Loans And The Allowance For Loan Losses | 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: March 31, 2017 December 31, 2016 Mortgage loans on real estate: (in thousands) Residential mortgages $ 122,818 $ 118,542 Commercial and multi-family 464,288 462,385 Construction-Residential 2,155 2,540 Construction-Commercial 95,757 93,240 Home equities 66,229 66,234 Total real estate loans 751,247 742,941 Commercial and industrial loans 192,041 197,371 Consumer and other loans 1,344 1,417 Net deferred loan origination costs 951 783 Total gross loans 945,583 942,512 Allowance for loan losses (13,579) (13,916) Loans, net $ 932,004 $ 928,596 The Bank sells certain fixed rate residential mortgages to FNMA while maintaining the servicing rights for those mortgages. In the three month period ended March 31, 2017, the Bank sold mortgages to FNMA totaling $ 2.8 million , compared with $0.9 m illion in the three month period ended March 31, 2016. At each of March 31, 2017 and December 31, 2016, the Bank had a loan servicing portfolio principal balance of $76 million upon which it earned servicing fees. The value of the mortgage servicing rights for that portfolio was $0.6 million at March 31, 2017 and $0.5 million at December 31, 2016. At March 31, 2017 there were $0.9 million in residential mortgages held for sale compared with $0.3 million at December 31, 2016. The Company has never been contacted by FNMA to repurchase any loans due to improper documentation or fraud. The Company had $9 million in commercial and industrial loans held for sale as of March 31, 2017. This represents a single loan relationship in which the Bank was a participant in a larger syndicated loan. There was no significant credit deterioration in the loan as the Bank received a bid for the loan at par and as a result the loan’s fair value was equal to its amortized cost. The Bank does not typically sell its commercial loans or hold them for resale. However, management determined that from a risk management and capital management perspective, selling this particular loan was in the Bank’s best interest. The loan is expected to be sold in the second quarter of 2017. There were no commercial loans held for sale as of December 31, 2016. 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, 2016. 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, 2016. Unless otherwise noted in this Form 10-Q, the policies and methodology described in the Annual Report for the year ended December 31, 2016 are consistent with those utilized by the Company in the three month period ended March 31, 2017. 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: · 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. 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: March 31, 2017 (in thousands) Corporate Credit Exposure – By Credit Rating Commercial Real Estate Construction Commercial and Multi-Family Mortgages Total Commercial Real Estate Commercial and Industrial 1-3 $ 80,643 $ 375,456 $ 456,099 $ 123,648 4 10,936 71,958 82,894 55,746 5 - 6,641 6,641 9,264 6 4,178 10,233 14,411 2,570 7 - - - 813 Total $ 95,757 $ 464,288 $ 560,045 $ 192,041 December 31, 2016 (in thousands) Corporate Credit Exposure – By Credit Rating Commercial Real Estate Construction Commercial and Multi-Family Mortgages Total Commercial Real Estate Commercial and Industrial 1-3 $ 82,520 $ 372,235 $ 454,755 $ 121,414 4 6,541 73,655 80,196 59,117 5 - 12,506 12,506 12,623 6 4,179 3,989 8,168 3,404 7 - - - 813 Total $ 93,240 $ 462,385 $ 555,625 $ 197,371 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: March 31, 2017 (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 $ 2,751 $ 138 $ 931 $ 3,820 $ 188,221 $ 192,041 $ 72 $ 2,771 Residential real estate: Residential 1,225 70 659 1,954 120,864 122,818 - 846 Construction - - - - 2,155 2,155 - - Commercial real estate: Commercial 15,249 213 2,097 17,559 446,729 464,288 - 3,174 Construction 4,127 - 4,179 8,306 87,451 95,757 - 4,179 Home equities 128 207 593 928 65,301 66,229 - 1,232 Consumer and other 50 7 - 57 1,287 1,344 - 11 Total Loans $ 23,530 $ 635 $ 8,459 $ 32,624 $ 912,008 $ 944,632 $ 72 $ 12,213 Note: Loan balances do not include $ 951 thousand in net deferred loan origination costs as of March 31, 2017. December 31, 2016 (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 $ 6,772 $ 2,966 $ 1,150 $ 10,888 $ 186,483 $ 197,371 $ - $ 3,106 Residential real estate: Residential 868 123 567 1,558 116,984 118,542 - 862 Construction - - - - 2,540 2,540 - - Commercial real estate: Commercial 6,319 1,522 2,357 10,198 452,187 462,385 483 1,874 Construction 257 - 4,417 4,674 88,566 93,240 239 4,178 Home equities 481 119 679 1,279 64,955 66,234 - 1,261 Consumer and other 15 10 5 30 1,387 1,417 - 17 Total Loans $ 14,712 $ 4,740 $ 9,175 $ 28,627 $ 913,102 $ 941,729 $ 722 $ 11,298 Note: Loan balances do not include $783 thousand in net deferred loan origination costs as of December 31, 2016. Allowance for loan losses The following tables present the activity in the allowance for loan losses according to portfolio segment for the three month periods ended March 31, 2017 and 2016: March 31, 2017 (in thousands) Commercial and Industrial Commercial Real Estate Mortgages* Consumer and Other Residential Mortgages* Home Equities Total Allowance for loan losses: Beginning balance $ 4,813 $ 7,890 $ 96 $ 769 $ 348 $ 13,916 Charge-offs (33) - (28) - - (61) Recoveries 147 - 12 - - 159 Provision (Credit) (964) 308 55 150 16 (435) Ending balance $ 3,963 $ 8,198 $ 135 $ 919 $ 364 $ 13,579 Allowance for loan losses: Ending balance: Individually evaluated for impairment $ 253 $ 1,716 $ 36 $ 1 $ 9 $ 2,015 Collectively evaluated for impairment 3,710 6,482 99 918 355 11,564 Total $ 3,963 $ 8,198 $ 135 $ 919 $ 364 $ 13,579 Loans: Ending balance: Individually evaluated for impairment $ 2,786 $ 12,473 $ 36 $ 2,561 $ 1,694 $ 19,550 Collectively evaluated for impairment 189,255 547,572 1,308 122,412 64,535 925,082 Total $ 192,041 $ 560,045 $ 1,344 $ 124,973 $ 66,229 $ 944,632 * Includes construction loans Note: Loan balances do not include $ 951 thousand in net deferred loan origination costs as of March 31, 2017. March 31, 2016 (in thousands) Commercial and Industrial Commercial Real Estate Mortgages* Consumer and Other Residential Mortgages* Home Equities Total Allowance for loan losses: Beginning balance $ 4,383 $ 7,135 $ 85 $ 909 $ 371 $ 12,883 Charge-offs (13) - (7) - - (20) Recoveries 7 38 3 - - 48 Provision (Credit) 203 269 12 (213) (63) 208 Ending balance $ 4,580 $ 7,442 $ 93 $ 696 $ 308 $ 13,119 Allowance for loan losses: Ending balance: Individually evaluated for impairment $ 516 $ 1,134 $ 41 $ 2 $ - $ 1,693 Collectively evaluated for impairment 4,064 6,308 52 694 308 11,426 Total $ 4,580 $ 7,442 $ 93 $ 696 $ 308 $ 13,119 Loans: Ending balance: Individually evaluated for impairment $ 5,382 $ 10,092 $ 41 $ 2,482 $ 1,545 $ 19,542 Collectively evaluated for impairment 145,431 464,806 2,131 104,212 60,048 776,628 Total $ 150,813 $ 474,898 $ 2,172 $ 106,694 $ 61,593 $ 796,170 * Includes construction loans Note: Loan balances do not include $ 603 thousand in net deferred loan origination costs as of March 31, 2016. Impaired Loans The following tables provide data, at the class level, for impaired loans as of the dates indicated: At March 31, 2017 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 $ 1,176 $ 1,279 $ - $ 1,183 $ 23 $ 5 Residential real estate: Residential 2,491 2,697 - 2,493 9 17 Construction - - - - - - Commercial real estate: Commercial 2,452 2,506 - 2,534 34 19 Construction - - - - - - Home equities 1,611 1,697 - 1,627 15 4 Consumer and other - - - - - - Total impaired loans $ 7,730 $ 8,179 $ - $ 7,837 $ 81 $ 45 At March 31, 2017 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 $ 1,610 $ 1,853 $ 253 $ 1,654 $ 24 $ 2 Residential real estate: Residential 70 72 1 70 1 - Construction - - - - - - Commercial real estate: Commercial 5,843 5,871 541 5,843 13 53 Construction 4,178 4,201 1,175 4,179 50 - Home equities 83 85 9 83 1 - Consumer and other 36 62 36 37 1 1 Total impaired loans $ 11,820 $ 12,144 $ 2,015 $ 11,866 $ 90 $ 56 At March 31, 2017 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Foregone Interest Income Recognized Total: (in thousands) Commercial and industrial $ 2,786 $ 3,132 $ 253 $ 2,837 $ 47 $ 7 Residential real estate: Residential 2,561 2,769 1 2,563 10 17 Construction - - - - - - Commercial real estate: Commercial 8,295 8,377 541 8,377 47 72 Construction 4,178 4,201 1,175 4,179 50 - Home equities 1,694 1,782 9 1,710 16 4 Consumer and other 36 62 36 37 1 1 Total impaired loans $ 19,550 $ 20,323 $ 2,015 $ 19,703 $ 171 $ 101 At December 31, 2016 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 $ 1,304 $ 1,604 $ - $ 1,455 $ 125 $ 51 Residential real estate: Residential 2,513 2,720 - 2,542 39 78 Construction - - - - - - Commercial real estate: Commercial 2,123 2,168 - 2,181 33 89 Construction 257 257 - 404 2 28 Home equities 1,559 1,621 - 1,606 51 30 Consumer and other - - - - - - Total impaired loans $ 7,756 $ 8,370 $ - $ 8,188 $ 250 $ 276 At December 31, 2016 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 $ 1,844 $ 1,913 $ 492 $ 1,898 $ 62 $ 53 Residential real estate: Residential 71 72 1 72 2 1 Construction - - - - - - Commercial real estate: Commercial 1,054 1,083 296 1,062 50 - Construction 4,179 4,201 1,175 4,180 194 - Home equities 194 206 20 195 9 1 Consumer and other 43 68 43 45 3 3 Total impaired loans $ 7,385 $ 7,543 $ 2,027 $ 7,452 $ 320 $ 58 At December 31, 2016 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Foregone Interest Income Recognized Total: (in thousands) Commercial and industrial $ 3,148 $ 3,517 $ 492 $ 3,353 $ 187 $ 104 Residential real estate: Residential 2,584 2,792 1 2,614 41 79 Construction - - - - - - Commercial real estate: Commercial 3,177 3,251 296 3,243 83 89 Construction 4,436 4,458 1,175 4,584 196 28 Home equities 1,753 1,827 20 1,801 60 31 Consumer and other 43 68 43 45 3 3 Total impaired loans $ 15,141 $ 15,913 $ 2,027 $ 15,640 $ 570 $ 334 Non-performing loans The following table sets forth information regarding non-performing loans as of the dates specified: March 31, 2017 December 31, 2016 (in thousands) Non-accruing loans: Commercial and industrial loans $ 2,771 $ 3,106 Residential real estate: Residential 846 862 Construction - - Commercial real estate: Commercial and multi-family 3,174 1,874 Construction 4,179 4,178 Home equities 1,232 1,261 Consumer loans 11 17 Total non-accruing loans $ 12,213 $ 11,298 Accruing loans 90+ days past due 72 722 Total non-performing loans $ 12,285 $ 12,020 Total non-performing loans to total assets 1.08 % 1.09 % Total non-performing loans to total loans 1.30 % 1.28 % Troubled debt restructurings The Company had $9.1 million and $5.1 million in loans that were restructured in a troubled debt restructuring (“TDR”) at March 31, 2017 and December 31, 2016, respectively. Of those balances, $1.7 million and $1.2 million were in non-accrual status at March 31, 2017 and December 31, 2016, 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 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 March 31, 2017, 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: March 31, 2017 (in thousands) Total Nonaccruing Accruing Related Allowance Commercial and industrial $ 729 $ 714 $ 15 $ 168 Residential real estate: Residential 1,949 235 1,714 - Construction - - - - Commercial real estate: Commercial and multi-family 5,713 592 5,121 245 Construction - - - - Home equities 638 177 461 - Consumer and other loans 26 - 26 26 Total troubled restructured loans $ 9,055 $ 1,718 $ 7,337 $ 439 December 31, 2016 (in thousands) Total Nonaccruing Accruing Related Allowance Commercial and industrial $ 574 $ 532 $ 42 $ 147 Residential real estate: Residential 1,949 227 1,722 - Construction - - - - Commercial real estate: Commercial and multi-family 1,617 313 1,304 - Construction 257 - 257 - Home equities 667 175 492 1 Consumer and other loans 26 - 26 26 Total troubled restructured loans $ 5,090 $ 1,247 $ 3,843 $ 174 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 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 month periods ended March 31, 2017 and 2016: Three months ended March 31, 2017 Three months ended March 31, 2016 (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: Extension of maturity - $ - $ - 1 $ 24 $ 24 Interest rate reduction - - - - - - Term-out line of credit 1 180 180 1 20 20 Combination of concessions - - - - - - Residential Real Estate & Construction: Extension of maturity - - - 1 95 95 Commercial Real Estate & Construction - - - - - - Extension of maturity 3 5,073 5,073 - - - Home Equities - - - - - - 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. There were no loans which were classified as TDRs during the previous 12 months which defaulted during each of the three month periods ended March 31, 2017 and 2016. |