Loans | Note 6: Loans Major classifications of loans at the indicated dates are as follows: June 30, December 31, (In thousands) 2018 2017 Residential mortgage loans: 1-4 family first-lien residential mortgages $ 225,864 $ 216,793 Construction 3,288 5,558 Total residential mortgage loans 229,152 222,351 Commercial loans: Real estate 206,960 192,525 Lines of credit 49,314 51,285 Other commercial and industrial 58,742 50,097 Tax exempt loans 9,860 10,405 Total commercial loans 324,876 304,312 Consumer loans: Home equity and junior liens 26,262 25,935 Other consumer 27,037 28,646 Total consumer loans 53,299 54,581 Total loans 607,327 581,244 Net deferred loan fees (142 ) (413 ) Less allowance for loan losses (7,605 ) (7,126 ) Loans receivable, net $ 599,580 $ 573,705 Although the Bank may occasionally purchase or fund loan participation interests outside of its primary market areas, the Bank generally originates residential mortgage, commercial, and consumer loans largely to customers throughout Oswego and Onondaga counties. Although the Bank has a diversified loan portfolio, a substantial portion of its borrowers’ abilities to honor their loan contracts is dependent upon the counties’ employment and economic conditions. The Bank acquired $15.6 million and $10.2 million of loans originated by an unrelated financial institution, located outside of the Bank’s market area, in January 2017 and April 2017, respectively. The acquired loan pools represented a 90% participating interest in a total of 1,231 loans secured by liens on automobiles with maturities ranging primarily from two to six years. These loans are serviced through their respective maturities by the originating financial institution. As of June 30, 2018 and December 31, 2017 there were 1,000 loans outstanding with a remaining outstanding carrying value of $16.3 million and 1,082 loans outstanding with a remaining outstanding carrying value of $19.6 million, respectively. Since the acquisition of these loan pools, a total of nine loans had cumulative net charge-offs totaling $79,000 with $34,000 in net charge-offs for the six months ended June 30, 2018. As of June 30, 2018 and December 31, 2017, residential mortgage loans with a carrying value of $154.1 million and $148.1 million, respectively, have been pledged by the Company to the Federal Home Loan Bank of New York (“FHLBNY”) under a blanket collateral agreement to secure the Company’s line of credit and term borrowings. Loan Origination / Risk Management The Company’s lending policies and procedures are presented in Note 5 to the audited consolidated financial statements included in the 2017 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2018 and have not changed. As part of the execution of the Company’s overall balance sheet management strategies, the Bank will acquire participating interests in loans originated by unrelated third parties on a sporadic basis. The purchase of participations in loans that are originated by third parties only occurs after the completion of thorough pre-acquisition due diligence. Loans in which the Company acquires a participating interest are determined to meet, in all material respects, the Company’s internal underwriting policies, including credit and collateral suitability thresholds, prior to acquisition. In addition, the financial condition of the originating financial institutions, which are generally retained as the ongoing loan servicing provider for participations acquired by the Bank, are analyzed prior to the acquisition of the participating interests and monitored on a regular basis thereafter for the life of those interests. To develop and document a systematic methodology for determining the allowance for loan losses, the Company has divided the loan portfolio into three portfolio segments, each with different risk characteristics but with similar methodologies for assessing risk. Each portfolio segment is broken down into loan classes where appropriate. Loan classes contain unique measurement attributes, risk characteristics, and methods for monitoring and assessing risk that are necessary to develop the allowance for loan losses. Unique characteristics such as borrower type, loan type, collateral type, and risk characteristics define each class. The following table illustrates the portfolio segments and classes for the Company’s loan portfolio: Portfolio Segment Class Residential Mortgage Loans 1-4 family first-lien residential mortgages Construction Commercial Loans Real estate Lines of credit Other commercial and industrial Tax exempt loans Consumer Loans Home equity and junior liens Other consumer The following tables present the classes of the loan portfolio, not including net deferred loan costs, summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company's internal risk rating system as of the dates indicated: As of June 30, 2018 Special (In thousands) Pass Mention Substandard Doubtful Total Residential mortgage loans: 1-4 family first-lien residential mortgages $ 221,719 $ 485 $ 1,284 $ 2,376 $ 225,864 Construction 3,288 - - - 3,288 Total residential mortgage loans 225,007 485 1,284 2,376 229,152 Commercial loans: Real estate 201,733 1,533 1,913 1,781 206,960 Lines of credit 48,941 164 169 40 49,314 Other commercial and industrial 57,411 407 628 296 58,742 Tax exempt loans 9,860 - - - 9,860 Total commercial loans 317,945 2,104 2,710 2,117 324,876 Consumer loans: Home equity and junior liens 25,906 127 140 89 26,262 Other consumer 26,864 161 12 - 27,037 Total consumer loans 52,770 288 152 89 53,299 Total loans $ 595,722 $ 2,877 $ 4,146 $ 4,582 $ 607,327 As of December 31, 2017 Special (In thousands) Pass Mention Substandard Doubtful Total Residential mortgage loans: 1-4 family first-lien residential mortgages $ 211,825 $ 891 $ 1,869 $ 2,208 $ 216,793 Construction 5,558 - - - 5,558 Total residential mortgage loans 217,383 891 1,869 2,208 222,351 Commercial loans: Real estate 187,073 1,372 2,024 2,056 192,525 Lines of credit 50,507 195 523 60 51,285 Other commercial and industrial 48,738 407 532 420 50,097 Tax exempt loans 10,405 - - - 10,405 Total commercial loans 296,723 1,974 3,079 2,536 304,312 Consumer loans: Home equity and junior liens 25,396 61 304 174 25,935 Other consumer 28,584 55 7 - 28,646 Total consumer loans 53,980 116 311 174 54,581 Total loans $ 568,086 $ 2,981 $ 5,259 $ 4,918 $ 581,244 Management has reviewed its loan portfolio and determined that, to the best of its knowledge, no material exposure exists to sub-prime or other high-risk residential mortgages. The Company is not in the practice of originating these types of loans. Nonaccrual and Past Due Loans Loans are placed on nonaccrual when the contractual payment of principal and interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan may be currently performing. Loans are considered past due if the required principal and interest payments have not been received within thirty days of the payment due date. An age analysis of past due loans, not including net deferred loan costs, segregated by portfolio segment and class of loans, as of June 30, 2018 and December 31, 2017, are detailed in the following tables: As of June 30, 2018 30-59 Days 60-89 Days 90 Days Past Due Past Due and Total Total Loans (In thousands) And Accruing And Accruing Over Past Due Current Receivable Residential mortgage loans: 1-4 family first-lien residential mortgages $ 1,095 $ 87 $ 2,090 $ 3,272 $ 222,592 $ 225,864 Construction - - - - 3,288 3,288 Total residential mortgage loans 1,095 87 2,090 3,272 225,880 229,152 Commercial loans: Real estate 54 387 2,469 2,910 204,050 206,960 Lines of credit 161 17 133 311 49,003 49,314 Other commercial and industrial 100 9 550 659 58,083 58,742 Tax exempt loans - 238 - 238 9,622 9,860 Total commercial loans 315 651 3,152 4,118 320,758 324,876 Consumer loans: Home equity and junior liens 55 10 140 205 26,057 26,262 Other consumer 107 64 63 234 26,803 27,037 Total consumer loans 162 74 203 439 52,860 53,299 Total loans $ 1,572 $ 812 $ 5,445 $ 7,829 $ 599,498 $ 607,327 As of December 31, 2017 30-59 Days 60-89 Days 90 Days Past Due Past Due and Total Total Loans (In thousands) And Accruing And Accruing Over Past Due Current Receivable Residential mortgage loans: 1-4 family first-lien residential mortgages $ 1,196 $ 925 $ 2,088 $ 4,209 $ 212,584 $ 216,793 Construction - - - - 5,558 5,558 Total residential mortgage loans 1,196 925 2,088 4,209 218,142 222,351 Commercial loans: Real estate 720 2,056 1,545 4,321 188,204 192,525 Lines of credit 1,482 31 132 1,645 49,640 51,285 Other commercial and industrial 575 60 766 1,401 48,696 50,097 Tax exempt loans - - - - 10,405 10,405 Total commercial loans 2,777 2,147 2,443 7,367 296,945 304,312 Consumer loans: Home equity and junior liens 94 74 300 468 25,467 25,935 Other consumer 192 50 63 305 28,341 28,646 Total consumer loans 286 124 363 773 53,808 54,581 Total loans $ 4,259 $ 3,196 $ 4,894 $ 12,349 $ 568,895 $ 581,244 Nonaccrual loans, segregated by class of loan, were as follows: June 30, December 31, (In thousands) 2018 2017 Residential mortgage loans: 1-4 family first-lien residential mortgages $ 2,090 $ 2,088 2,090 2,088 Commercial loans: Real estate 2,469 1,545 Lines of credit 133 132 Other commercial and industrial 550 766 3,152 2,443 Consumer loans: Home equity and junior liens 140 300 Other consumer 63 63 203 363 Total nonaccrual loans $ 5,445 $ 4,894 The Company is required to disclose certain activities related to Troubled Debt Restructurings (“TDR”) in accordance with accounting guidance. Certain loans have been modified in a TDR where economic concessions have been granted to a borrower who is experiencing, or expected to experience, financial difficulties. These economic concessions could include a reduction in the loan interest rate, extension of payment terms, reduction of principal amortization, or other actions that it would not otherwise consider for a new loan with similar risk characteristics. The Company is required to disclose new TDRs for each reporting period for which an income statement is being presented. The pre-modification outstanding recorded investment is the principal loan balance less the provision for loan losses before the loan was modified as a TDR. The post-modification outstanding recorded investment is the principal balance less the provision for loan losses after the loan was modified as a TDR. Additional provision for loan losses is the change in the allowance for loan losses between the pre-modification outstanding recorded investment and post-modification outstanding recorded investment. The Company had no loans that have been modified as TDRs for the three months ended June 30, 2018. The table below details a loan that has been modified as a TDR for the six months ended June 30, 2018. For the six months ended June 30, 2018 (In thousands) Number of loans Pre-modification outstanding recorded investment Post-modification outstanding recorded investment Additional provision for loan losses Other commercial and industrial loans 1 $ 300 $ 300 $ - The TDR evaluated for impairment for the six months ended June 30, 2018, has been classified as a TDR due to economic concessions granted, which included an extended maturity date that will result in a delay in payment from the original contractual maturity. The Company had no loans that have been modified as TDRs for the three or six months ended June 30, 2017. The Company is required to disclose loans that have been modified as TDRs within the previous 12 months in which there was payment default after the restructuring. The Company defines payment default as any loans 90 days past due on contractual payments. The Company had no loans that had been modified as TDRs during the twelve months prior to June 30, 2018, which had subsequently defaulted during the six months ended June 30, 2018. The Company had no loans that had been modified as TDRs during the twelve months prior to June 30, 2017, which had subsequently defaulted during the six months ended June 30, 2017. When the Company modifies a loan within a portfolio segment that is individually evaluated for impairment, a potential impairment is analyzed either based on the present value of the expected future cash flows discounted at the interest rate of the original loan terms or the fair value of the collateral less costs to sell. If it is determined that the value of the loan is less than its recorded investment, then impairment is recognized as a component of the provision for loan losses, an associated increase to the allowance for loan losses or as a charge-off to the allowance for loan losses in the current period. Impaired Loans The following table summarizes impaired loan information by portfolio class at the indicated dates: June 30, 2018 December 31, 2017 Unpaid Unpaid Recorded Principal Related Recorded Principal Related (In thousands) Investment Balance Allowance Investment Balance Allowance With no related allowance recorded: 1-4 family first-lien residential mortgages $ 872 $ 876 $ - $ 900 $ 909 $ - Commercial real estate 2,351 2,405 - 3,314 3,360 - Commercial lines of credit 162 162 - 507 507 - Other commercial and industrial 732 733 - 523 524 - Home equity and junior liens - - - 80 80 - With an allowance recorded: 1-4 family first-lien residential mortgages 972 972 111 958 958 210 Commercial real estate 2,179 2,179 596 2,186 2,187 320 Commercial lines of credit 47 47 47 40 40 40 Other commercial and industrial 306 306 276 525 525 391 Home equity and junior liens 207 207 141 210 210 142 Total: 1-4 family first-lien residential mortgages 1,844 1,848 111 1,858 1,867 210 Commercial real estate 4,530 4,584 596 5,500 5,547 320 Commercial lines of credit 209 209 47 547 547 40 Other commercial and industrial 1,038 1,039 276 1,048 1,049 391 Home equity and junior liens 207 207 141 290 290 142 Totals $ 7,828 $ 7,887 $ 1,171 $ 9,243 $ 9,300 $ 1,103 The following table presents the average recorded investment in impaired loans for the periods indicated: For the three months ended For the six months ended June 30, June 30, (In thousands) 2018 2017 2018 2017 1-4 family first-lien residential mortgages $ 1,846 $ 1,416 $ 1,850 $ 1,482 Commercial real estate 4,971 4,508 5,147 4,696 Commercial lines of credit 376 418 433 412 Other commercial and industrial 1,050 984 1,049 997 Home equity and junior liens 208 215 235 305 Total $ 8,451 $ 7,541 $ 8,714 $ 7,892 The following table presents the cash basis interest income recognized on impaired loans for the periods indicated: For the three months ended For the six months ended June 30, June 30, (In thousands) 2018 2017 2018 2017 1-4 family first-lien residential mortgages $ 14 $ 10 $ 32 $ 21 Commercial real estate 18 50 66 95 Commercial lines of credit 10 7 21 13 Other commercial and industrial 13 6 19 13 Home equity and junior liens 3 3 6 4 Total $ 58 $ 76 $ 144 $ 146 |