OTHER REAL ESTATE OWNED (“OREO”)

OREO assets are presented net of the valuation allowance. The Company considers OREO as classified assets for regulatory and financial reporting. OREO carrying amounts reflect management’s estimate of the realizable value of these properties incorporating current appraised values, local real estate market conditions and related costs. An analysis of OREO activity follows.



	Nine Months Ended September 30,						Years Ended December 31,
(dollars in thousands)	2019			2018			2018
Balance at beginning of year	$	8,111		$	9,341		$	9,341
Additions of underlying property	3,266			282			307
Disposals of underlying property	(416		)	(991		)	(1,005		)
Valuation allowance	(766		)	(425		)	(532		)
Balance at end of period	$	10,195		$	8,207		$	8,111

During the nine months ended September 30, 2019 and 2018, OREO additions were $3.3 million and $282,000, respectively. During the nine months ended September 30, 2019 additions of $3.3 million were for commercial real estate acquired at foreclosure on a $3.8 classified loan relationship recorded at the estimated fair value at the date of foreclosure less selling costs, establishing a new cost basis. During the nine months ended September 30, 2018, additions of $282,000 were for $139,000 of capitalized costs to improve a residential development project and $143,000 for commercial real estate.

During the nine months ended September 30, 2019, the Company recognized net gains of $188,000 on disposals of $416,000 for multiple residential lots of $65,000, a commercial building of $316,000 and commercial equipment of $35,000. In connection with the sale of the commercial building, the Bank provided a loan of $280,000. The transaction qualified for sales treatment under ASC Topic 610‑20 “Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets”. During the nine months ended September 30, 2018, the Company recognized net losses of $8,000 on disposals of $991,000 for multiple residential lots of $188,000, a commercial building of $476,000 and a commercial lot of $327,000.

During the year ended December 31, 2018, additions of $307,000 consisted of $165,000 of capitalized costs to improve a development project and $142,000 for commercial real estate. The Company disposed of commercial real estate for proceeds of $807,000 and gains of $4,000 along with residential lots for proceeds of $190,000 and a loss of $12,000 for the year ended December 31, 2018.

The Company had $227,000 of impaired loans secured by residential real estate for which formal foreclosure proceedings were in process as of September 30, 2019. There were no impaired loans secured by residential real estate for which formal foreclosure proceedings were in process as of December 31, 2018.

To adjust properties to current appraised values, additions to the valuation allowance were taken for the nine months ended September 30, 2019 and 2018 and the year ended December 31, 2018. OREO carrying amounts reflect management’s estimate of the realizable value of these properties incorporating current appraised values, local real estate market conditions and related costs.

Expenses applicable to OREO assets included the following.



	Nine Months Ended September 30,
(dollars in thousands)	2019			2018
Valuation allowance	$	766		$	425
(Gains) losses on dispositions	(188		)	8
Operating expenses	173			83
	$	751		$	516