Loans Receivable | Note 5. Loans Receivable Loans receivable are summarized as follows at June 30 (in thousands): June 30, 2018 2017 Mortgage loans: Residential $ 250,578 $ 217,778 Commercial 495,265 437,651 Construction 17,352 22,404 Net deferred loan origination costs 1,041 397 Total mortgages 764,236 678,230 Commercial and consumer loans: Commercial loans 104,135 93,631 Home equity lines of credit 37,395 41,927 Consumer and overdrafts 745 233 Net deferred loan origination costs 729 777 Total commercial and consumer loans 143,004 136,568 Total loans receivable 907,240 814,798 Allowance for loan losses (4,904 ) (5,150 ) Loans receivable, net $ 902,336 $ 809,648 In 2015, the Bank completed a merger with CMS Bancorp and its wholly owned subsidiary, CMS Bank. References to acquired loans in this note pertain only to those loans acquired as part of the merger. The following tables present the activity in the allowance for loan losses by portfolio segment for the years ended June 30, 2018, 2017 and 2016 (in thousands): For the year ended June 30, 2018 Beginning Allowance Provision (Credit) Charge-offs Recoveries Ending Allowance Originated: Residential $ 360 $ 161 $ (136 ) $ 1 $ 386 Commercial 2,589 114 - 370 3,073 Construction 1,150 352 (997 ) - 505 Commercial loans 949 (335 ) (54 ) 220 780 Home equity lines of credit 76 45 (60 ) 19 80 Consumer and overdrafts - 30 (23 ) - 7 Acquired: - Residential 26 47 - - 73 Total $ 5,150 $ 414 $ (1,270 ) $ 610 $ 4,904 For the year ended June 30, 2017 Beginning Allowance Provision (Credit) Charge-offs Recoveries Ending Allowance Originated: Residential $ 237 $ 290 $ (237 ) $ 70 $ 360 Commercial 2,149 421 - 19 2,589 Construction 269 989 (108 ) - 1,150 Commercial loans 1,313 (944 ) (741 ) 1,321 949 Home equity lines of credit 73 3 - - 76 Consumer and overdrafts 1 (5 ) - 4 - Acquired: - Residential - 64 (38 ) - 26 Commercial loans - 2 (2 ) - - Consumer and overdrafts - 3 (3 ) - - Total $ 4,042 $ 823 $ (1,129 ) $ 1,414 $ 5,150 For the year ended June 30, 2016 Beginning Allowance Provision (Credit) Charge-offs Recoveries Ending Allowance Originated: Residential $ 193 $ 444 $ (400 ) $ - $ 237 Commercial 1,766 215 (10 ) 178 2,149 Construction 100 (23 ) - 192 269 Commercial loans 1,793 1,172 (1,677 ) 25 1,313 Home equity lines of credit 69 28 (24 ) - 73 Consumer and overdrafts - 23 (22 ) - 1 Total $ 3,921 $ 1,859 $ (2,133 ) $ 395 $ 4,042 The following tables present the balance in the allowance for loan losses and the recorded investment in loans, excluding net deferred fees and accrued interest, by portfolio segment, and based on impairment method as of June 30, 2018 and June 30, 2017 (in thousands): June 30, 2018 Loans Individually Evaluated for Impairment Collectively Evaluated for Impairment Acquired With Deteriorated Credit Quality Total Individually Evaluated for Impairment Collectively Evaluated for Impairment Acquired With Deteriorated Credit Quality Total Residential $ 2,360 $ 246,913 $ 1,305 $ 250,578 $ 154 $ 232 $ 73 $ 459 Commercial 1,683 492,105 1,477 495,265 - 3,073 - 3,073 Construction 2,260 15,092 - 17,352 276 229 - 505 Commercial loans 2,451 101,684 - 104,135 9 771 - 780 Home equity lines of credit 360 36,867 168 37,395 12 68 - 80 Consumer and overdrafts - 745 - 745 - 7 - 7 Total $ 9,114 $ 893,406 $ 2,950 $ 905,470 $ 451 $ 4,380 $ 73 $ 4,904 June 30, 2017 Loans Individually Evaluated for Impairment Collectively Evaluated for Impairment Acquired With Deteriorated Credit Quality Total Individually Evaluated for Impairment Collectively Evaluated for Impairment Acquired With Deteriorated Credit Quality Total Residential $ 4,471 $ 211,983 $ 1,324 $ 217,778 $ 131 $ 229 $ 26 $ 386 Commercial 2,411 433,416 1,824 437,651 - 2,589 - 2,589 Construction 3,661 18,743 - 22,404 997 153 - 1,150 Commercial loans 6,169 87,420 42 93,631 9 940 - 949 Home equity lines of credit 610 41,140 177 41,927 5 71 - 76 Consumer and overdrafts - 233 - 233 - - - - Total $ 17,322 $ 792,935 $ 3,367 $ 813,624 $ 1,142 $ 3,982 $ 26 $ 5,150 The following tables present information related to loans individually evaluated for impairment (excluding loans acquired with deteriorated credit quality) by class of loans as of and for the years ended June 30, 2018, 2017 and 2016 (in thousands): June 30, 2018 Unpaid Principal Balance Recorded Investment Allowance for Loan Losses With no related allowance recorded: Residential $ 1,659 $ 1,576 $ - Commercial 1,765 1,683 - Commercial loans 2,254 2,098 - Home equity lines of credit 341 341 - With an allowance recorded: Residential 742 784 154 Construction 3,257 2,260 276 Commercial loans 353 353 9 Home equity lines of credit 84 19 12 Total $ 10,455 $ 9,114 $ 451 June 30, 2017 Unpaid Principal Balance Recorded Investment Allowance for Loan Losses With no related allowance recorded: Residential $ 4,216 $ 4,014 $ - Commercial 2,935 2,411 - Construction 404 404 - Commercial loans 9,433 4,979 - Home equity lines of credit 599 599 - With an allowance recorded: Residential 395 457 131 Construction 3,257 3,257 997 Commercial loans 1,190 1,190 9 Home equity lines of credit 11 11 5 Total $ 22,440 $ 17,322 $ 1,142 For the year ended For the year ended For the year ended June 30, 2018 June 30, 2017 June 30, 2016 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With no related allowance recorded: Residential $ 3,041 $ 184 $ 4,238 $ 42 $ 5,577 $ 6 Commercial 2,350 248 2,448 137 9,324 88 Construction 93 17 406 12 13 - Commercial loans 3,457 1,049 5,065 239 10,755 71 Home equity lines of credit 507 22 599 (2 ) 430 - With an allowance recorded: Residential 453 15 432 15 - - Construction 2,720 - 3,015 71 132 - Commercial loans 1,491 66 1,224 61 422 12 Home equity lines of credit 11 - 11 - - - Total $ 14,123 $ 1,601 $ 17,438 $ 575 $ 26,653 $ 177 The following table presents the recorded investment in nonaccrual loans and in loans past due over 90 days still on accrual status, by class of loans as of June 30, 2018 and June 30, 2017 (in thousands): Loans Past Due Over 90 Days Nonaccrual and Still Accruing June 30, June 30, June 30, June 30, 2018 2017 2018 2017 Originated: Residential $ 604 $ 2,581 $ - $ - Commercial 262 - - - Construction 2,260 3,661 - - Commercial loans 788 2,959 - - Home equity lines of credit 45 302 - - Acquired: Residential 1,308 1,776 - - Commercial 532 497 - - Home equity lines of credit 303 296 - - Total $ 6,102 $ 12,072 $ - $ - Nonperforming loans include both smaller-balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. The table above excludes acquired loans that are accounted for as purchased credit impaired loans totaling $1.8 million and $2.7 million as of June 30, 2018 and June 30, 2017, respectively. Such loans are excluded because the loans are in pools that are considered performing. The discounts arising from recording these loans at fair value upon acquisition were due in part to credit quality and the accretable yield is being recognized as interest income over the life of the loans based on expected cash flows. The following tables present the aging of the recorded investment in past due loans by class of loans as of June 30, 2018 and June 30, 2017 (in thousands): June 30, 2018 90 Days or 30-59 60-89 More Past Total Past Days Past Due Days Past Due Due Due Current Total Originated: Residential $ - $ 394 $ 210 $ 604 $ 194,986 $ 195,590 Commercial - - 262 262 420,320 420,582 Construction - - 2,260 2,260 15,092 17,352 Commercial loans - - 500 500 102,767 103,267 Home equity lines of credit - - 45 45 32,311 32,356 Consumer and overdrafts - - - - 733 733 Total originated - 394 3,277 3,671 766,209 769,880 Acquired: Residential - 232 1,806 2,038 52,950 54,988 Commercial - - 1,112 1,112 73,571 74,683 Construction - - - - - - Commercial loans - - - - 868 868 Home equity lines of credit 30 - 296 326 4,713 5,039 Consumer and overdrafts - - - - 12 12 Total acquired 30 232 3,214 3,476 132,114 135,590 Total $ 30 $ 626 $ 6,491 $ 7,147 $ 898,323 $ 905,470 June 30, 2017 90 Days or 30-59 60-89 More Past Total Past Days Past Due Days Past Due Due Due Current Total Originated: Residential $ 94 $ 275 $ 1,973 $ 2,342 $ 153,390 $ 155,732 Commercial - - - - 355,247 355,247 Construction - - 3,661 3,661 18,743 22,404 Commercial loans - - 544 544 88,449 88,993 Home equity lines of credit - 199 103 302 35,246 35,548 Consumer and overdrafts - - - - 211 211 Total originated 94 474 6,281 6,849 651,286 658,135 Acquired: Residential 237 463 1,472 2,172 59,874 62,046 Commercial - - 1,054 1,054 81,350 82,404 Construction - - - - - - Commercial loans - - - - 4,638 4,638 Home equity lines of credit - - 296 296 6,083 6,379 Consumer and overdrafts - - - 22 22 Total acquired 237 463 2,822 3,522 151,967 155,489 Total $ 331 $ 937 $ 9,103 $ 10,371 $ 803,253 $ 813,624 Troubled Debt Restructurings The terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan. As of June 30, 2018 and June 30, 2017, the Company had 12 and 20 loans classified as troubled debt restructurings totaling $3.8 million and $9.9 million, respectively. The Company has allocated $139,000 and $145,000, respectively, of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2018 and June 30, 2017, and has not committed to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings. The following table presents loans by modified in troubled debt restructurings that occurred during the years ended June 30, 2018, 2017 and 2016 (dollars in thousands): Number of loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Year ended June 30, 2018: Commercial loans 1 $ 275 $ 289 Total 1 $ 275 $ 289 Year ended June 30, 2017: Residential 1 $ 165 $ 210 Commercial loans 1 276 276 Total 2 $ 441 $ 486 Year ended June 30, 2016: Residential 3 $ 1,697 $ 1,697 Commercial 1 1,178 1,178 Commercial loans 1 64 64 Home equity lines of credit 1 200 200 Total 4 $ 3,139 $ 3,139 The Company had two troubled debt restructurings, both commercial loans, for which there was a payment default in the year ended June 30, 2018 that were modified in the twelve months prior to default, which resulted in a $2,000 increase to the allowance for loan loss. There were two troubled debt restructurings, one residential mortgage and one home equity line of credit, for which there was a payment default in the year ended June 30, 2017 that were modified in the twelve months prior to default, and resulted in no increase to the allowance for loan loss. There was one such default, on a residential mortgage, in the year ended June 30, 2016 which resulted in no increase to the allowance for loan losses. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy. Credit Quality Indicators The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a monthly basis. The Company utilized the same grading process for acquired loans as it does for originated loans. The Company uses the following definitions for risk ratings: Special Mention – Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date. Substandard – Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loans not meeting the criteria above that are analyzed individually as part of the above-described process and loans in groups of homogenous loans are considered to be pass rated loans. These loans are monitored based on delinquency and performance. Based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands): June 30, 2018 Pass Special Mention Substandard Total Originated: Residential $ 194,341 $ 571 $ 678 $ 195,590 Commercial 418,370 - 2,212 420,582 Construction 15,092 - 2,260 17,352 Commercial loans 98,205 167 4,895 103,267 Home equity lines of credit 32,167 144 45 32,356 Consumer and overdrafts 733 - - 733 Total originated 758,908 882 10,090 769,880 Acquired: Residential 51,858 249 2,881 54,988 Commercial 71,832 842 2,009 74,683 Construction - - - - Commercial loans 857 11 - 868 Home equity lines of credit 4,641 - 398 5,039 Consumer and overdrafts 12 - - 12 Total acquired 129,200 1,102 5,288 135,590 Total $ 888,108 $ 1,984 $ 15,378 $ 905,470 June 30, 2017 Pass Special Mention Substandard Total Originated: Residential $ 153,165 $ - $ 2,567 $ 155,732 Commercial 352,203 134 2,910 355,247 Construction 18,743 - 3,661 22,404 Commercial loans 79,406 - 9,587 88,993 Home equity lines of credit 35,246 58 244 35,548 Consumer and overdrafts 211 - 211 Total originated 638,974 192 18,969 658,135 Acquired: Residential 58,665 - 3,381 62,046 Commercial 80,082 - 2,322 82,404 Construction - - - - Commercial loans 4,638 - - 4,638 Home equity lines of credit 5,906 - 473 6,379 Consumer and overdrafts 22 - - 22 Total acquired 149,313 - 6,176 155,489 Total $ 788,287 $ 192 $ 25,145 $ 813,624 Purchased Credit Impaired Loans The Company has acquired loans for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans as of June 30, 2018 and 2017 is as follows (in thousands): June 30, June 30, 2018 2017 Residential $ 1,232 $ 1,298 Commercial 1,477 1,824 Commercial loans - 42 Home equity lines of credit 168 177 Carrying amount, net of allowance of $73 and $26, respectively $ 2,877 $ 3,341 Accretable yield, or income expected to be collected, for acquired loans is as follows (in thousands): Year ended June 30, 2018 2017 2016 Beginning balance $ 403 $ 578 $ 713 New loans acquired - - - Accretion income (70 ) (190 ) (185 ) Reclassification from non-accretable difference 5 15 132 Disposals (93 ) - (82 ) Ending balance $ 245 $ 403 $ 578 |