance, June 30, 2016	$	766	$	331	$	88		$	6		$	5		$	1,196

	For the Six Months Ended June 30, 2016
Allowance for loan losses:	(In thousands)
Balance, January 1, 2016	$	648	$	383		$	102		$	19		$	3	$	1,155
Provision for loan losses		118		(52	)		(55	)		(13	)		2		-
Charge-offs		-		-			-			-			-		-
Recoveries		-		-			41			-			-		41

Balance, June 30, 2016	$	766	$	331		$	88		$	6		$	5	$	1,196

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and

impairment method as of

June 30, 2017

and

December 31, 2016:

	At June 30, 2017
	Real Estate
					Construction		Commercial
	Residential		Commercial		and Land		Business		Consumer		Total
	(In thousands)

Allowance for loan losses:
Ending balance, individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-

Ending balance, collectively evaluated for impairment	$	545	$	442	$	76	$	15	$	8	$	1,086

Loans:
Ending balance	$	43,989	$	38,077	$	9,669	$	1,428	$	654	$	93,817

Ending balance; individually evaluated for impairment	$	1,130	$	34	$	1,648	$	-	$	-	$	2,812

Ending balance; collectively evaluated for impairment	$	42,859	$	38,043	$	8,021	$	1,428	$	654	$	91,005

	December 31, 2016
	Real Estate
					Construction		Commercial
	Residential		Commercial		and Land		Business		Consumer		Total
	(In thousands)

Allowance for loan losses:

Ending balance, individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-

Ending balance, collectively evaluated for impairment	$	656	$	326	$	72	$	4	$	5	$	1,063

Loans:
Ending balance	$	43,036	$	32,175	$	9,543	$	383	$	776	$	85,913

Ending balance; individually evaluated for impairment	$	2,779	$	533	$	1,709	$	-	$	-	$	5,021

Ending balance; collectively evaluated for impairment	$	40,257	$	31,642	$	7,834	$	383	$	776	$	80,892

Internal Risk Categories

The Bank has adopted a standard loan grading system for all loans. Loans are selected for a grading review based on certain characteristics, including concentrations of credit and upon delinquency of

days or more. Definitions are as follows:

Pass

Loans categorized as Pass are higher quality loans that do

not

fit any of the other categories described below.

Special Mention

/Watch

: The loans identified as special mention/watch have an obvious flaw or a potential weakness that deserves special management attention, but which has

not

yet impacted collectability. These flaws or weaknesses, if left uncorrected,

may

result in the deterioration of the prospects of repayment or the deterioration of the Bank’s credit position.

Substandard

These are loans with a well-defined weakness, where the Bank has a serious concern about the borrower’s ability to make full repayment if the weaknesses are

not

corrected. The loan

may

contain a flaw, which could impact the borrower’s ability to repay, or the borrower’s continuance as a “going concern”. When collateral values are

not

sufficient to secure the loan and other weaknesses are present, the loan

may

be rated substandard. A loan will also be graded substandard when full repayment is expected, but it must come from the liquidation of collateral. All loans that are past due

days or more are classified as substandard.

Doubtful

: These are loans with major defined weaknesses, where future charge-off of a part of the credit is highly likely. The primary repayment source is

longer viable and the viability of the secondary source of repayment is in doubt. The amount of loss is uncertain due to circumstances within the credit that are

not

yet fully developed and the loan is rated “Doubtful” until the loss can be accurately estimated.

Loss

: These are loans that represent near term charge-offs. Loans classified as loss are considered uncollectible and of such little value that it is

not

desirable to continue carrying them as assets on the Bank’s financial statements, even though partial recovery

may

be possible at some future time.

The following tables present the credit risk profile of the

Company’s loan portfolio based on internal rating category and payment activity as of

June 30, 2017

and

December 31, 2016:

	June 30, 2017
	Real Estate
					Construction		Commercial
	Residential		Commercial		and Land		Business		Consumer		Total
	(In thousands)

Pass	$	42,054	$	37,550	$	8,441	$	1,428	$	654	$	90,127
Special mention/Watch		304		-		-		-		-		304
Substandard		1,631		527		1,228		-		-		3,386
Doubtful		-		-		-		-		-		-

Total	$	43,989	$	38,077	$	9,669	$	1,428	$	654	$	93,817

	December 31, 2016
	Real Estate
					Construction		Commercial
	Residential		Commercial		and Land		Business		Consumer		Total
	(In thousands)
Pass	$	40,724	$	31,677	$	8,520	$	348	$	766	$	82,035
Special mention/Watch		415		-		-		-		10		425
Substandard		1,897		498		1,023		35		-		3,453
Doubtful		-		-		-		-		-		-

Total	$	43,036	$	32,175	$	9,543	$	383	$	776	$	85,913

The Company evaluates the loan risk grading system definitions and allowance for loan losses methodology on an ongoing basis.

significant changes were made to either during the past year.

The following tables present the

Company’s loan portfolio aging analysis of the recorded investment in loans as of

June 30, 2017

and

December 31, 2016:

	June 30, 2017 (Unaudited)
													Total Loans >
	30-59 Days		60-89 Days		Greater Than		Total				Total Loans		90 Days &
	Past Due		Past Due		90 Days		Past Due		Current		Receivable		Accruing
	(In thousands)
Real estate
Residential	$	84	$	-	$	91	$	175	$	43,814	$	43,989	$	-
Commercial		-		-		-		-		38,077		38,077		-
Construction and land		-		-		-		-		9,669		9,669		-
Commercial business		-		-		-		-		1,428		1,428		-
Consumer		-		-		-		-		654		654		-

Total	$	84	$	-	$	91	$	175	$	93,642	$	93,817	$	-

	December 31, 2016
													Total Loans >
	30-59 Days		60-89 Days		Greater Than		Total				Total Loans		90 Days &
	Past Due		Past Due		90 Days		Past Due		Current		Receivable		Accruing
	(In thousands)
Real estate
Residential	$	194	$	-	$	327	$	521	$	42,515	$	43,036	$	-
Commercial		-		-		4		4		32,171		32,175		-
Construction and land		-		-		-		-		9,543		9,543		-
Commercial business		-		-		-		-		383		383		-
Consumer		-		-		-		-		776		776

Total	$	194	$	-	$	331	$	525	$	85,388	$	85,913	$	-

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC

310

), when based on current information and events, it is probable the

Bank will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming multi-family and commercial loans but also include loans modified in troubled debt restructurings.

The following table presents impaired loans as of

June 30, 2017

and for the

three

and

six

month periods ended

June 30, 2017

and

2016:

	As of						For the Three Months Ended
	June 30, 2017						June 30, 2017				June 30, 2016
			Unpaid				Average Balance of		Interest		Average Balance of		Interest
	Recorded Balance		Principal Balance		Specific Allowance		Impaired Loans		Income Recognized		Impaired Loans		Income Recognized
	(Unaudited)
	(In thousands)
Loans without a specific valuation allowance:
Real estate
Residential	$	1,130	$	1,256	$	-	$	1,002	$	32	$	1,280	$	14
Commercial		34		34		-		34		-		241		4
Construction and land		1,648		1,648		-		1,682		21		1,554		21
Commercial business						-		-		-		-		-
Consumer		-		-		-		-		-		-		-

Loans with a specific valuation allowance:
Real estate
Residential		-		-		-		-		-		468		7
Commercial		-		-		-		-		-		-		-
Construction and land		-		-		-		-		-		-		-
Commercial business		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		-

Totals	$	2,812	$	2,938	$	-	$	2,718	$	53	$	3,543	$	46

											For the six Months Ended

	As of and for the six months ended June 30, 2017										June 30, 2016
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Balance of Impaired Loans		Interest Income Recognized		Average Balance of Impaired Loans		Interest Income Recognized
	(In thousands)
Loans without a specific valuation allowance:
Real estate
Residential	$	1,130	$	1,256	$	-	$	964	$	28	$	1,286	$	28
Commercial		34		34		-		34		1		237		8
Construction and land		1,648		1,648		-		1,691		46		1,562		42
Commercial business		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		-

Loans with a specific valuation allowance:
Real estate
Residential		-		-		-		-		-		469		8
Commercial		-		-		-		-		-		-		-
Construction and land		-		-		-		-		-		-		-
Commercial business		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		-

Totals	$	2,812	$	2,938	$	-	$	2,689	$	75	$	3,554	$	86

The following table presents impaired loans as of

December 31, 2016:

	As of December 31, 2016
	Recorded Balance		Unpaid Principal Balance		Specific Allowance
	(In thousands)
Loans without a specific valuation allowance:
Real estate
Residential	$	2,779	$	2,936	$	-
Commercial		533		560		-
Construction and land		1,709		1,709		-
Commercial business		-		-		-
Consumer		-		-		-

Loans with a specific valuation allowance:
Real estate
Residential		-		-		-
Commercial		-		-		-
Construction and land		-		-		-
Commercial business		-		-		-
Consumer		-		-		-

Totals	$	5,021	$	5,205	$	-

The following table presents the

Company’s nonaccrual loans at

June 30, 2017

and

December 31, 2016.

The table excludes performing troubled debt restructurings.

	June 30,		December 31,
	2017		2016

	(In thousands)
Real estate loans
Residential	$	455	$	614
Commercial		-		4
Construction and land		-		-
Commercial business		-		-
Consumer and other		-		-

Total nonaccrual	$	455	$	618

June 30, 2017 (

unaudited) and

December 31, 2016,

the Company had certain loans that were modified in troubled debt restructurings (TDRs) and impaired. The modification of terms of such loans generally included

one

or a combination of the following: an extension of the maturity date or a reduction of the stated interest rate.

During the

three

and

six

months ended

June 30, 2017

and

2016,

there were

new loan modifications classified as TDRs.

The

Company had

TDRs modified in the

twelve

months ended

June 30, 2017

and

2016

that subsequently defaulted. A loan is considered to be in payment default once it is

days contractually past due under the loan’s modified terms.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the

Bank’s internal underwriting policy.

Foreclosed real estate held for sale consisted of residential real estate at

June 30, 2017

and

December 31, 2016.

There were

$290,000

and

$323,000

of residential real estate loans in the process of foreclosure at

June 30, 2017

and

December 31, 2016,

respectively.