Note 5 – Loans Receivable and Credit Quality

The following table presents the composition of loans receivable at June 30, 2018 and December 31, 2017, respectively:



	June 30, 2018			December 31, 2017
			Percentage of			Percentage of
	Balance		total Loans	Balance		total Loans

		(Dollars in Thousands)

Commercial real estate	$	396,667	42.90%	$	347,292	40.46%
Commercial construction		22,390	2.42%		30,090	3.51%
Commercial		40,130	4.34%		36,406	4.24%
Residential real estate		464,783	50.26%		443,601	51.68%
Consumer		705	0.08%		904	0.11%
Total loans		924,675	100.00%		858,293	100.00%
Unearned origination fees		574			458
Allowance for loan losses		(7,473)			(7,040)
	$	917,776		$	851,711

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention (potential weaknesses), substandard (well defined weaknesses) and doubtful (full collection unlikely) within the Company's internal risk rating system as of June 30, 2018 and December 31, 2017, respectively:



	Pass		Special Mention		Substandard		Doubtful		Total

June 30, 2018		(In Thousands)
Commercial real estate	$	390,970	$	-	$	5,697	$	-	$	396,667
Commercial construction		22,075		-		315		-		22,390
Commercial		40,057		-		73		-		40,130
Residential real estate		463,352		762		669		-		464,783
Consumer		705		-		-		-		705
Total	$	917,159	$	762	$	6,754	$	-	$	924,675

December 31, 2017
Commercial real estate	$	341,865	$	-	$	5,427	$	-	$	347,292
Commercial construction		29,775		-		315		-		30,090
Commercial		36,406		-		-		-		36,406
Residential real estate		442,770		-		831		-		443,601
Consumer		904		-		-		-		904
Total	$	851,720	$	-	$	6,573	$	-	$	858,293

The Company had two (2) foreclosed assets in the amount of $297 thousand as of June 30, 2018, of which one (1) is residential real estate in the amount of $100 thousand. At June 30, 2018 and December 31, 2017, the Company had $502 thousand and $499 thousand, respectively, in recorded investment in consumer mortgage loans collateralized by residential real estate that are in the process of foreclosure.

The following table summarizes information in regards to impaired loans by loan portfolio class as of June 30, 2018 and December 31, 2017, respectively:


	June 30, 2018						December 31, 2017
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
	(In Thousands)
With no related allowance recorded:
Commercial real estate	$	5,972	$	6,337			$	7,383	$	7,748
Commercial construction		315		315				315		315
Commercial		73		73				-		-
Residential real estate		875		1,180				1,043		1,329
Consumer		-		-				-		-
With an allowance recorded:
Commercial real estate	$	-	$	-	$	-	$	-	$	-	$	-
Commercial construction		-		-		-		-		-		-
Commercial		242		242		36		245		245		39
Residential real estate		966		966		171		986		986		212
Consumer		-		-		-		-		-		-
Total:
Commercial real estate	$	5,972	$	6,337	$	-	$	7,383	$	7,748	$	-
Commercial construction		315		315		-		315		315		-
Commercial		315		315		36		245		245		39
Residential real estate		1,841		2,146		171		2,029		2,315		212
Consumer		-		-		-		-		-		-
	$	8,443	$	9,113	$	207	$	9,972	$	10,623	$	251

The following tables summarize information regarding the average recorded investment and interest income recognized on impaired loans by loan portfolio for the three and six months ended June 30, 2018 and 2017, respectively:


	Three Months Ended June 30,
	2018				2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In Thousands)
With no related allowance recorded:
Commercial real estate	$	5,848	$	66	$	6,655	$	51
Commercial construction		315		2		315		2
Commercial		37		2		50		-
Residential real estate		898		2		1,204		(2)
Consumer		-		-		-		-
With an allowance recorded:
Commercial real estate	$	-	$	-	$	996	$	10
Commercial construction		-		-		-		-
Commercial		243		3		248		3
Residential real estate		971		8		1,010		8
Consumer		-		-		-		-
Total:
Commercial real estate	$	5,848	$	66	$	7,651	$	61
Commercial construction		315		2		315		2
Commercial		280		5		298		3
Residential real estate		1,869		10		2,214		6
Consumer		-		-		-		-
	$	8,312	$	83	$	10,478	$	72


	Six Months Ended June 30,
	2018				2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In Thousands)
With no related allowance recorded:
Commercial real estate	$	6,359	$	123	$	7,156	$	112
Commercial construction		315		5		315		5
Commercial		24		2		67		-
Residential real estate		946		5		1,308		3
Consumer		-		-		-		-
With an allowance recorded:
Commercial real estate	$	-	$	-	$	664	$	10
Commercial construction		-		-		-		-
Commercial		244		5		258		5
Residential real estate		976		16		943		9
Consumer		-		-		-		-
Total:
Commercial real estate	$	6,359	$	123	$	7,820	$	122
Commercial construction		315		5		315		5
Commercial		268		7		325		5
Residential real estate		1,922		21		2,251		12
Consumer		-		-		-		-
	$	8,864	$	156	$	10,711	$	144

The following table presents non-accrual loans by classes of the loan portfolio:



	June 30, 2018		December 31, 2017

	(In Thousands)
Commercial real estate	$	104	$	104
Commercial construction		-		-
Commercial		-		-
Residential real estate		528		686
Consumer		-		-
Total	$	632	$	790

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of June 30, 2018 and December 31, 2017, respectively:


					Greater								Loan
					than								Receivables >
	30-59 Days		60-89 Days		90 Days		Total				Total Loan		90 Days and
	Past Due		Past Due		Past Due		Past Due		Current		Receivables		Accruing

June 30, 2018	(In Thousands)
Commercial real estate	$	-	$	480	$	603	$	1,083	$	395,584	$	396,667	$	500
Commercial construction		-		-		-		-		22,390		22,390		-
Commercial		51		-		159		210		39,920		40,130		160
Residential real estate		1,516		100		226		1,842		462,941		464,783		-
Consumer		-		-		-		-		705		705		-
Total	$	1,567	$	580	$	988	$	3,135	$	921,540	$	924,675	$	660

December 31, 2017
Commercial real estate	$	2,852	$	-	$	104	$	2,956	$	344,336	$	347,292	$	-
Commercial construction		-		-		-		-		30,090		30,090		-
Commercial		-		-		-		-		36,406		36,406		-
Residential real estate		1,036		1,800		634		3,470		440,131		443,601		-
Consumer		-		-		-		-		904		904		-
Total	$	3,888	$	1,800	$	738	$	6,426	$	851,867	$	858,293	$	-

The following tables detail the activity in the allowance for loan losses for the three and six months ended June 30, 2018 and 2017:



	Commercial Real Estate		Commercial Construction		Commercial		Residential Real Estate		Consumer		Unallocated		Total

Allowance for loan losses	(In Thousands)
Three Months Ending June 30, 2018
Beginning Balance - March 31, 2018	$	2,456	$	249	$	475	$	3,508	$	22	$	556	$	7,266
Charge-offs		-		-		(40)		(23)		-		-		(63)
Recoveries		1		-		-		4		-		-		5
Provisions		(76)		(91)		(15)		304		5		138		265
Ending Balance - June 30, 2018	$	2,381	$	158	$	420	$	3,793	$	27	$	694	$	7,473

Six Months Ending June 30, 2018
Beginning Balance - December 31, 2017	$	2,251	$	369	$	472	$	3,510	$	18	$	420	$	7,040
Charge-offs		-		-		(40)		(23)		-		-		(63)
Recoveries		8		-		-		8		-		-		16
Provisions		122		(211)		(12)		298		9		274		480
Ending Balance - June 30, 2018	$	2,381	$	158	$	420	$	3,793	$	27	$	694	$	7,473

Three Months Ending June 30, 2017
Beginning Balance - March 31, 2017	$	2,353	$	670	$	363	$	2,968	$	16	$	249	$	6,619
Charge-offs		-		-		(93)		-		-		-		(93)
Recoveries		-		-		-		-		-		-		-
Provisions		(199)		(197)		223		402		11		(5)		235
Ending Balance - June 30, 2017	$	2,154	$	473	$	493	$	3,370	$	27	$	244	$	6,761

Six Months Ending June 30, 2017
Beginning Balance - December 31, 2016	$	2,349	$	516	$	423	$	2,937	$	15	$	277	$	6,517
Charge-offs		-		-		(122)		(62)		-		-		(184)
Recoveries		13		-		-		-		-		-		13
Provisions		(208)		(43)		192		495		12		(33)		415
Ending Balance - June 30, 2017	$	2,154	$	473	$	493	$	3,370	$	27	$	244	$	6,761

The following tables represent the allocation for loan losses and the related loan portfolio disaggregated based on impairment methodology at June 30, 2018 and December 31, 2017:



	Commercial Real Estate		Commercial Construction		Commercial		Residential Real Estate		Consumer		Unallocated		Total

	(In Thousands)
June 30, 2018
Allowance for Loan Losses
Ending Balance	$	2,381	$	158	$	420	$	3,793	$	27	$	694	$	7,473
Ending balance: individually evaluated for impairment	$	-	$	-	$	36	$	171	$	-	$	-	$	207
Ending balance: collectively evaluated for impairment	$	2,381	$	158	$	384	$	3,622	$	27	$	694	$	7,266

Loans receivables:
Ending balance	$	396,667	$	22,390	$	40,130	$	464,783	$	705			$	924,675
Ending balance: individually evaluated for impairment	$	5,972	$	315	$	315	$	1,841	$	-			$	8,443
Ending balance: collectively evaluated for impairment	$	390,695	$	22,075	$	39,815	$	462,942	$	705			$	916,232

December 31, 2017
Allowance for Loan Losses
Ending Balance	$	2,251	$	369	$	472	$	3,510	$	18	$	420	$	7,040
Ending balance: individually evaluated for impairment	$	-	$	-	$	39	$	212	$	-	$	-	$	251
Ending balance: collectively evaluated for impairment	$	2,251	$	369	$	433	$	3,298	$	18	$	420	$	6,789

Loans receivables:
Ending balance	$	347,292	$	30,090	$	36,406	$	443,601	$	904			$	858,293
Ending balance: individually evaluated for impairment	$	7,383	$	315	$	245	$	2,029	$	-			$	9,972
Ending balance: collectively evaluated for impairment	$	339,909	$	29,775	$	36,161	$	441,572	$	904			$	848,321

Troubled Debt Restructurings

The Company may grant a concession or modification for economic or legal reasons related to a borrower’s financial condition that it would not otherwise consider, resulting in a modified loan which is then identified as troubled debt restructuring (“TDR”). The Company may modify loans through rate reductions, extensions to maturity, interest only payments, or payment modifications to better coincide the timing of payments due under the modified terms with the expected timing of cash flows from the borrowers’ operations. Loan modifications are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. TDRs are considered impaired loans for purposes of calculating the Company’s allowance for loan losses.

The Company identifies loans for potential restructure primarily through direct communication with the borrower and the evaluation of the borrower’s financial statements, revenue projections, tax returns, and credit reports. Even if the borrower is not presently in default, management will consider the likelihood that cash flow shortages, adverse economic conditions, and negative trends may result in a payment default in the near future.

The following table presents TDR’s outstanding:



	Accrual Loans		Non-Accrual Loans		Total Modifications

June 30, 2018	(In Thousands)
Commercial real estate	$	1,316	$	-	$	1,316
Commercial construction		260		-		260
Commercial		243		-		243
Residential real estate		1,172		26		1,198
Consumer		-		-		-
	$	2,991	$	26	$	3,017

December 31, 2017
Commercial real estate	$	3,002	$	-	$	3,002
Commercial construction		260		-		260
Commercial		245		-		245
Residential real estate		1,198		52		1,250
Consumer		-		-		-
	$	4,705	$	52	$	4,757

As of June 30, 2018, no available commitments were outstanding on TDRs.

There were no newly restructured loans that occurred during the three and six months ended June 30, 2018 and 2017.

There were no loans that were modified and classified as a TDR within the prior twelve months that experienced a payment default (loans ninety days or more past due) during the three and six months ended June 30, 2018 and 2017.