LOANS AND ALLOWANCE FOR LOAN LOSSES

At June 30, 2019 and December 31, 2018, the Company had $1.31 billion and $1.24 billion, respectively, in loans receivable outstanding. Outstanding balances include a total net reduction of $272,000 and $105,000 at June 30, 2019 and December 31, 2018, respectively, for unearned income, net deferred loan fees, and unamortized discounts and premiums. The loans held for sale were $823,000 and $419,000 at June 30, 2019 and December 31, 2018, respectively. The portfolios of loans receivable at June 30, 2019 and December 31, 2018, consist of the following:



	June 30, 2019		December 31, 2018
	Amount		Amount
	(Dollars in thousands)
Commercial and Industrial	$	36,014	$	34,640
Construction	199,892		139,877
Real Estate Mortgage:
Commercial – Owner Occupied	135,494		135,617
Commercial – Non-owner Occupied	288,727		321,580
Residential – 1 to 4 Family	575,975		545,391
Residential – Multifamily	59,611		49,628
Consumer	13,426		14,424
Total Loans	$	1,309,139	$	1,241,157

An age analysis of past due loans by class at June 30, 2019 and December 31, 2018 is as follows:



June 30, 2019	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days and Not Accruing		Total Past Due		Current		Total Loans		Loans > 90 Days and Accruing
	(Dollars in Thousands)
Commercial and Industrial	$	—	$	—	$	13	$	13	$	36,001	$	36,014	$	—
Construction	—		—		1,365		1,365		198,527		199,892		—
Real Estate Mortgage:
Commercial – Owner Occupied	171		—		2,996		3,167		132,327		135,494		—
Commercial – Non-owner Occupied	—		—		1,937		1,937		286,790		288,727		—
Residential – 1 to 4 Family	20		127		2,118		2,385		573,590		575,975		120
Residential – Multifamily	—		—		—		—		59,611		59,611		—
Consumer	—		—		—		—		13,426		13,426		—
Total Loans	$	191	$	127	$	8,429	$	8,867	$	1,300,272	$	1,309,139	$	120



December 31, 2018	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days and Not Accruing		Total Past Due		Current		Total Loans		Loans > 90 Days and Accruing
	(Dollars in thousands)
Commercial and Industrial	$	—	$	—	$	14	$	14	$	34,626	$	34,640	$	—
Construction	—		—		1,365		1,365		138,512		139,877		—
Real Estate Mortgage:
Commercial – Owner Occupied	—		—		—		—		135,617		135,617		—
Commercial – Non-owner Occupied	—		—		—		—		321,580		321,580		—
Residential – 1 to 4 Family	81		154		1,686		1,921		543,470		545,391		—
Residential – Multifamily	—		—		—		—		49,628		49,628		—
Consumer	62		—		—		62		14,362		14,424		—
Total Loans	$	143	$	154	$	3,065	$	3,362	$	1,237,795	$	1,241,157	$	—

Allowance For Loan and Lease Losses (ALLL)

We maintain the ALLL at a level that we believe to be appropriate to absorb estimated probable credit losses incurred in the loan portfolio as of the balance sheet date. We establish our allowance in accordance with guidance provided in Accounting Standard Codification ("ASC") - Contingencies (ASC 450) and Receivables (ASC 310).

The allowance for loan and lease losses represents management’s estimate of probable losses inherent in the Company’s lending activities excluding loans accounted for under fair value. The allowance for loan losses is maintained through charges to the provision for loan losses in the Consolidated Statements of Income as losses are estimated to have occurred. Loans or portions thereof that are determined to be uncollectible are charged against the allowance, and subsequent recoveries, if any, are credited to the allowance.

The Company performs periodic reviews of its loan and lease portfolios to identify credit risks and to assess the overall collectability of those portfolios. The Company's allowance for loan losses includes a formula-based component and an asset-specific component. The asset-specific component of the allowance relates to loans considered to be impaired, which includes performing troubled debt restructurings (“TDRs”) as well as nonperforming loans. To determine the asset-specific component of the allowance, the loans are evaluated individually based on the borrower's ability to repay amounts owed, collateral, relative risk grade of the loans, and other factors given current events and conditions. The Company generally measures the asset-specific allowance as the difference between the fair value (net realizable value) and the recorded investment of a loan.

The formula-based component of the allowance evaluates the impairments of pools of the loan and lease portfolio collectively. It incorporates a historical valuation allowance and general valuation allowance. The historical loss experience is measured by type of credit and internal risk grade, loss severity, specific homogeneous risk pools. A historical loss ratio and valuation allowance are established for each pool of similar loans and updated periodically based on actual charge-off experience and current events. The general valuation allowance is based on general economic conditions and other qualitative risk factors both internal and external to the Company. It is generally determined by evaluating, among other things: (i) the experience, ability and effectiveness of the Bank's lending management and staff; (ii) the effectiveness of the Bank's loan policies, procedures and internal controls; (iii) changes in asset quality; (iv) changes in loan portfolio volume; (v) the composition and concentrations of credit; (vi) the impact of competition on loan structuring and pricing; (vii) the effectiveness of the internal loan review function; (viii) the impact of environmental risks on portfolio risks; (ix) the impact of rising interest rates on portfolio risk; and (x) national and local economic trends and conditions, and industry conditions. Management evaluates the degree of risk that each one of these components has on the quality of the loan portfolio on a quarterly basis. Each component is determined to have either a high, high-moderate, moderate, low-moderate or low degree of risk. The results are then input into a "general allocation matrix" to determine an appropriate general valuation allowance.

The process of determining the level of the allowance for loan and lease losses requires a high degree of estimate and judgment. It is reasonably possible that actual outcomes may differ from our estimates.

The following tables present the information regarding the allowance for loan and lease losses and associated loan data:



						Real Estate Mortgage
	Commercial and Industrial			Construction		Commercial Owner Occupied			Commercial Non-owner Occupied			Residential 1 to 4 Family		Residential Multifamily		Consumer			Total
Allowance for loan losses	(Dollars in thousands)
Three months ended June 30, 2019
March 31, 2019	$	688		$	1,796	$	1,884		$	6,398		$	8,098	$	743	$	203		19,810
Charge-offs	—			—		—			—			—		—		—			—
Recoveries	4			6		7			12			1		—		—			30
Provisions	1			725		(145		)	(506		)	381		1		(7		)	450
Ending Balance at June 30, 2019	$	693		$	2,527	$	1,746		$	5,904		$	8,480	$	744	$	196		$	20,290

Six months ended June 30, 2019
December 31, 2018	$	718		$	1,694	$	2,062		$	5,853		$	7,917	$	621	$	210		19,075
Charge-offs	—			—		—			—			—		—		—			—
Recoveries	10			6		13			33			3		—		—			65
Provisions	(35		)	827		(329		)	18			560		123		(14		)	1,150
Ending Balance at June 30, 2019	$	693		$	2,527	$	1,746		$	5,904		$	8,480	$	744	$	196		$	20,290

Allowance for loan losses
Individually evaluated for impairment	$	13		$	107	$	34		$	188		$	458	$	—	$	—		$	800
Collectively evaluated for impairment	680			2,420		1,712			5,716			8,022		744		196			19,490
Ending Balance at June 30, 2019	$	693		$	2,527	$	1,746		$	5,904		$	8,480	$	744	$	196		$	20,290

Loans
Individually evaluated for impairment	$	13		$	5,350	$	5,282		$	12,976		$	2,649	$	—	$	—		$	26,270
Collectively evaluated for impairment	36,001			194,542		130,212			275,751			573,326		59,611		13,426			1,282,869
Ending Balance at June 30, 2019	$	36,014		$	199,892	$	135,494		$	288,727		$	575,975	$	59,611	$	13,426		$	1,309,139



							Real Estate Mortgage
	Commercial and Industrial			Construction			Commercial Owner Occupied			Commercial Non-owner Occupied			Residential 1 to 4 Family		Residential Multifamily			Consumer			Total
Allowance for loan losses	(Dollars in thousands)
Three months ended June 30, 2018
March 31, 2018	$	555		$	2,227		$	1,991		$	4,781		$	6,644	$	648		$	235		17,081
Charge-offs	—			(27		)	—			(49		)	—		—			(1		)	(77		)
Recoveries	10			—			5			50			4		—			—			69
Provisions	(26		)	(202		)	(35		)	478			18		(29		)	(4		)	200
Ending Balance at June 30, 2018	$	539		$	1,998		$	1,961		$	5,260		$	6,666	$	619		$	230		$	17,273

Six months ended June 30, 2018
December 31, 2017	$	684		$	2,068		$	2,017		$	4,630		$	6,277	$	627		$	230		16,533
Charge-offs	—			(27		)	—			(49		)	—		—			(18		)	(94		)
Recoveries	30			—			141			55			8		—			—			234
Provisions	(175		)	(43		)	(197		)	624			381		(8		)	18			600
Ending Balance at June 30, 2018	$	539		$	1,998		$	1,961		$	5,260		$	6,666	$	619		$	230		$	17,273

Allowance for loan losses
Individually evaluated for impairment	$	15		$	73		$	51		$	196		$	14	$	—		$	—		$	349
Collectively evaluated for impairment	524			1,925			1,910			5,064			6,652		619			230			16,924
Ending Balance at June 30, 2018	$	539		$	1,998		$	1,961		$	5,260		$	6,666	$	619		$	230		$	17,273

Loans
Individually evaluated for impairment	$	15		$	5,780		$	3,609		$	11,829		$	2,310	$	—		$	—		$	23,543
Collectively evaluated for impairment	27,818			124,603			126,704			260,448			473,392		49,349			15,386			1,077,700
Ending Balance at June 30, 2018	$	27,833		$	130,383		$	130,313		$	272,277		$	475,702	$	49,349		$	15,386		$	1,101,243

Impaired Loans

A loan is considered impaired when, based on the current information and events, it is probable that the Company will be unable to collect the payments of principal and interest as of the date such payments were due. Loans are placed on non-accrual status when, in management's opinion, the borrower may be unable to meet payment obligations as they become due, as well as when a loan is 90 days past due, unless the loan is well secured and in the process of collection, as required by regulatory provisions. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

All our impaired loans are assessed for recoverability based on an independent third-party full appraisal to determine the net realizable value (“NRV”) based on the fair value of the underlying collateral, less cost to sell and other costs or the present value of discounted cash flows in the case of certain impaired loans that are not collateral dependent.

The following tables provide further detail on impaired loans and the associated ALLL at June 30, 2019 and December 31, 2018:



June 30, 2019	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(Dollars in thousands)
With no related allowance recorded:
Commercial and Industrial	$	—	$	—	$	—
Construction	—		—		—
Real Estate Mortgage:
Commercial – Owner Occupied	2,996		2,996		—
Commercial – Non-owner Occupied	1,936		1,936		—
Residential – 1 to 4 Family	945		945		—
Residential – Multifamily	—		—		—
Consumer	—		—		—
	5,877		5,877		—
With an allowance recorded:
Commercial and Industrial	13		19		13
Construction	5,350		9,840		107
Real Estate Mortgage:
Commercial – Owner Occupied	2,286		2,286		34
Commercial – Non-owner Occupied	11,040		11,040		188
Residential – 1 to 4 Family	1,704		1,704		458
Residential – Multifamily	—		—		—
Consumer	—		—		—
	20,393		24,889		800
Total:
Commercial and Industrial	13		19		13
Construction	5,350		9,840		107
Real Estate Mortgage:
Commercial – Owner Occupied	5,282		5,282		34
Commercial – Non-owner Occupied	12,976		12,976		188
Residential – 1 to 4 Family	2,649		2,649		458
Residential – Multifamily	—		—		—
Consumer	—		—		—
	$	26,270	$	30,766	$	800



December 31, 2018	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(Dollars in thousands)
With no related allowance recorded:
Commercial and Industrial	$	—	$	—	$	—
Construction	—		—		—
Real Estate Mortgage:
Commercial – Owner Occupied	—		—		—
Commercial – Non-owner Occupied	—		—		—
Residential – 1 to 4 Family	1,131		1,131		—
Residential – Multifamily	—		—		—
Consumer	—		—		—
	1,131		1,131		—
With an allowance recorded:
Commercial and Industrial	14		19		14
Construction	5,589		10,080		69
Real Estate Mortgage:
Commercial – Owner Occupied	2,441		2,441		36
Commercial – Non-owner Occupied	11,299		11,299		192
Residential – 1 to 4 Family	1,383		1,383		299
Residential – Multifamily	—		—		—
Consumer	—		—		—
	20,726		25,222		610
Total:
Commercial and Industrial	14		19		14
Construction	5,589		10,080		69
Real Estate Mortgage:
Commercial – Owner Occupied	2,441		2,441		36
Commercial – Non-owner Occupied	11,299		11,299		192
Residential – 1 to 4 Family	2,514		2,514		299
Residential – Multifamily	—		—		—
Consumer	—		—		—
	$	21,857	$	26,353	$	610

The following table presents by loan portfolio class, the average recorded investment and interest income recognized on impaired loans for the three and six months ended June 30, 2019 and 2018:



	Three Months Ended June 30,
	2019				2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
Commercial and Industrial	$	13	$	1	$	16	$	1
Construction	5,410		44		5,839		49
Real Estate Mortgage:
Commercial – Owner Occupied	3,810		23		3,654		48
Commercial – Non-owner Occupied	12,072		177		11,917		148
Residential – 1 to 4 Family	2,767		3		2,750		13
Residential – Multifamily	—		—		—		—
Consumer	—		—		—		—
Total	$	24,072	$	248	$	24,176	$	259



	Six Months Ended June 30,
	2019				2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
Commercial and Industrial	$	13	$	1	$	16	$	1
Construction	5,470		89		5,876		97
Real Estate Mortgage:
Commercial – Owner Occupied	3,354		66		3,699		96
Commercial – Non-owner Occupied	11,814		329		12,078		296
Residential – 1 to 4 Family	2,682		13		2,903		27
Residential – Multifamily	—		—		—		—
Consumer	—		—		27		—
Total	$	23,333	$	498	$	24,599	$	517

Troubled debt restructurings (TDRs)

We reported performing TDR loans (not reported as non-accrual loans) of $17.8 million and $18.8 million, respectively, at June 30, 2019 and December 31, 2018. We did not have any nonperforming TDR loans at December 31, 2018. We had one nonperforming TDR loan at June 30, 2019 in the amount of $286,000. There were no new loans modified as a TDR and no additional commitments to lend additional funds to debtors whose loans have been modified in TDRs for the three and six months ended June 30, 2019 and the year ended December 31, 2018, respectively.

A TDR is a loan the terms of which have been restructured in a manner that grants a concession to a borrower experiencing financial difficulty. TDRs result from our loss mitigation activities that include rate reductions, extension of maturity, or a combination of both, which are intended to minimize economic loss and to avoid foreclosure or repossession of collateral. TDRs are classified as impaired loans and are included in the impaired loan disclosures. TDRs are also evaluated to determine whether they should be placed on non-accrual status. Once a loan becomes a TDR, it will continue to be reported as a TDR until it is repaid in full, foreclosed, sold or it meets the criteria to be removed from TDR status.

At the time a loan is modified in a TDR, we consider the following factors to determine whether the loan should accrue interest:


•	Whether there is a period of current payment history under the current terms, typically 6 months;


•	Whether the loan is current at the time of restructuring; and


•	Whether we expect the loan to continue to perform under the restructured terms with a debt coverage ratio that complies with the Bank’s credit underwriting policy of 1.25 times debt service.

TDRs are generally included in nonaccrual loans and may return to performing status after a minimum of six consecutive monthly payments under restructured terms and also meeting other performance indicators. We review the financial performance of the borrower over the past year to be reasonably assured of repayment and performance according to the modified terms. This review consists of an analysis of the borrower’s historical results; the borrower’s projected results over the next four quarters; and current financial information of the borrower and any guarantors. The projected repayment source needs to be reliable, verifiable, quantifiable and sustainable. At the time of restructuring, the amount of the loan principal for which we are not reasonably assured of repayment is charged-off, but not forgiven.

All TDRs are also reviewed quarterly to determine the amount of any impairment. The nature and extent of impairment of TDRs, including those that have experienced a subsequent default, is considered in the determination of an appropriate level of allowance for loan losses. For the performing TDR loans, we had specific reserves of $290,000 and $306,000 in the allowance at June 30, 2019 and December 31, 2018, respectively. We had no nonperforming TDR loans at December 31, 2018 and had specific reserves of $25,500 for nonperforming TDR at June 30, 2019. Some loan modifications classified as TDRs may not ultimately result in the full collection of principal and interest, as modified, and result in potential incremental losses. These potential incremental losses have been factored into our overall allowance for loan losses estimate.

Credit Quality Indicators: As part of the on-going monitoring of the credit quality of the Company's loan portfolio, management tracks certain credit quality indicators including trends related to the risk grades of loans, the level of classified loans, net charge-offs, nonperforming loans (see details above) and the general economic conditions in the region.

The Company utilizes a risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 7. Grades 1 through 4 are considered “Pass”. A description of the general characteristics of the seven risk grades is as follows:


1.	Good: Borrower exhibits the strongest overall financial condition and represents the most creditworthy profile.


2.	Satisfactory (A): Borrower reflects a well-balanced financial condition, demonstrates a high level of creditworthiness and typically will have a strong banking relationship with the Bank.


3.	Satisfactory (B): Borrower exhibits a balanced financial condition and does not expose the Bank to more than a normal or average overall amount of risk. Loans are considered fully collectable.


4.	Watch List: Borrower reflects a fair financial condition, but there exists an overall greater than average risk. Risk is deemed acceptable by virtue of increased monitoring and control over borrowings. Probability of timely repayment is present.

Other Assets Especially Mentioned (OAEM): Borrower's financial condition is such that assets in this category have a potential weakness or pose unwarranted financial risk to the Bank even though the asset value is not currently impaired. The asset does not currently warrant adverse classification but if not corrected could weaken and could create future increased risk exposure. Includes loans that require an increased degree of monitoring or servicing as a result of internal or external changes.

Substandard: This classification represents more severe cases of #5 (OAEM) characteristics that require increased monitoring. Assets are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Assets are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral. Asset has a well-defined weakness or weaknesses that impairs the ability to repay debt and jeopardizes the timely liquidation or realization of the collateral at the asset’s net book value.

Doubtful: Assets which have all the weaknesses inherent in those assets classified #6 (Substandard) but the risks are more severe relative to financial deterioration in capital and/or asset value; accounting/evaluation techniques may be questionable and the overall possibility for collection in full is highly improbable. Borrowers in this category require constant monitoring, are considered work-out loans and present the potential for future loss to the Bank.

An analysis of the credit risk profile by internally assigned grades as of June 30, 2019 and December 31, 2018 is as follows:



At June 30, 2019	Pass		OAEM		Substandard		Doubtful		Total
	(Dollars in thousands)
Commercial and Industrial	$	36,001	$	—	$	13	$	—	$	36,014
Construction	188,047		4,214		7,631		—		199,892
Real Estate Mortgage:
Commercial – Owner Occupied	132,498		—		2,996		—		135,494
Commercial – Non-owner Occupied	286,589		—		2,138		—		288,727
Residential – 1 to 4 Family	572,807		935		2,233		—		575,975
Residential – Multifamily	59,611		—		—		—		59,611
Consumer	13,426		—		—		—		13,426
Total	$	1,288,979	$	5,149	$	15,011	$	—	$	1,309,139



At December 31, 2018	Pass		OAEM		Substandard		Doubtful		Total
	(Dollars in thousands)
Commercial and Industrial	$	34,626	$	—	$	14	$	—	$	34,640
Construction	127,523		4,503		7,851		—		139,877
Real Estate Mortgage:
Commercial – Owner Occupied	135,617		—		—		—		135,617
Commercial – Non-owner Occupied	321,446		—		134		—		321,580
Residential – 1 to 4 Family	542,865		719		1,807		—		545,391
Residential – Multifamily	49,628		—		—		—		49,628
Consumer	14,424		—		—		—		14,424
Total	$	1,226,129	$	5,222	$	9,806	$	—	$	1,241,157