Loans and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2018

Loans and Allowance For Loan Losses [Abstract]

Loans and Allowance for Loan Losses

Note 3: Loans and Allowance for Loan Losses

Categories of loans include:

	September 30,			December 31,
	2018			2017
	(In thousands)
Commercial loans	$	89,844		$	81,327
Commercial real estate		215,793			198,936
Residential real estate		76,668			75,853
Installment loans		10,877			12,473
Total gross loans		393,182			368,589
Less allowance for loan losses		(2,004	)		(2,122	)
Total loans	$	391,178		$	366,467

The risk characteristics of each loan portfolio segment are as follows:

Commercial

Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may include a personal guarantee. Short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial Real Estate

Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The characteristics of properties securing the Company’s commercial real estate portfolio are diverse, but with geographic location almost entirely in the Company’s market area. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In general, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate versus nonowner-occupied loans.

Residential Real Estate and Installment

Residential Real Estate and Installment loans consist of two segments - residential mortgage loans and consumer personal loans. For residential mortgage loans that are secured by 1-4 family residences and are generally owner-occupied, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and consumer personal loans are secured by consumer personal assets, such as automobiles or recreational vehicles. Some consumer personal loans are unsecured, such as small installment loans and certain lines of credit. 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. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Allowance for Loan Losses and Recorded Investment in Loans

As of and for the three and nine month period ended September 30, 2018

	Commercial			Commercial  Real Estate			Residential  Real Estate			Installment			Unallocated			Total
(In thousands)
Allowance for loan losses:
Balance, July 1, 2018	$	545		$	654		$	505		$	376		$	—		$	2,080
Provision charged to expense		(130	)		28			109			65			—			72
Losses charged off		—			—			(98	)		(74	)		—			(172	)
Recoveries		1			1			1			21			—			24
Balance, September 30, 2018	$	416		$	683		$	517		$	388		$	—		$	2,004
Balance, January 1, 2018	$	537		$	843		$	436		$	218		$	88		$	2,122
Provision charged to expense		(124	)		(162	)		255			320			(88	)		201
Losses charged off		—			—			(177	)		(198	)		—			(375	)
Recoveries		3			2			3			48			—			56
Balance, September 30, 2018	$	416		$	683		$	517		$	388		$	—		$	2,004
Allocation:
Ending balance:  individually evaluated for impairment	$	19		$	85		$	—		$	—		$	—		$	104
Ending balance:  collectively evaluated for impairment	$	397		$	598		$	517		$	388		$	—		$	1,900
Loans:
Ending balance:  individually evaluated for impairment	$	78		$	811		$	—		$	95		$	—		$	984
Ending balance:  collectively evaluated for impairment	$	89,766		$	214,982		$	76,668		$	10,782		$	—		$	392,198

Allowance for Loan Losses and Recorded Investment in Loans

As of and for the three and nine month period ended September 30, 2017

	Commercial			Commercial  Real Estate			Residential  Real Estate			Installment			Unallocated			Total
(In thousands)
Allowance for loan losses:
Balance, July 1, 2017	$	532		$	845		$	447		$	291		$	177		$	2,292
Provision charged to expense		(26	)		13			1			43			(6	)		25
Losses charged off		(30	)		(59	)		(6	)		(40	)		—			(135	)
Recoveries		—			1			1			11			—			13
Balance, September 30, 2017	$	476		$	800		$	443		$	305		$	171		$	2,195
Balance, January 1, 2017	$	495		$	804		$	591		$	107		$	344		$	2,341
Provision charged to expense		10			57			(149	)		330			(173	)		75
Losses charged off		(30	)		(64	)		(6	)		(167	)		—			(267	)
Recoveries		1			3			7			35			—			46
Balance, September 30, 2017	$	476		$	800		$	443		$	305		$	171		$	2,195
Allocation:
Ending balance:  individually evaluated for impairment	$	3		$	120		$	—		$	—		$	—		$	123
Ending balance:  collectively evaluated for impairment	$	473		$	680		$	443		$	305		$	171		$	2,072
Loans:
Ending balance:  individually evaluated for impairment	$	95		$	661		$	—		$	305		$	—		$	1,061
Ending balance:  collectively evaluated for impairment	$	75,193		$	195,066		$	76,501		$	12,568		$	—		$	359,328

Allowance for Loan Losses and Recorded Investment in Loans

As of December 31, 2017

	Commercial		Commercial  Real Estate		Residential  Real Estate		Installment		Unallocated		Total
	(In thousands)
Allowance for loan losses:
Ending balance:  individually evaluated for impairment	$	—	$	73	$	—	$	—	$	—	$	73
Ending balance:  collectively evaluated for impairment	$	537	$	770	$	436	$	218	$	88	$	2,049
Loans:
Ending balance:  individually evaluated for impairment	$	83	$	619	$	—	$	306	$	—	$	1,008
Ending balance:  collectively evaluated for impairment	$	81,244	$	198,317	$	75,853	$	12,167	$	—	$	367,581

The following tables show the portfolio quality indicators.

	September 30, 2018
Loan Class	Commercial		Commercial Real Estate		Residential  Real Estate		Installment		Total
	(In thousands)
Pass Grade	$	89,754	$	214,254	$	76,668	$	10,782	$	391,458
Special Mention		—		464		—		—		464
Substandard		90		1,075		—		95		1,260
Doubtful		—		—		—		—		—
	$	89,984	$	215,793	$	76,668	$	10,877	$	393,182

	December 31, 2017
Loan Class	Commercial		Commercial Real Estate		Residential Real Estate		Installment		Total
	(In thousands)
Pass Grade	$	78,652	$	195,063	$	75,853	$	12,167	$	361,735
Special Mention		20		3,066		—		—		3,086
Substandard		2,655		807		—		306		3,768
Doubtful		—		—		—		—		—
	$	81,327	$	198,936	$	75,853	$	12,473	$	368,589

To facilitate the monitoring of credit quality within the loan portfolio, and for purposes of analyzing historical loss rates used in the determination of the ALLL, the Company utilizes the following categories of credit grades: pass, special mention, substandard, and doubtful. The four categories, which are derived from standard regulatory rating definitions, are assigned upon initial approval of credit to borrowers and updated periodically thereafter. Pass ratings, which are assigned to those borrowers that do not have identified potential or well defined weaknesses and for which there is a high likelihood of orderly repayment, are updated periodically based on the size and credit characteristics of the borrower. All other categories are updated on at least a quarterly basis.

The Company assigns a special mention rating to loans that have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects for the loan or the Company’s credit position.

The Company assigns a substandard rating to loans that are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged. Substandard loans have well defined weaknesses or weaknesses that could jeopardize the orderly repayment of the debt. Loans and leases in this grade also are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies noted are not addressed and corrected.

The Company assigns a doubtful rating to loans that have all the attributes of a substandard rating with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors that may work to the advantage of and strengthen the credit quality of the loan or lease, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceeding, capital injection, perfecting liens on additional collateral or refinancing plans.

The Company evaluates the loan risk grading system definitions and allowance for loan losses methodology on an ongoing basis. No significant changes were made to either during the past year to date period.

Loan Portfolio Aging Analysis
As of September 30, 2018

	30-59 Days  Past Due and Accruing		60-89 Days Past Due and Accruing		Greater Than 90  Days and  Accruing		Non Accrual		Total Past Due and Non Accrual		Current		Total Loans  Receivable
	(In thousands)
Commercial	$	—	$	—	$	—	$	19	$	19	$	89,825	$	89,844
Commercial real estate		—		—		53		744		797		214,996		215,793
Residential real estate		372		275		—		513		1,160		75,508		76,668
Installment		15		—		6		19		40		10,837		10,877
Total	$	387	$	275	$	59	$	1,295	$	2,016	$	391,166	$	393,182

Loan Portfolio Aging Analysis
As of December 31, 2017

	30-59 Days  Past Due and Accruing		60-89 Days Past Due and Accruing		Greater Than 90  Days and  Accruing		Non Accrual		Total Past Due and Non Accrual		Current		Total Loans  Receivable
	(In thousands)
Commercial	$	56	$	—	$	—	$	83	$	139	$	81,188	$	81,327
Commercial real estate		262		—		—		500		762		198,174		198,936
Residential real estate		559		306		—		760		1,625		74,228		75,853
Installment		61		40		—		52		153		12,320		12,473
Total	$	938	$	346	$	—	$	1,395	$	2,679	$	365,910	$	368,589

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

Impaired Loans

	As of September 30, 2018						For the three months ended September 30, 2018				For the nine months ended September 30, 2018
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in  Impaired Loans		Interest Income Recognized		Average Investment in  Impaired Loans		Interest Income Recognized
	(In thousands)
Loans without a specific valuation allowance:
Commercial	$	58	$	58	$	—	$	59	$	—	$	60	$	2
Commercial  real estate		412		412		—		438		9		446		14
Residential real estate		—		—		—		—		—		—		—
Installment		96		96		—		97		1		99		3
		566		566		—		594		10		605		19
Loans with a specific valuation allowance:
Commercial		19		19		19		19		1		20		1
Commercial  real estate		399		399		85		408		1		407		2
Residential real estate		—		—		—		—		—		—		—
Installment		—		—		—		—		—		—		—
		418		418		104		427		2		427		3
Total:
Commercial	$	77	$	77	$	19	$	78	$	1	$	80	$	3
Commercial  real estate	$	811	$	811	$	85	$	846	$	10	$	853	$	16
Residential real estate	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Installment	$	96	$	96	$	—	$	97	$	1	$	99	$	3

Impaired Loans

	As of December 31, 2017						For the three months ended September 30, 2017				For the nine months ended September 30, 2017
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in  Impaired Loans		Interest Income Recognized		Average Investment in  Impaired Loans		Interest Income Recognized
	(In thousands)
Loans without a specific valuation allowance:
Commercial	$	83	$	83	$	—	$	65	$	—	$	62	$	2
Commercial real estate		209		317		—		592		3		607		8
Residential		—		—		—		—		—		—		—
Installment		306		306		—		306		—		313		3
		598		706		—		963		—		982		13
Loans with a specific valuation allowance:
Commercial		—		—		—		30		4		97		7
Commercial real estate		410		410		73		535		2		496		14
Residential real estate		—		—		—		—		—		—		—
Installment		—		—		—		—		—		—		—
		410		410		73		565		6		593		21
Total:
Commercial	$	83	$	83	$	73	$	95	$	4	$	159	$	9
Commercial real estate	$	619	$	727	$	—	$	1,127	$	5	$	1,103	$	22
Residential real estate	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Installment	$	306	$	306	$	—	$	306	$	—	$	313	$	3

Interest income recognized on a cash basis was not materiality different than interest income recognized.

For the TDRs noted in the tables below, the Company extended the maturity dates and granted interest rate concessions as part of each of those loan restructurings. The loans included in the tables are considered impaired and specific loss calculations are performed on the individual loans. In conjunction with the restructuring there were no amounts charged-off.

	Three Months ended September 30, 2018
	Number of  Contracts		Pre- Modification  Outstanding Recorded Investment		Post-Modification  Outstanding Recorded  Investment
	(In thousands)
Commercial		—	$	—	$	—
Commercial real estate		—		—		—
Residential real estate		—		—		—
Installment		—		—		—

	Three Months Ended September 30, 2018
	Interest Only		Term		Combination		Total Modification
	(In thousands)
Commercial	$	—	$	—	$	—	$	—
Commercial real estate		—		—		—		—
Residential real estate		—		—		—		—
Consumer		—		—		—		—

	Nine Months ended September 30, 2018
	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(In thousands)
Commercial		—	$	—	$	—
Commercial real estate		—		—		—
Residential real estate		—		—		—
Installment		—		—		—

	Nine Months Ended September 30, 2018
	Interest Only		Term		Combination		Total Modification
	(In thousands)
Commercial	$	—	$	—	$	—	$	—
Commercial real estate		—		—		—		—
Residential real estate		—		—		—		—
Consumer		—		—		—		—

	Three Months ended September 30, 2017
	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(In thousands)
Commercial		2	$	40	$	40
Commercial real estate		1		62		62
Residential real estate		—		—		—
Installment		—		—		—

	Three Months ended September 30, 2017
	Interest Only		Term		Combination		Total Modification
	(In thousands)
Commercial	$	—	$	40	$	—	$	40
Commercial real estate		—		62		—		62
Residential estate		—		—		—		—
Consumer		—		—		—		—

	Nine Months ended September 30, 2017
	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post-Modification  Outstanding Recorded  Investment
	(In thousands)
Commercial		2	$	40	$	40
Commercial real estate		3		189		165
Residential estate		—		—		—
Installment		—		—		—

	Nine Months Ended September 30, 2017
	Interest Only		Term		Combination		Total Modification
	(In thousands)
Commercial	$	—	$	40	$	—	$	40
Commercial real estate		—		165		—		165
Residential estate		—		—		—		—
Consumer		—		—		—		—

During the nine months ended September 30, 2017 troubled debt restructurings described above increased the allowance for loan losses by 20,000. At September 30, 2018 and 2017 and for three and nine month periods then ended, there were no material defaults of any troubled debt restructurings that were modified in the last 12 months. The Company generally considers TDR’s that become 90 days or more past due under the modified terms as subsequently defaulted.