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, 2018 December 31, 2017 Mortgage loans on real estate: (in thousands) Residential mortgages $ 140,598 $ 131,208 Commercial and multi-family 550,072 519,902 Construction-Residential 313 2,134 Construction-Commercial 101,494 107,274 Home equities 69,382 69,745 Total real estate loans 861,859 830,263 Commercial and industrial loans 245,258 232,211 Consumer and other loans 1,565 1,654 Net deferred loan origination costs 1,279 1,187 Total gross loans 1,109,961 1,065,315 Allowance for loan losses (14,693) (14,019) Loans, net $ 1,095,268 $ 1,051,296 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, 2018, the Bank did no t sell any mortgages to FNMA, compared with $ 2.8 million in the three month period ended March 31, 2017. At March 31, 2018 and December 31, 2017, the Bank had a loan servicing portfolio principal balance of $76 million and $78 million, respectively, upon which it earned servicing fees. At each of March 31, 2018 and December 31, 2017, the value of the mortgage servicing rights for that portfolio was $0.6 million. No loans were held for sale at March 31, 2018 or December 31, 2017. The Company has never been contacted by FNMA to repurchase any loans due to improper documentation or fraud. 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, 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 1-3 $ 66,484 $ 439,056 $ 505,540 $ 169,533 4 34,511 89,346 123,857 59,714 5 - 12,385 12,385 13,622 6 499 9,285 9,784 1,656 7/8 - - - 733 Total $ 101,494 $ 550,072 $ 651,566 $ 245,258 December 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 $ 83,203 $ 418,819 $ 502,022 $ 158,181 4 24,071 87,746 111,817 57,827 5 - 4,106 4,106 13,247 6 - 9,231 9,231 2,134 7/8 - - - 822 Total $ 107,274 $ 519,902 $ 627,176 $ 232,211 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, 2018 (in thousands) Current Non-accruing Total Balance 30-59 days 60-89 days 90+ days Loans Balance Commercial and industrial $ 241,654 $ 1,107 $ 300 $ 193 $ 2,004 $ 245,258 Residential real estate: Residential 137,787 1,421 - - 1,390 140,598 Construction 313 - - - - 313 Commercial real estate: Commercial 536,570 4,114 - 392 8,996 550,072 Construction 80,120 20,875 - - 499 101,494 Home equities 67,862 151 72 - 1,297 69,382 Consumer and other 1,558 7 - - - 1,565 Total Loans $ 1,065,864 $ 27,675 $ 372 $ 585 $ 14,186 $ 1,108,682 Note: Loan balances do not include $ 1.3 million in net deferred loan origination costs as of March 31, 2018. December 31, 2017 (in thousands) Current Non-accruing Total Balance 30-59 days 60-89 days 90+ days Loans Balance Commercial and industrial $ 225,915 $ 4,019 $ 163 $ 365 $ 1,749 $ 232,211 Residential real estate: Residential 129,251 731 - - 1,226 131,208 Construction 2,134 - - - - 2,134 Commercial real estate: Commercial 508,044 2,611 - 309 8,938 519,902 Construction 102,109 3,239 1,926 - - 107,274 Home equities 68,415 171 40 - 1,119 69,745 Consumer and other 1,628 11 6 - 9 1,654 Total Loans $ 1,037,496 $ 10,782 $ 2,135 $ 674 $ 13,041 $ 1,064,128 Note: Loan balances do not include $ 1.2 million in net deferred loan origination costs as of December 31, 2017. 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, 2018 and 2017: March 31, 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) - (34) - - (101) Recoveries 6 - 1 - 1 8 Provision (Credit) (28) 736 20 57 (18) 767 Ending balance $ 5,115 $ 8,145 $ 96 $ 1,007 $ 330 $ 14,693 Allowance for loan losses: Ending balance: Individually evaluated for impairment $ 292 $ 567 $ 24 $ 36 $ - $ 919 Collectively evaluated for impairment 4,823 7,578 72 971 330 13,774 Total $ 5,115 $ 8,145 $ 96 $ 1,007 $ 330 $ 14,693 Loans: Ending balance: Individually evaluated for impairment $ 2,485 $ 10,282 $ 24 $ 2,765 $ 1,960 $ 17,516 Collectively evaluated for impairment 242,773 641,284 1,541 138,146 67,422 1,091,166 Total $ 245,258 $ 651,566 $ 1,565 $ 140,911 $ 69,382 $ 1,108,682 * Includes construction loans Note: Loan balances do not include $ 1.3 million in net deferred loan origination costs as of March 31, 2018. 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. Impaired Loans The following tables provide data, at the class level, for impaired loans as of the dates indicated: At March 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 $ 2,037 $ 3,172 $ - $ 2,109 $ 41 $ 10 Residential real estate: Residential 2,451 2,634 - 2,467 13 17 Construction - - - - - - Commercial real estate: Commercial 3,004 3,152 - 3,022 36 8 Construction 665 665 - 675 9 5 Home equities 1,960 2,083 - 1,978 20 8 Consumer and other - - - - - - Total impaired loans $ 10,117 $ 11,706 $ - $ 10,251 $ 119 $ 48 At March 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 $ 448 $ 480 $ 292 $ 515 $ 8 $ - Residential real estate: Residential 314 317 36 315 5 - Construction - - - - - - Commercial real estate: Commercial 6,613 6,786 567 6,651 74 - Construction - - - - - - Home equities - - - - - - Consumer and other 24 29 24 24 - - Total impaired loans $ 7,399 $ 7,612 $ 919 $ 7,505 $ 87 $ - At March 31, 2018 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Foregone Interest Income Recognized Total: (in thousands) Commercial and industrial $ 2,485 $ 3,652 $ 292 $ 2,624 $ 49 $ 10 Residential real estate: Residential 2,765 2,951 36 2,782 18 17 Construction - - - - - - Commercial real estate: Commercial 9,617 9,938 567 9,673 110 8 Construction 665 665 - 675 9 5 Home equities 1,960 2,083 - 1,978 20 8 Consumer and other 24 29 24 24 - - Total impaired loans $ 17,516 $ 19,318 $ 919 $ 17,756 $ 206 $ 48 At December 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 $ 1,023 $ 1,917 $ - $ 1,704 $ 92 $ 28 Residential real estate: Residential 2,415 2,594 - 2,456 46 83 Construction - - - - - - Commercial real estate: Commercial 2,336 2,469 - 2,449 134 32 Construction 187 187 - 218 - 13 Home equities 1,785 1,892 - 1,828 62 33 Consumer and other - - - - - - Total impaired loans $ 7,746 $ 9,059 $ - $ 8,655 $ 334 $ 189 At December 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 $ 1,240 $ 1,431 $ 372 $ 1,279 $ 79 $ 12 Residential real estate: Residential 196 196 28 196 6 3 Construction - - - - - - Commercial real estate: Commercial 6,689 6,819 643 6,755 156 129 Construction - - - - - - Home equities - - - - - - Consumer and other 34 59 34 37 3 2 Total impaired loans $ 8,159 $ 8,505 $ 1,077 $ 8,267 $ 244 $ 146 At December 31, 2017 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Foregone Interest Income Recognized Total: (in thousands) Commercial and industrial $ 2,263 $ 3,348 $ 372 $ 2,983 $ 171 $ 40 Residential real estate: Residential 2,611 2,790 28 2,652 52 86 Construction - - - - - - Commercial real estate: Commercial 9,025 9,288 643 9,204 290 161 Construction 187 187 - 218 - 13 Home equities 1,785 1,892 - 1,828 62 33 Consumer and other 34 59 34 37 3 2 Total impaired loans $ 15,905 $ 17,564 $ 1,077 $ 16,922 $ 578 $ 335 Troubled debt restructurings The following tables summarize the loans that were classified as troubled debt restructurings as of the dates indicated: March 31, 2018 (in thousands) Total Nonaccruing Accruing Related Allowance Commercial and industrial $ 735 $ 254 $ 481 $ 39 Residential real estate: Residential 1,640 265 1,375 - Construction - - - - Commercial real estate: Commercial and multi-family 4,515 3,894 621 191 Construction 166 - 166 - Home equities 791 128 663 - Consumer and other 24 - 24 24 Total TDR loans $ 7,871 $ 4,541 $ 3,330 $ 254 December 31, 2017 (in thousands) Total Nonaccruing Accruing Related Allowance Commercial and industrial $ 734 $ 220 $ 514 $ 8 Residential real estate: Residential 1,656 271 1,385 - Construction - - - - Commercial real estate: Commercial and multi-family 3,854 3,767 87 236 Construction 187 - 187 - Home equities 794 128 666 - Consumer and other 25 - 25 24 Total TDR loans $ 7,250 $ 4,386 $ 2,864 $ 268 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, 2018, 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 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, 2018 and 2017: Three months ended March 31, 2018 Three months ended March 31, 2017 (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 $ 180 $ 180 Residential Real Estate & Construction - - - - - - Commercial Real Estate & Construction: Extension of maturity 1 181 181 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 to its collateral value. A loan is considered in default when the loan is 90 days past due. The following table presents loans which were classified as TDRs during the preceding twelve months and which subsequently defaulted during the twelve month periods ended March 31, 2018 and 2017. Three months ended March 31, 2018 Three months ended March 31, 2017 (Recorded Investment in thousands) (Recorded Investment in thousands) Troubled Debt Restructurings Number of Recorded Number of Recorded That Subsequently Defaulted Contracts Investment Contracts Investment Commercial and industrial 1 $ 87 - $ - Residential real estate 1 148 - - Commercial real estate - - - - Home equities - - - - Consumer and other loans - - - - |