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, 2019		December 31, 2018
Mortgage loans on real estate:	(in thousands)
Residential mortgages	$	159,450	$	158,404
Commercial and multi-family		623,049		592,507
Construction-Residential		479		113
Construction-Commercial		88,300		105,196
Home equities		70,751		70,546
Total real estate loans		942,029		926,766

Commercial and industrial loans		267,505		226,057
Consumer and other loans		1,527		1,520
Net deferred loan origination costs		1,638		1,587
Total gross loans		1,212,699		1,155,930

Allowance for loan losses		(15,248)		(14,784)

Loans, net	$	1,197,451	$	1,141,146

The Bank sells certain fixed rate residential mortgages to FNMA while maintaining the servicing rights for those mortgages. In the three month and six month periods ended June 30, 2019, the Bank sold mortgages to FNMA totaling $2.6 million and $4.6 million, respectively. The Bank did not sell any mortgages to FNMA in the three month and six month periods ended June 30, 2018. At June 30, 2019 and December 31, 2018, the Bank had a loan servicing portfolio principal balance of $74 million and $73 million, respectively, upon which it earned servicing fees. The value of the mortgage servicing rights for that portfolio was $0.6 million at June 30, 2019 and December 31, 2018. No loans were held for sale at June 30, 2019. At December 31, 2018 there were $0.4 million in residential mortgages held for sale. 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, 2018. 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, 2018. Unless otherwise noted in this Form 10-Q, the policies and methodology described in the Annual Report for the year ended December 31, 2018 are consistent with those utilized by the Company in the three and six month periods ended June 30, 2019.

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 losses:

Acceptable or better

Watch

Special Mention

Substandard

Doubtful

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. Unlike commercial customers, consumer loan customers are not required to provide the Company with updated financial information. 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 primary credit quality indicator for consumer loans. However, once a consumer loan is identified as impaired, it is individually evaluated for impairment.

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



June 30, 2019
(in thousands)
Corporate Credit Exposure – By Credit Rating	Commercial Real Estate Construction		Commercial and Multi-Family Mortgages		Total Commercial Real Estate		Commercial and Industrial
Acceptable or better	$	57,310	$	467,643	$	524,953	$	173,858
Watch		26,382		132,110		158,492		78,857
Special Mention		4,329		16,522		20,851		8,389
Substandard		279		6,774		7,053		6,401
Doubtful/Loss		-		-		-		-
Total	$	88,300	$	623,049	$	711,349	$	267,505




December 31, 2018
(in thousands)
Corporate Credit Exposure – By Credit Rating	Commercial Real Estate Construction		Commercial and Multi-Family Mortgages		Total Commercial Real Estate		Commercial and Industrial
Acceptable or better	$	65,932	$	466,294	$	532,226	$	155,687
Watch		30,628		109,409		140,037		57,366
Special Mention		-		10,583		10,583		4,105
Substandard		8,636		6,221		14,857		8,870
Doubtful/Loss		-		-		-		29
Total	$	105,196	$	592,507	$	697,703	$	226,057

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, 2019
(in thousands)

		Current							Non-accruing		Total
		Balance	30-59 days		60-89 days		90+ days		Loans		Balance

Commercial and industrial	$	264,346	$	853	$	-	$	-	$	2,306	$	267,505
Residential real estate:
Residential		157,580		170		-		-		1,700		159,450
Construction		479		-		-		-		-		479
Commercial real estate:
Commercial		616,241		1,129		-		-		5,679		623,049
Construction		88,021		-		-		-		279		88,300
Home equities		69,415		248		32		-		1,056		70,751
Consumer and other		1,506		21		-		-		-		1,527
Total Loans	$	1,197,588	$	2,421	$	32	$	-	$	11,020	$	1,211,061

Note: Loan balances do not include $1.6 million in net deferred loan origination costs as of June 30, 2019.



December 31, 2018
(in thousands)

		Current							Non-accruing		Total
		Balance	30-59 days		60-89 days		90+ days		Loans		Balance

Commercial and industrial	$	217,625	$	6,173	$	565	$	-	$	1,694	$	226,057
Residential real estate:
Residential		154,063		2,546		332		-		1,463		158,404
Construction		113		-		-		-		-		113
Commercial real estate:
Commercial		582,016		4,546		-		-		5,945		592,507
Construction		95,204		1,027		329		-		8,636		105,196
Home equities		69,094		123		76		-		1,253		70,546
Consumer and other		1,514		5		1		-		-		1,520
Total Loans	$	1,119,629	$	14,420	$	1,303	$	-	$	18,991	$	1,154,343

Note: Loan balances do not include $1.6 million in net deferred loan origination costs as of December 31, 2018.

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 30, 2019 and 2018:




June 30, 2019

(in thousands)	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer and Other		Residential Mortgages*		Home Equities		Total
Allowance for loan
losses:
Beginning balance	$	4,368	$	8,844	$	106	$	1,121	$	345	$	14,784
Charge-offs		(158)		-		(54)		-		-		(212)
Recoveries		39		-		9		-		-		48
Provision (Credit)		1,023		(207)		69		(238)		(19)		628
Ending balance	$	5,272	$	8,637	$	130	$	883	$	326	$	15,248

Allowance for loan
losses:
Ending balance:
Individually evaluated
for impairment	$	374	$	66	$	22	$	35	$	-	$	497
Collectively evaluated
for impairment		4,898		8,571		108		848		326		14,751
Total	$	5,272	$	8,637	$	130	$	883	$	326	$	15,248

Loans:
Ending balance:
Individually evaluated
for impairment	$	4,206	$	6,557	$	22	$	2,993	$	1,635	$	15,413
Collectively evaluated
for impairment		263,299		704,792		1,505		156,936		69,116		1,195,648
Total	$	267,505	$	711,349	$	1,527	$	159,929	$	70,751	$	1,211,061

* Includes construction loans

Note: Loan balances do not include $1.6 million in net deferred loan origination costs as of June 30, 2019.




June 30, 2018

(in thousands)	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer and Other		Residential Mortgages*		Home Equities		Total
Allowance for loan
losses:
Beginning balance	$	5,204	$	7,409	$	109	$	950	$	347	$	14,019
Charge-offs		(67)		-		(64)		(86)		(11)		(228)
Recoveries		13		-		4		-		1		18
Provision (Credit)		(809)		2,036		41		161		(3)		1,426
Ending balance	$	4,341	$	9,445	$	90	$	1,025	$	334	$	15,235

Allowance for loan
losses:
Ending balance:
Individually evaluated
for impairment	$	94	$	1,245	$	24	$	38	$	-	$	1,401
Collectively evaluated
for impairment		4,247		8,200		66		987		334		13,834
Total	$	4,341	$	9,445	$	90	$	1,025	$	334	$	15,235
Loans:
Ending balance:
Individually evaluated
for impairment	$	2,936	$	18,475	$	24	$	2,522	$	1,904	$	25,861
Collectively evaluated
for impairment		236,549		649,067		1,423		144,141		67,415		1,098,595
Total	$	239,485	$	667,542	$	1,447	$	146,663	$	69,319	$	1,124,456

* Includes construction loans

Note: Loan balances do not include $1.4 million in net deferred loan origination costs as of June 30, 2018.

The following tables present the activity in the allowance for loan losses according to portfolio segment for the three month periods ended June 30, 2019 and 2018:



June 30, 2019
($ in thousands)	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer and Other		Residential Mortgages*		Home Equities		Total
Allowance for loan
losses:
Beginning balance	$	4,754	$	9,049	$	111	$	953	$	340	$	15,207
Charge-offs		(37)		-		(31)		-		-		(68)
Recoveries		17		-		2		-		-		19
Provision (Credit)		538		(412)		48		(70)		(14)		90
Ending balance	$	5,272	$	8,637	$	130	$	883	$	326	$	15,248



June 30, 2018
($ in thousands)	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer and Other		Residential Mortgages*		Home Equities		Total
Allowance for loan
losses:
Beginning balance	$	5,115	$	8,145	$	96	$	1,007	$	330	$	14,693
Charge-offs		-		-		(30)		(86)		(11)		(127)
Recoveries		7		-		3		-		-		10
Provision (Credit)		(781)		1,300		21		104		15		659
Ending balance	$	4,341	$	9,445	$	90	$	1,025	$	334	$	15,235

Impaired Loans

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



		At June 30, 2019
		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	$	3,345	$	3,535	$	-	$	3,467	$	44	$	60
Residential real estate:
Residential		2,531		2,769		-		2,599		32		29
Construction		-		-		-		-		-		-
Commercial real estate:
Commercial		6,212		6,696		-		6,507		125		24
Construction		279		279		-		304		14		-
Home equities		1,635		1,814		-		1,704		35		17
Consumer and other		-		-		-		-		-		-
Total impaired loans	$	14,002	$	15,093	$	-	$	14,581	$	250	$	130


		At June 30, 2019
		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	$	861	$	958	$	374	$	954	$	23	$	10
Residential real estate:
Residential		462		467		35		465		11		2
Construction		-		-		-		-		-		-
Commercial real estate:
Commercial		66		68		66		68		2		-
Construction		-		-		-		-		-		-
Home equities		-		-		-		-		-		-
Consumer and other		22		25		22		23		-		1
Total impaired loans	$	1,411	$	1,518	$	497	$	1,510	$	36	$	13


		At June 30, 2019
		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Foregone		Interest Income Recognized
Total:		(in thousands)
Commercial and industrial	$	4,206	$	4,493	$	374	$	4,421	$	67	$	70
Residential real estate:
Residential		2,993		3,236		35		3,064		43		31
Construction		-		-		-		-		-		-
Commercial real estate:
Commercial		6,278		6,764		66		6,575		127		24
Construction		279		279		-		304		14		-
Home equities		1,635		1,814		-		1,704		35		17
Consumer and other		22		25		22		23		-		1
Total impaired loans	$	15,413	$	16,611	$	497	$	16,091	$	286	$	143



		At December 31, 2018
		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	$	1,633	$	2,611	$	-	$	1,785	$	116	$	65
Residential real estate:
Residential		2,289		2,483		-		2,337		45		69
Construction		-		-		-		-		-		-
Commercial real estate:
Commercial		6,538		6,914		-		6,733		220		115
Construction		116		116		-		143		-		12
Home equities		1,887		2,058		-		1,952		71		43
Consumer and other		-		-		-		-		-		-
Total impaired loans	$	12,463	$	14,182	$	-	$	12,950	$	452	$	304


		At December 31, 2018
		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	$	2,068	$	2,095	$	249	$	2,098	$	17	$	125
Residential real estate:
Residential		525		556		85		520		22		3
Construction		-		-		-		-		-		-
Commercial real estate:
Commercial		-		-		-		-		-		-
Construction		8,636		8,975		716		8,793		379		113
Home equities		-		-		-		-		-		-
Consumer and other		23		27		23		23		-		2
Total impaired loans	$	11,252	$	11,653	$	1,073	$	11,434	$	418	$	243


		At December 31, 2018
		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Foregone		Interest Income Recognized
Total:		(in thousands)
Commercial and industrial	$	3,701	$	4,706	$	249	$	3,883	$	133	$	190
Residential real estate:
Residential		2,814		3,039		85		2,857		67		72
Construction		-		-		-		-		-		-
Commercial real estate:
Commercial		6,538		6,914		-		6,733		220		115
Construction		8,752		9,091		716		8,936		379		125
Home equities		1,887		2,058		-		1,952		71		43
Consumer and other		23		27		23		23		-		2
Total impaired loans	$	23,715	$	25,835	$	1,073	$	24,384	$	870	$	547

Troubled debt restructurings

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



		June 30, 2019
		(in thousands)
		Total		Nonaccruing		Accruing		Related Allowance
Commercial and industrial	$	2,116	$	216	$	1,900	$	69
Residential real estate:
Residential		1,565		272		1,293		-
Construction		-		-		-		-
Commercial real estate:
Commercial and multi-family		4,055		3,456		599		-
Construction		-		-		-		-
Home equities		803		224		579		-
Consumer and other		22		-		22		22
Total TDR loans	$	8,561	$	4,168	$	4,393	$	91



		December 31, 2018
		(in thousands)
		Total		Nonaccruing		Accruing		Related Allowance
Commercial and industrial	$	2,282	$	275	$	2,007	$	154
Residential real estate:
Residential		1,617		266		1,351		14
Construction		-		-		-		-
Commercial real estate:
Commercial and multi-family		4,164		3,571		593		-
Construction		8,753		8,637		116		716
Home equities		756		122		634		-
Consumer and other		23		-		23		23
Total TDR loans	$	17,595	$	12,871	$	4,724	$	907

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 reserve for a TDR is based upon the present value of the future expected cash flows discounted at the loan’s original effective interest 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, 2019, there were no commitments to lend additional funds to debtors owing on loans whose terms have been modified in TDRs.

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 borrower time to improve cash flow or sell the property. Other common concessions leading to the designation of a TDR are lines of credit that are termed-out and/or extensions of maturities at rates that are less than the prevailing market rates given the risk profile of the borrower.

The following tables show the data for TDR activity by the type of concession granted to the borrower for the three and six month periods ended June 30, 2019 and 2018:


	Three months ended June 30, 2019					Three months ended June 30, 2018
	(Recorded Investment in thousands)					(Recorded Investment 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:										-
Term-out line of credit	-	$	-	$	-	1	$	29	$	29
Combination of concessions	-		-		-	1		63		63
Residential Real Estate & Construction	-		-		-	-		-		-
Commercial Real Estate & Construction:
Combination of concessions	-		-		-	1		154		154
Home Equities:			-		-	-		-		-
Deferral of principal	-		-		-	1		100		100
Extension of maturity and
interest rate reduction	1		171		171	-		-		-
Consumer and other loans	-		-		-	-		-		-



	Six months ended June 30, 2019					Six months ended June 30, 2018
	(Recorded Investment in thousands)					(Recorded Investment 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:
Term-out line of credit	-	$	-	$	-	1	$	29	$	29
Combination of concessions	-		-		-	1		63		63
Residential Real Estate & Construction
Commercial Real Estate & Construction:
Extension of maturity	-		-		-	1		181		181
Combination of concessions	-		-		-	1		154		154
Home Equities:
Deferral of principal	-		-		-	1		100		100
Extension of maturity and
interest rate reduction	2		280		280	-		-		-
Consumer and other loans	-		-		-	-		-		-

The general practice of the Bank is to work with borrowers so that they are able to repay 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 to its collateral value. A loan is considered in default when the loan is 90 days past due. Loans which were classified as TDRs during the previous 12 months which defaulted during the six month periods ended June 30, 2019 and 2018 were not material.