4. LOANS AND THE ALLOWANCE FOR LOAN LOSSES

Loan Portfolio Composition

The following table presents selected information on the composition of the Company’s loan portfolio as of the dates indicated:




	June 30, 2015		December 31, 2014
Mortgage loans on real estate:		(in thousands)
Residential Mortgages	$	98,269	$	98,374
Commercial and multi-family		373,891		363,252
Construction-Residential		709		721
Construction-Commercial		45,232		40,986
Home equities		59,381		59,948
Total real estate loans		577,482		563,281

Commercial and industrial loans		129,812		129,456
Consumer loans		1,699		1,764
Other		1,165		404
Net deferred loan origination costs		674		759
Total gross loans		710,832		695,664

Allowance for loan losses		(13,110)		(12,533)

Loans, net	$	697,722	$	683,131

The Bank sells certain fixed rate residential mortgages to FNMA while maintaining the servicing rights for those mortgages. In the three month period ended June 30, 2015, the Bank sold mortgages to FNMA totaling $7.1 million, as compared with $3.4 million in mortgages sold to FNMA in the three month period ended June 30, 2014. During the six month period ended June 30, 2015 and 2014, the Bank sold $9.7 million and $3.4 million in mortgages, respectively, to FNMA. At June 30, 2015, the Bank had a loan servicing portfolio principal balance of $77.3 million upon which it earns servicing fees, as compared with $71.6 million at December 31, 2014. The value of the mortgage servicing rights for that portfolio was $0.6 and $0.5 million at June 30, 2015 and December 31, 2014, respectively. At June 30, 2015, there were $1.0 million in residential mortgage loans held-for-sale, compared with $0.4 million in residential mortgages held-for-sale at December 31, 2014. The Company had no commercial loans held-for-sale at June 30, 2015 or December 31, 2014. The Company has never been contacted by FNMA to repurchase any loans due to improper documentation or fraud.

As noted in Note 1, these financial statements should be read in conjunction with the Audited Consolidated Financial Statements and the Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2014. Disclosures related to the basis for accounting for loans, the method for recognizing interest income on loans, the policy for placing loans on nonaccrual status and the subsequent recording of payments and resuming accrual of interest, the policy for determining past due status, a description of the Company’s accounting policies and methodology used to estimate the allowance for loan losses, the policy for charging off loans, the accounting policies for impaired loans, and more descriptive information on the Company’s credit risk ratings are all contained in the Notes to the Audited Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. Unless otherwise noted in this Form 10-Q, the policies and methodology described in the Annual Report for the year ended December 31, 2014 are consistent with those utilized by the Company in the three and six months ended June 30, 2015.

Credit Quality Indicators

The Bank monitors the credit risk in its loan portfolio by reviewing certain credit quality indicators (“CQI”). The primary CQI for its commercial mortgage and commercial and industrial (“C&I”) portfolios is the individual loan’s credit risk rating. The following list provides a description of the credit risk ratings that are used internally by the Bank when assessing the adequacy of its allowance for loan and lease losses:

1-3-Pass

4-Watch

5-O.A.E.M. (Other Assets Especially Mentioned) or Special Mention

6-Substandard

7-Doubtful

8-Loss

The Company’s consumer loans, including residential mortgages and home equities, are not individually risk rated or reviewed in the Company’s loan review process. Consumers are not required to provide the Company with updated financial information as is a commercial customer. Consumer loans also carry smaller balances. Given the lack of updated information after the initial underwriting of the loan and small size of individual loans, the Company uses delinquency status as the credit quality indicator for consumer loans.

The following tables provide data, at the class level, of credit quality indicators of certain loans and leases for the dates specified:




June 30, 2015
(in thousands)
Corporate Credit Exposure – By Credit Rating	Commercial Real Estate Construction		Commercial and Multi-Family Mortgages		Total Commercial Real Estate		Commercial and Industrial
3	$	37,357	$	311,618	$	348,975	$	77,168
4		2,669		40,588		43,257		33,611
5		5,206		15,720		20,926		11,464
6		-		5,965		5,965		7,465
7		-		-		-		104
Total	$	45,232	$	373,891	$	419,123	$	129,812




December 31, 2014
(in thousands)
Corporate Credit Exposure – By Credit Rating	Commercial Real Estate Construction		Commercial and Multi-Family Mortgages		Total Commercial Real Estate		Commercial and Industrial
3	$	29,421	$	299,798	$	329,219	$	83,789
4		10,492		50,691		61,183		30,223
5		1,073		7,853		8,926		8,662
6		-		4,757		4,757		6,613
7		-		153		153		169
Total	$	40,986	$	363,252	$	404,238	$	129,456

Past Due Loans

The following tables provide an analysis of the age of the recorded investment in loans that are past due as of the dates indicated:




June 30, 2015
(in thousands)

							Total Past		Current		Total		90+ Days		Non-accruing
	30-59 days		60-89 days		90+ days		Due		Balance		Balance		Accruing		Loans

Commercial and
industrial	$	463	$	223	$	148	$	834	$	128,978	$	129,812	$	103	$	5,620
Residential real estate:
Residential		237		243		650		1,130		97,139		98,269		125		1,265
Construction		-		-		-		-		709		709		-		-
Commercial real estate:
Commercial		-		-		2,525		2,525		371,366		373,891		238		2,812
Construction		-		-		267		267		44,965		45,232		267		-
Home equities		254		518		326		1,098		58,283		59,381		72		475
Consumer		23		1		17		41		1,658		1,699		-		17
Other		-		-		-		-		1,165		1,165		-		-
Total Loans	$	977	$	985	$	3,933	$	5,895	$	704,263	$	710,158	$	805	$	10,189

NOTE: Loan and lease balances do not include $674 thousand in net deferred loan origination costs as of June 30, 2015.



December 31, 2014
(in thousands)

							Total Past		Current		Total		90+ Days		Non-accruing
	30-59 days		60-89 days		90+ days		Due		Balance		Balance		Accruing		Loans

Commercial and
industrial	$	153	$	60	$	274	$	487	$	128,969	$	129,456	$	-	$	5,500
Residential real estate:
Residential		848		158		682		1,688		96,686		98,374		-		1,296
Construction		-		-		-		-		721		721		-		-
Commercial real estate:
Commercial		4,201		3,115		513		7,829		355,423		363,252		-		3,162
Construction		8		-		201		209		40,777		40,986		201		-
Home equities		594		120		192		906		59,042		59,948		-		415
Consumer		13		1		-		14		1,750		1,764		-		17
Other		-		-		-		-		404		404		-		-
Total Loans	$	5,817	$	3,454	$	1,862	$	11,133	$	683,772	$	694,905	$	201	$	10,390

NOTE: Loan and lease balances do not include $759 thousand in net deferred loan origination costs as of December 31, 2014.

Allowance for loan losses

The following tables present the activity in the allowance for loan losses according to portfolio segment, for the six month periods ended June, 2015 and 2014:




June 30, 2015

(in thousands)	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer **		Residential Mortgages*		HELOC		Unallocated		Total
Allowance for loan
losses:
Beginning balance	$	4,896	$	5,650	$	78	$	941	$	819	$	149	$	12,533
Charge-offs		(80)		(35)		(11)		-		-		-		(126)
Recoveries		57		23		6		1		-		-		87
Provision		(228)		856		(2)		6		(16)		-		616
Ending balance	$	4,645	$	6,494	$	71	$	948	$	803	$	149	$	13,110

Allowance for loan
losses:
Ending balance:
Individually evaluated
for impairment	$	730	$	59	$	46	$	40	$	-	$	-	$	875
Collectively evaluated
for impairment		3,915		6,435		25		908		803		149		12,235
Total	$	4,645	$	6,494	$	71	$	948	$	803	$	149	$	13,110

Loans:
Ending balance:
Individually evaluated
for impairment	$	5,795	$	5,455	$	46	$	2,500	$	961	$	-	$	14,757
Collectively evaluated
for impairment		124,017		413,668		2,818		96,478		58,420		-		695,401
Total	$	129,812	$	419,123	$	2,864	$	98,978	$	59,381	$	-	$	710,158

* Includes construction loans

** Includes all other consumer loans

NOTE: Loan balances do not include $674 thousand in net deferred loan origination costs as of June 30, 2015.



June 30, 2014

(in thousands)	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer **		Residential Mortgages*		HELOC		Direct Financing Leases		Unallocated		Total
Allowance for loan
losses:
Beginning balance	$	4,489	$	4,912	$	37	$	1,038	$	878	$	-	$	149	$	11,503
Charge-offs		(474)		(57)		(12)		-		(1)		-		-		(544)
Recoveries		59		39		4		2		-		131		-		235
Provision		(171)		651		17		6		(44)		(131)		-		328
Ending balance	$	3,903	$	5,545	$	46	$	1,046	$	833	$	-	$	149	$	11,522

Allowance for loan
losses:
Ending balance:
Individually evaluated
for impairment	$	191	$	358	$	18	$	-	$	-	$	-	$	-	$	567
Collectively evaluated
for impairment		3,712		5,187		28		1,046		833		-		149		10,955
Total	$	3,903	$	5,545	$	46	$	1,046	$	833	$	-	$	149	$	11,522

Loans:
Ending balance:
Individually evaluated
for impairment	$	1,125	$	13,642	$	18	$	1,958	$	544	$	-	$	-	$	17,287
Collectively evaluated
for impairment		110,358		377,657		3,753		96,736		56,937		-		-		645,441
Total	$	111,483	$	391,299	$	3,771	$	98,694	$	57,481	$	-	$	-	$	662,728

* Includes construction loans

** Includes all other consumer loans

NOTE: Loan balances do not include $671 thousand in net deferred loan origination costs as of June 30, 2014.

The following tables present the activity in the allowance for loan losses by portfolio segment for the three month periods ended June 30, 2015 and 2014:



June 30, 2015
(in thousands)	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer **		Residential Mortgages*		HELOC		Unallocated		Total
Allowance for loan
and lease losses:
Beginning balance	$	4,989	$	5,830	$	70	$	924	$	815	$	149	$	12,777
Charge-offs		(80)		(35)		(5)		-		-		-		(120)
Recoveries		19		13		5		1		-		-		38
Provision		(283)		686		1		23		(12)		-		415
Ending balance	$	4,645	$	6,494	$	71	$	948	$	803	$	149	$	13,110



June 30, 2014
(in thousands)	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer **		Residential Mortgages*		HELOC		Direct Financing Leases		Unallocated		Total
Allowance for loan
and lease losses:
Beginning balance	$	4,523	$	5,108	$	36	$	1,037	$	881	$	-	$	149	$	11,734
Charge-offs		(417)		(57)		(6)		-		-		-		-		(480)
Recoveries		31		10		2		2		-		47		-		92
Provision		(234)		484		14		7		(48)		(47)		-		176
Ending balance	$	3,903	$	5,545	$	46	$	1,046	$	833	$	-	$	149	$	11,522

Impaired Loans

The following tables provide data, at the class level, of impaired loans as of the dates indicated:



		At June 30, 2015
		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Foregone		Interest Income Recognized
With no related allowance recorded:		(in thousands)
Commercial and industrial	$	2,162	$	2,240	$	-	$	2,439	$	64	$	9
Residential real estate:
Residential		2,229		2,408		-		2,244		22		23
Construction		-		-		-		-		-		-
Commercial real estate:
Commercial		1,891		1,991		-		1,927		13		41
Construction		1,101		1,101		-		1,088		-		21
Home equities		961		1,012		-		980		15		9
Consumer		-		-		-		-		-		-
Other		-		-		-		-		-		-
Total impaired loans	$	8,344	$	8,752	$	-	$	8,678	$	114	$	103


		At June 30, 2015
		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Foregone		Interest Income Recognized
With a related allowance recorded:		(in thousands)
Commercial and industrial	$	3,633	$	3,746	$	730	$	3,726	$	112	$	12
Residential real estate:
Residential		271		285		40		271		10		-
Construction		-		-		-		-		-		-
Commercial real estate:
Commercial		2,463		2,642		59		2,514		87		-
Construction		-		-		-		-		-		-
Home equities		-		-		-		-		-		-
Consumer		46		68		46		47		2		2
Other		-		-		-		-		-		-
Total impaired loans	$	6,413	$	6,741	$	875	$	6,558	$	211	$	14


		At June 30, 2015
		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Foregone		Interest Income Recognized
Total:		(in thousands)
Commercial and industrial	$	5,795	$	5,986	$	730	$	6,165	$	176	$	21
Residential real estate:
Residential		2,500		2,693		40		2,515		32		23
Construction		-		-		-		-		-		-
Commercial real estate:
Commercial		4,354		4,633		59		4,441		100		41
Construction		1,101		1,101		-		1,088		-		21
Home equities		961		1,012		-		980		15		9
Consumer		46		68		46		47		2		2
Other		-		-		-		-		-		-
Total impaired loans	$	14,757	$	15,493	$	875	$	15,236	$	325	$	117



		At December 31, 2014
		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Foregone		Interest Income Recognized
With no related allowance recorded:		(in thousands)
Commercial and industrial	$	1,017	$	1,022	$	-	$	1,096	$	9	$	66
Residential real estate:
Residential		2,264		2,435		-		2,271		37		68
Construction		-		-		-		-		-		-
Commercial real estate:
Commercial		2,103		2,208		-		2,139		33		91
Construction		1,074		1,074		-		1,169		-		44
Home equities		911		950		-		917		17		22
Consumer		-		-		-		-		-		-
Other		-		-		-		-		-		-
Total impaired loans	$	7,369	$	7,689	$	-	$	7,592	$	96	$	291


		At December 31, 2014
		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Foregone		Interest Income Recognized
With a related allowance recorded:		(in thousands)
Commercial and industrial	$	4,701	$	4,734	$	988	$	4,701	$	64	$	234
Residential real estate:
Residential		271		285		3		271		20		-
Construction		-		-		-		-		-		-
Commercial real estate:
Commercial		2,640		2,785		274		2,708		96		50
Construction		-		-		-		-		-		-
Home equities		-		-		-		-		-		-
Consumer		48		60		48		49		5		6
Other		-		-		-		-		-		-
Total impaired loans	$	7,660	$	7,864	$	1,313	$	7,729	$	185	$	290


		At December 31, 2014
		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Foregone		Interest Income Recognized
Total:		(in thousands)
Commercial and industrial	$	5,718	$	5,756	$	988	$	5,797	$	73	$	300
Residential real estate:
Residential		2,535		2,720		3		2,542		57		68
Construction		-		-		-		-		-		-
Commercial real estate:
Commercial		4,743		4,993		274		4,847		129		141
Construction		1,074		1,074		-		1,169		-		44
Home equities		911		950		-		917		17		22
Consumer		48		60		48		49		5		6
Other		-		-		-		-		-		-
Total impaired loans	$	15,029	$	15,553	$	1,313	$	15,321	$	281	$	581

Non-performing loans

The following table sets forth information regarding non-performing loans as of the dates specified:



	June 30, 2015			December 31, 2014
		(in thousands)
Non-accruing loans:
Commercial and industrial loans	$	5,620		$	5,500
Residential real estate:
Residential		1,265			1,296
Construction		-			-
Commercial real estate:
Commercial and multi-family		2,812			3,162
Construction		-			-
Home equities		475			415
Consumer loans		17			17
Other		-			-
Total non-accruing loans	$	10,189		$	10,390

Accruing loans 90+ days past due		805			201
Total non-performing loans	$	10,994		$	10,591

Total non-performing loans
to total assets		1.21	%		1.25	%
Total non-performing loans
to total loans		1.55	%		1.52	%

Troubled debt restructurings

The Company had $6.7 million in loans that were restructured in a troubled debt restructuring (“TDR”) at June 30, 2015, compared with $6.6 million at December 31, 2014. $2.1 million and $1.9 million of those balances were in non-accrual status at June 30, 2015 and December 31, 2014, respectively. Any TDR that is placed on non-accrual is not reverted back to accruing status until the borrower makes timely payments as contracted for at least six months and future collection under the revised terms is probable. All of the Company’s restructurings were allowed in an effort to maximize its ability to collect on loans where borrowers were experiencing financial difficulty. The Company did not engage in any re-modifications during the three and six month periods ended June 30, 2015 and 2014.

The reserve for a TDR is based upon the present value of the future expected cash flows discounted at the loan’s original effective rate or upon the fair value of the collateral less costs to sell, if the loan is deemed collateral dependent. This reserve methodology is used because all TDR loans are considered impaired. As of June 30, 2015, there were no commitments to lend additional funds to debtors owing on loans whose terms have been modified in TDRs.

The following tables summarize the loans that were classified as troubled debt restructurings as of the dates indicated:



		June 30, 2015
		($ in thousands)
		Total		Nonaccruing		Accruing		Related Allowance
Commercial and industrial	$	816	$	641	$	175	$	196
Residential real estate:
Residential		1,815		580		1,235		-
Construction		-		-		-		-
Commercial real estate:
Commercial and multi family		2,208		667		1,541		33
Construction		1,101		-		1,101		-
Home equities		707		221		486		-
Consumer loans		30		-		30		30
Other		-		-		-		-
Total troubled restructured loans	$	6,677	$	2,109	$	4,568	$	259



		December 31, 2014
		($ in thousands)
		Total		Nonaccruing		Accruing		Related Allowance
Commercial and industrial	$	492	$	274	$	218	$	173
Residential real estate:
Residential		1,833		594		1,239		-
Construction		-		-		-		-
Commercial real estate:
Commercial and multi family		2,428		847		1,581		33
Construction		1,074		-		1,074		-
Home equities		728		233		495		-
Consumer loans		31		-		31		31
Other		-		-		-		-
Total troubled restructured loans	$	6,586	$	1,948	$	4,638	$	237

The Company’s TDRs have various agreements that involve deferral of principal payments, or interest-only payments, for a period (usually 12 months or less) to allow the customer time to improve cash flow or sell the property. Other common types of concessions leading to the designation of a TDR are lines of credit that are termed out and extensions of maturities at rates that are less than market given the risk profile of the borrower.

The following table shows the data for TDR activity by type of concession granted to the borrower for the three and six month periods ended June 30, 2015 and 2014:


	Three months ended June 30, 2015			Three months ended June 30, 2014
	($ in thousands)			($ in thousands)

Troubled Debt Restructurings by Type of Concession	Number of Contracts	Pre-Modification Outstanding Recorded Investment	Post-Modification Outstanding Recorded Investment	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment

Commercial and Industrial	-	-	-	-		-		-
Residential Real Estate & Construction:
Extension of maturity	-	-	-	2	$	632	$	632
Commercial Real Estate & Construction	-	-	-	-		-		-
Home Equities:
Extension of maturity & rate reduction	-	-	-	1		20		20
Extension of maturity	-	-	-	2		65		65
Consumer loans	-	-	-	-		-		-
Other	-	-	-	-		-		-


	Six months ended June 30, 2015					Six months ended June 30, 2014
	($ in thousands)					($ in thousands)


Troubled Debt Restructurings by Type of Concession	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment

Commercial and Industrial:
Deferral of principal	3	$	541	$	541	-	$	-	$	-
Residential Real Estate & Construction:
Extension of maturity	-		-		-	2		632		632
Commercial Real Estate & Construction	-		-		-	-		-		-
Home Equities:
Extension of maturity & rate reduction	-		-		-	1		20		20
Extension of maturity	-		-		-	2		65		65
Consumer loans	-		-		-	-		-		-
Other	-		-		-	-		-		-

The general practice of the Bank is to work with borrowers so that they are able to pay back their loan in full. If a borrower continues to be delinquent or cannot meet the terms of a TDR and the loan is determined to be uncollectible, the loan will be charged-off. The following table presents loans which were classified as TDRs during the previous 12 months which defaulted during the three and six month periods ended June 30, 2015 and 2014:



	Three months ended June 30, 2015			Three months ended June 30, 2014
	($ in thousands)			($ in thousands)
Troubled Debt Restructurings	Number of	Recorded		Number of	Recorded
That Subsequently Defaulted	Contracts	Investment		Contracts	Investment
Commercial and Industrial	-	$	-	1	$	71
Residential Real Estate:
Residential	-		-	-		-
Construction	-		-	-		-
Commercial Real Estate:
Commercial and Multi-Family	1		245	-		-
Construction	-		-	-		-
Home Equities	-		-	1		54
Consumer loans	-		-	-		-
Other	-		-	-		-



	Six months ended June 30, 2015			Six months ended June 30, 2014
	($ in thousands)			($ in thousands)
Troubled Debt Restructurings	Number of	Recorded		Number of	Recorded
That Subsequently Defaulted	Contracts	Investment		Contracts	Investment
Commercial and Industrial	-	$	-	1	$	71
Residential Real Estate:
Residential	-		-	-		-
Construction	-		-	-		-
Commercial Real Estate:
Commercial and Multi-Family	1		245	-		-
Construction	-		-	-		-
Home Equities	1		19	1		54
Consumer loans	-		-	-		-
Other	-		-	-		-